Mess In The Economy
Dr Ashwani Mahajan
Central Statistical Organisation of Government of India, announced its estimates for National Income for the year 2012-13 on May 31, according to which growth estimates for 2012-13 have been placed at 5 per cent. It is notable that a year before (2011-12) growth was estimated to be 6.2 per cent and for the year 2011-12, this figure was 8.3 per cent. Estimates for 2012-13 are important also due to the fact that this is first year of the 12th Five Year Plan. Confusion about the actual rate of growth, was continuing since beginning, as the government’s original estimates for the year 2012-13 were placed at above 7 per cent, which were reduced later, after international agencies like IMF and others reduced their estimates for Indian economy to 4.9 per cent. However, for the year 2013-14, government has once again placed GDP growth estimate around 7 per cent.
However, International Monetary Fund (IMF) is telling a different story, while explaining the deceleration in growth. IMF in its recent report shows concerns about decline in growth rate in India and has paralleled the same with South East Asian and Latin American countries’ slide after reaching their peak growth. It is notable that countries like Thailand, Malaysia, Philippine, Indonesia, Taiwan, South Korea, Hong Kong etc. reached at nearly 10-12 per cent growth in their respective GDPs in 1980s itself. Latin American countries had reached that level, much earlier. Thanks to their rising GDP and per capita incomes, these countries were called emerging economies and were named as Asian Tigers. Multinational companies were opening their production centres in these countries and these countries achieved modernity in their production structure. These countries were attracting significant amount of foreign investment and their exports too were rising fast.
Due to the development perception in these countries, the prices of real estate were also booming and value multiplied in a short spell of time. Suddenly, something happened! Prices of real estate started receding. Exports too started declining, balance of payment on current account went into negative zone and became intolerable. Foreign investors started plying away. With deepening of foreign exchange crisis and burst of real estate bubble, production started declining, real wages declined and living standard obviously were badly hit. These countries had to focibly devalue their respective currencies.
IMF’s latest report is significant for India, also due to the reason that after achieving a significantly high average rate of growth of GDP in the last decade, rate of growth has receded to merely 5 per cent annually. Western experts are terming this as ‘Hindu Rate of Growth’ (a derogatory term, which used to define low rate of growth in the past). Although, IMF has taken cognizance of slowdown in growth in China too, for India, crisis seem to be even more acute. IMF has stated in its report that India is falling into the trap, what they call ‘Medium Income Trap’ in which first Latin American countries and then South East Asian countries fell. By ‘Medium Income Trap’ they mean that developing countries (which are also called medium income countries), who are aspiring to become high income countries, face a blockade or ‘a trap’ and would face crisis of various types and would not be able to grow to the level of high income countries. It is notable that when South East Asian countries faced crisis in 1997, it was primarily a foreign exchange crisis, which forced these countries to devalue their respective currencies. At that time prices of real estate declined significantly and that affected the health and existence of their banking system. Employment declined and foreigners working in their countries had to leave countries, losing all their saving. However, India remained insulated from this crisis. Rather growth rate of GDP accelerated and India experienced an unprecedented growth since then and in the last decade, average growth rate crossed 8 per cent annually.
Now is the Real Crisis
Issue is not merely of reduction in growth rate in a single year. We have to understand the context of this deceleration. India could save itself from South East Asian crisis of 1997-98. Similarly India remained insulated to a great extent, even from the US economic crisis of 2007 and later even European economic crisis could not affect India much and Indian growth trajectory remained more or less unaffected. International agencies did not alter economic rating of India, through economic rating of European and even USA kept on declining.
However, in the last 2-3 years, health of Indian economy is constantly declining. After achieving a high rate of growth of 8.3 per cent on 2010-11, in the year 2011-12 it decelerated to 6.2 per cent and now in 2012-13 to only 5 per cent. All this indicates at looming dangers on Indian economy. If we try to analyse this growth figures further, we find that rate of growth of manufacturing, which was average 9.3 per cent annually between 2004-05 and 2010-11, declined to merely 2.7 per cent in 2011-12. Though rate of growth of agriculture was maintaining low in the last four years, it has further decelerated to 1.9 perc ent in 2012-13. Economy had been zooming due to high rate of growth of services, which too has decelerated to only 7.1 per cent in 2012-13.
More disturbing is the fact that manufacturing growth has been roaming around one percent in the last at least 7 quarters. Economy, which was saved from earlier shocks of international upheavals, is no longer in good health. Foreign debt, which was merely US$ 224.5 billion in March 2009, has zoomed to US$ 374 billion in December 2012. During 2011-12, a huge sum of US$ 31.5 billion was paid out as repayment of interest and principal. Foreign investors too are not behind in transferring money abroad and a huge sum of US$ 26 billion was sent abroad in the form of interest, dividends, royalties etc. Despite huge inflow of foreign exchange due to remittances from non-resident Indian and software exports, our current account deficit (CAD) is going to surpass US$ 100 billion in 2012-13. This trend is destined to reduce foreign exchange reserves and weaken our rupee. It is notable that in the last one month rupee has slid by more than 5 per cent. Rupee may weaken even further. This may worsen our trade deficit and accentuate inflationary tendencies. Declining incomes in the country is affecting demand and thereby weakening the possibilities of reviving manufacturing sector. Under these circumstances, IMF’s warning assume special significance. Economic mismanagement, corruption and misdirected policy of globalisation (unbridled imports, blind policy of foreign investment) is behind this slowdown. Policy makers will have to mend policies. We need to restrict imports especially from China – consumer goods, power plants, telecom equipments, imports of gold and silver need to be curbed. Restriction on foreign institutional investors (FFIs) including lock-in-period of at least 3 years may also be useful. Failure to make policy corrections may deepen foreign exchange crisis and may prove IMF’s warning right.