Economic Highlights

New Delhi, 3 September 2010

Govt Suffers Daily-Wage Disorder

HOLISTIC  STRATEGY  NEEDED 

By Shivaji Sarkar

The growth projections once again cannot be taken as projected. Such predictions should bolster national confidence and instil confidence among the people. It has not. Despite all previous such moves by Government agencies, a thaw is seen in the country’s progress.

Do the figures pointing to 8.8% first quarter --- April-June --- growth suggest much? It should have. But most observers have expressed lower growth in the coming months. Even otherwise, it is only a shade better than 8.6% growth achieved in the January-March quarter. This is worrisome. The nation needs to look beyond the official statements if growth is off-and-on or appears to be a casual process.

Undoubtedly, growth cannot take place in isolation. Given that other indicators are not in sync with what is being stated. Flaunting figures for political purposes may be dangerous as it might shake confidence in the process of governance, a mistake the former Soviet Union made.

The major bottlenecks in the process has been what the Reserve Bank states: general inflation coupled with 13-14% food inflation, lower purchasing capacity and, as per the Central Statistical Organisation (CSO), almost flat growth in private consumption which makes up 58% of the demand-side GDP. In addition another important factor, Government consumption expenditure has actually declined. Plainly, there is something acutely wrong with the real engine of growth.

Importantly, private consumption that reflects the demand for non-durable goods has declined from 2.6% in the last quarter of the previous financial year to 0.3%. It is the lowest in a decade. The fall in capital goods production also indicates a slowdown in investment. As measured by the industrial output, capital goods production has fallen to 9% in June from 37% in May.

The Government claims that growth had been bolstered by the manufacturing sector that grew by 12.4%. But it was 16.3% in the previous quarter. Industrial and manufacturing growth too is tapering. This is a grim indicator and might affect the prospects ahead. If the Chairman of the Prime Minister’s Economic Advisory Council C Rangarajan is to be believed, “Growth rate may decline in the third and fourth quarter”. In other words, the first quarter growth might be the highest for this fiscal!

There are more worries. The demand number, calculated from private and Government consumption, investment and net exports, showed that the economy grew as low as 3.7% during the first quarter in terms of constant prices (2003-04) lowest in a decade.

This is not surprising. As high inflation is apparently the reason for the lower consumption pattern. The rupee is continuously losing its sheen. It touched it’s lowest at Rs 47.08 after the figures suggesting the fastest pace of growth were announced. And is likely to lose further as the trade deficit increases and capital inflows remain weak. Besides, with the US and other western growth prospects either stagnating or showing little signs of improvement, sustenance of growth in the country might become an uphill task.

A major reason for the low consumption trend is ascribed to high inflation. According to the RBI persisting high inflation could not only dampen overall growth prospects of the economy but also hamper the progress of inclusive growth. More. The adverse impact on growth might potentially result from inflation induced distortion in resource allocation and possible decline in domestic savings, a trend already noticed in RBI’s annual report.

It is feared that uncertainty associated with inflation could complicate investment and consumption planning affecting capital accumulation and savings. Yet another danger, the RBI hints at,  is that inflation, at times, could also shift the focus from production activities and productivity enhancing investment to speculation and hoarding.

The economic trend calls for a check on food inflation. Which is eroding purchasing power as a large section of the population is unable to increase their nominal income to match the inflation. In reality, this leads to a decline in income. As a large section of the poor and lower middle income group allocate most part of their income to consumption of food items.

Clearly, the nation needs to consider this as a grave situation and not revel in figures because those who experience maximum loss of real income due to high inflation also do not benefit much from high growth, even if it is real. This is more so as agricultural growth virtually remains stagnant at 2% leading to a severe supply side problem coupled with policy faltering on not having a market intervention system.

Further, inflation is dispersed across commodities. This is a matter of worry. Articulates the RBI, “It needs to be recognised that high and generalised inflation, if persists, in itself is a risk to growth through its unfavourable effects on resource allocation and as well as unfavourable redistributive effects on the poor”. A prediction that high growth in the prevailing situation is not sustainable.

Even infrastructure remains a key constraint. Capacity expansion in critical sectors like crude oil, petroleum refining remained weak and the demand-supply gap in the power sector persist.  There are significant capacity constraints in coal, ports, and railways, which may restrain high growth. The recovery in automobile sector is cosmetic partly reflecting the lower production base.

In sum, the reality should shake the Government out of its complacence. If the trend persists and growth falls, it would have severe implication on Government revenue. True, this year it could partially contain fiscal deficit from the auction of the 3G spectrum earnings of around Rs 67,000 crore. But this should have been used as a reserve to increase investment in the infrastructure and core areas. The way it has been utilised to reduce the deficit speaks of a severe policy lag.

The next year it would impact finances in a graver way as tax collections would also show a falling trend and fiscal deficit might touch a new high. This would lead to increased Government borrowings and may further lead to a vortex of inflationary situation, low production and stunted growth. The nation needs a holistic strategy to come out of the “daily-wage syndrome” that the Government is pursuing. If not done the country could slide into a severe economic crisis. ---- INFA

(Copyright, India News and Feature Alliance)