It’s the economy stupid

Any prescription to revive the national economy should necessarily involve a detailed diagnosis of what went wrong in the first place. Naturally, the spectacular growth rate of the economy between 2005 and 2011 [barring 2008-09, owing to global economic crisis] requires a relook to understand the present consternation.

It is in this connection Ruchir Sharma points out in Breakout Nations: “In the peak year of 2007, the economies of all but three of world’s 183 countries grew, and they expanded at better than 5 per cent in 114 countries.”

In short, between 2004 and 2009 coinciding with the first term of UPA, global economy witnessed unprecedented growth coinciding with a remarkable performance of her manufacturing sector which in turn was export driven.

The subsequent fall since 2011 corresponds to a dismal performance of our manufacturing sector. In short, the core of India’s current economic crisis [I am using the word “crisis” advisedly] is the pathetic performance of her manufacturing sector.

Put pithily, a revival of the economy is necessarily intertwined with the revival of the manufacturing sector. It may be recalled in a message to “The National Strategy for Manufacturing” prepared by the National Manufacturing Competitiveness Council Prime Minister Manmohan Singh states “I am concerned that the share of manufacturing in national income has shown only a marginal improvement from 15.8%?in 1991 to 17% in 2003. This should be somewhere in the range of 25% to 35%. This requires manufacturing to keep growing at 12-14% in the next decade.” This was in March 2006.

Subsequently, in a press release dated November 4, 2011 [i.e. more than five years since the national strategy was unveiled] the ministry of commerce and industry stated “The share of manufacturing in India’s GDP has stagnated at 15-16% since 1980 while the share in comparable economies in Asia is much higher at 25 to 34%.”

And as a part of its diagnosis it added “On an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. Apart from facing multiple inspections, these units have to file sometime as many as 100 returns in a year.”

The worst hit with this draconian regime are our SMEs which contribute about 45% to the manufacturing output and 40% of exports. Importantly, they offer employment opportunities both for self-employment and jobs.

As several sample surveys initiated by the government indicate, this regime of excessive regulation, draconian laws and corrupt regulators has dynamited the Indian manufacturing from within One wonders what prevented the UPA from doing away with this regime. Deregulation of such laws would be the first big agenda for the next government.

And the issue is not merely limited to legislation. It encompasses a whole range of governance issues including but not limited to infrastructure improvement, availability of skilled labour, technological absorption capacity in each industry, curbing inflation.

Be that as it may, there is another burning issue that needs to be addressed by the next government. Data provided by the Economic Survey of 2012 reveals that the average daily percapita food grain consumption of an Indian in 1965 was 418 grams and that of pulses, 62 grams. Remember, in 1965 we had a war with Pakistan on top of a deadly drought.

Approximately after five decades of our “successful” tryst with green revolution, the survey shockingly points out that the average daily per capita food grain consumption of an Indian in 2010 was a meagre 407 grams and a disappointing 32 grams of pulses. Obviously, we are not producing enough food grains or pulses now when compared to 1965 on a per capita level.

No wonder when it comes to the Global Hunger Index as calculated by the International Food Policy Research Institute has placed India at a precarious 64 out of 79 countries. Put differently, we are just at the bottom when it comes to tackling hunger. To eliminate hunger, India needs to produce a minimum of 350 MT and distributed in its entirety.

This agenda mandates scientific water management [possibly through interlinking rivers], relook at our fertiliser policy, making farm to market distribution network efficient and, of course, bringing in technology to improve farm productivity.

The Montek-Chidambaram-Manmohan troika has been placing too much reliance on the service sector to engine our growth for too long. The time for such short cuts is over. On the contrary, it is time for the next government to focus on the real economy — agriculture and manufacturing.

(M.R. Venkatesh is a Chennai-based chartered accountant, economist, columnist and author. Comments can be sent to mrv@mrv.net.in)

Some quarters maintained that it is not exactly the qualifications needed for a central banker, considering that he had no experience as a banker and has been out of the country for most of the time.

That is except for the recent stint as chief economic adviser to the government and earlier as the PM’s informal economic adviser between 2008 and 2012 according to biographical sketches on the net.

But his prediction in 2005 as an economist at the IMF, about the bust awaiting the banks “when an unexpected ‘black swan’ occurred,” showed he knows how banks function, their strengths, weaknesses better than anyone else!

Dr Rajan has given himself the “task of building a bridge to the future, over the stormy waves produced by the global financial markets,” as he so eloquently put it in first statement on taking over at the RBI on September 4, 2013 .

His biggest challenge would be to handle the political scenario. In this he has very much the same task as the outgoing US Federal Reserve chief Ben Bernanke had, in trying to revive the US economy as the US government was hamstrung by the political logjam.

Dr Rajan has talked of the political uncertainty in the coming general elections, particularly since the confidence in the financial system is still fragile. A political crisis is not about a 25 basis point cut or hike.

A hike in interest rates is a ‘no no’ in a political crisis. The constant tussle between the growth imperative and the need to curb inflation gets accentuated during a crisis as do freebies hurt the fiscal and current account deficits.

He is called an inflation hawk but his reasoning is to give sanctity to the promise printed on currency notes: I promise to pay the bearer the sum of one hundred rupees. In his statement when he took office he said the primary role of the RBI is preserving the purchasing power of the rupee.

Today a Rs 100 note is hardly worth the paper it is printed on because of high inflation, particularly as reflected in the consumer price index. Dr Rajan attaches more importance to CPI than to the WPI as it affects the aam aadmi the most.

Inflation at the present elevated levels closer to the elections could harm the prospects of the ruling party and it is being literally left to Dr Rajan to find a way out. Hence it was surprising to hear him talk about the need to look into the Agricultural Produce Marketing Committee.

It would be in the interest of agriculture if Dr Rajan does take this look deeper with farmers’ representatives, since the part-time agricultural minister Sharad Pawar who is busy fighting on the cricket pitch and the civil supplies ministry has run out of ideas.

Dr Rajan has, in his three and a half months in the hot seat, shown that he can wield monetary policy with the same aplomb as his predecessors. Time will show if he does better than them.

For now he has to be given credit for having stabilised the rupee with an inflow of $34 billion through the swap window that he opened specifically for NRIs and overseas borrowings by banks. This turned the sentiment in the country from one of gloom to a hopeful glimmer.

If one were to draw a balance sheet, the net worth of UPA2 would slip into negative territory compared with UPA1 which posted superior economic results in most aspects. To make such a calculation, average performance during the two regimes has been taken with a very optimistic projection being taken for FY14 for UPA2 to get a five year average.

As can be seen, the indicators for UPA1 are higher than those for UPA2 for all indicators except agriculture. GDP growth has slowed down in the last three years to be much lower than the path of 8-9%. Within this segment, industrial growth has fallen sharply from 10.3% to 4.4% with growth in capital formation being just 8.9% relative to 15.8% during UPA1.

The main reason would be the impact of high inflation rates and consequent high interest rates combined with issues on governance which came in the way of monetary policy action. Inflation surprisingly averaged higher in terms of both the WPI and CPI which was driven more by food prices. This does come as a surprise because with agriculture performing well (3.6% as against 3.1%), food inflation should have been under control. Supply shocks for specific crops as well as distorted pricing through the MSP came in the way.

The fiscal deficit ratio also averaged 5.6% as against 3.9% in the previous term which made it difficult for the government to finance capital formation. With low growth coming in the way of tax collection, expenditures had to be curtailed to rein in the deficit at the targeted level. Further, on the external front, current account deficit has deteriorated substantially in UPA2 with a movement of -1.2% to -3.6% of GDP with gold imports being the chief cause. The pressure was finally seen on the rupee which tended to remain strong in UPA1 but declined by an average of 4.5% in UPA2 with the major hit being taken in FY14.

On the whole it does look like the momentum that had picked up during UPA1 could not be sustained in UPA2. While the global situation was also quite volatile, it could probably explain not more than 10-15% of the performance as UPA2 did comparably well in terms of getting in FDI and FII funds. It was a case of all adverse conditions coming together, which coupled with policy issues were the impediments.

However, there have been some positives on the qualitative side given that there has been an allegation made that reforms have tended to benefit the rich more than the poor. First, the Food Security Bill was passed, which is required to ensure that the poorer sections got this benefit. Second, the NREGA programme is a progressive policy that has provided employment to farmers between seasons. However, both of them would be pressure points for the fiscal balances going ahead.

Third, the government has finally managed to crack the fuel subsidy bill, albeit gradually, by making people used to paying prices closer to the market. The steps taken through Aadhaar to link subsidy on LPG to this identification and increase diesel prices in stages, are commendable. Fourth, the manner in which the government got its act to bring down the current account deficit and improve the balance of payments this year with the help of RBI was noteworthy.

(The writer is Chief Economist, CARE Ratings)

(Views of the writer are personal and do not reflect those of Deccan Chronicle)