State of Denial
The Chairman of the Prime Minister Economic Advisory Committee (PMEAC) Dr. C. Rangarajan, was quoted on 24th April as saying that the current (XII) Five Year Plan could still see an average GDP growth of 8%!. During the interview, given after the release of the latest Economic Review by the PMEAC, Dr. Rangarajan expounded on a lowering of the incremental capital-output ratio (ICOR) resulting in higher growth in coming years. In simple terms, he expects higher growth by a de-bottlenecking of large projects that will bring down the ICOR. How one wishes it was as simple as this to get us back to a higher 8-9% growth trajectory. Similarly, when in July 2011, at a seminar organized by Suman Berry, then head of the IGC, I had pointed out to the then Chief Economic Advisor, Kaushik Basu, that investment was beginning to slacken dangerously, he simply pooh-poohed the warning. We know what happened thereafter. Investment tanked in India and Kaushik became the Chief Economist of the World Bank! Clearly, there are advantages to being in a state of denial.
In the first year of the Plan, i.e. 2012-13 economic growth will be no more than 5.2%. In the next year (2013-14) it can at best rise to 6% for the following reasons. Government expenditure will necessarily remain repressed as the finance minister tries to bring fiscal deficit below 4.8% of the GDP as he has targeted in the budget. So any hopes of a pre-electoral splurge to boost aggregate demand, as was done in fiscal 2007-08 can surely be ruled out. The alternative is a hugely damaging credit downgrade that we can ill afford. So government demand will not provide a growth impetus. In fact, over the last quarter one has heard of increasing instances of non-clearance of large volumes of government dues resulting in a significant negative impact on cash flows and profitability of service providers and contracting companies.
From all accounts private investment demand is unlikely to strengthen as the investment climate continues to remain vitiated in major growth sectors like telecom, autos, steel, power generation, highways, etc. Despite all the talk of reforms since September, we have yet to see any real initiative that could boost investor spirits or promote investment. Moreover, there is now an apprehension of a major slow down in the real estate or the construction sector, which has provided a strong growth stimulus in the past ten years. So private investment demand, which is the strongest driver of growth, will remain weak this year. This is corroborated by demand for non-food commercial credit remaining weak and a rising level of NPAs in the banking sector.
There is hardly any reason to believe that private consumption demand will reverse its current weakening trend and start rising. Disposable incomes are unlikely to increase significantly in the absence of large scale government handouts and continued weakness of employment prospects. The on-going decline in auto sales, declining demand for consumer durables and lower spend on consumption items like FMCG products and fast food outlets are clear signs of continued consumer pessimism and the fact that the mood in the country is distinctly downbeat. Finally, despite the recent feeble uptick in export growth, and the fact that a lower base (exports actually declined in 2012-13!) may provide a basis of higher growth in 2013-14, net external demand is unlikely to emerge as a growth driver in the current year. A similar conclusion for a GDP growth of sub 6% in 2013-14 can be reached by looking at the supply side and considering growth prospects in agriculture, industrial and services sector. Talk of 6.7 to 7% growth in the current fiscal is just wishful thinking.
With the first two years of the Plan period achieving 5 and 6% rate of growth, the economy will have to grow at more than 9% annually in the remaining three years of the Twelfth Plan to achieve an overall average of 8% GDP growth. Even for an average 7% rate of growth over the plan period, GDP growth will have to jump to 8% in 2014-15 and be sustained at that level. Given the onset of election season in full measure from October this year, and the prospects of significant political instability, it can only be as brave a man as Dr. Rangarajan who can talk so confidently of the Twelfth Plan coming in with 8% growth rate. Should there not be some accountability for government agencies to ensure that their forecasts and pronouncements have are not completely out of whack from ground realities?
Such facile talk of higher growth rates is dangerous because it induces complacency when none is warranted. There are 1 million (repeat 10 lakh) new entrants to our labour force every month. These youngsters, who represent our much flaunted demographic dividend, need jobs. Without, productive employment, they will add to the hordes of urban lumpen class, which is now visible in all our neighbourhoods and colonies except of course in Luteyns Delhi. They are all aspiring for the good life, which they will seize by means fair or foul. In the absence of jobs, they will earn their livelihood by joining the gangs of touts, petty brokers, smugglers, real estate mafia. The luckier ones will pay hefty sums to get in to the police force or other public sector jobs and then wreck havoc on the civil society as they attempt to recoup the bribe they paid to secure the prized 'sarkari naukri'. It would be far more socially responsible for the government’s economic managers to not show their state of permanent denial by constantly talking of higher growth being round the corner, they should instead talk of the huge employment challenge facing the country and the dire consequences of these young people remaining unemployed and spilling out on the streets. This fear apparently kept Deng Xiaoping awake at night and led him to initiate the Chinese economic miracle. I wonder what apart from the fear of losing their jobs keeps our economic policy makers awake at night!
Author is Senior Fellow, CPR.