Column: What you sow is not what you reap

Written by Surjit S Bhalla | Updated: Oct 19 2013, 10:59am hrs
That India has an inflation problem, especially a food inflation problem, is by now universally recognised. That this inflation problem has begun to impact non-food inflation may be a creeping reality. Not as recognised, yet, is that we are also in deep crisis with regards to GDP growth. In recent weeks, various organisations have downgraded Indian growth prospects. It is a sorry picture when the most optimistic forecast for FY14 remains that of the government of Indiaaround 5.5% growth, projected by both RBI and the Prime Ministers Economic Advisory Council (PMEAC).

If India ends the year with around 4.5% growth (an expected reality) then the last three year GDP growth average of 5.2% will be among the worst since 1980. The three crisis years ending in 1992 averaged GDP growth of 4.1%, within depression distance of this years expected growth.

Obviously, there is a lot riding on GDP growth and forecasts. More than ever before, growth matters because this is an election year, and an unusual election year in that many experts think the elections could be a turning point in Indian economics and Indian politics. Of course, no one believes that the turning point will arrive if somehow the Congress was to retain power. That is what many of us thought would happen in 2004 and even more of us were certain that a turning point for Indian growth and economic reforms was reached in May 2009 when the Congress obtained 209 seats and headed what seemed to be a comfortable coalition. Alas, alaswe all know what has happened under UPA IIa paucity of reforms, a precipitous growth decline and staggering levels of inflation.

Why is inflation at double digits and growth at stagnation levels of around 4.5% for the second year running It may have something to do with UPAs growth and distribution model. This socialist distribution model has been discussed extensively, and with no apparent effect on the policymakers. What about UPAs growth model Without any risk of exaggeration, the UPA political economy model can best be described as follows. India is a dominantly agricultural country, and most of the poor reside in rural agricultural areas. Further, farmers are an important political constituency. Hence, a win-win proposition, for India and the Congress party, is to increase agricultural output and to do so at highly remunerative farm prices. There will be growth, there will be lower inflation due to higher output, there will be an improvement in inequality, there will be spillover demand effects into the industrial arena, and voila: India will be on an 8% trajectory as far as the eye can see. And yes, this extra growth can be used for redistributive purposes, and especially for in-the-name-of-the-poor programmes named after the Nehru-Gandhi dynasty.

Did the UPA movie turn out as planned The accompanying table tries to examine agricultural performance in two broad periodsthe NDA, FY99 to FY04, period under the leadership of Atal Bihari Vajpayee, and the FY05 to FY14 period of the UPA under the leadership of Manmohan Singh and Sonia Gandhi or Manmonia. Agricultural performance is modelled on only two variables rainfall this year, and rainfall last year. A heuristic explanation of the workings of the model (part of Zyfin Researchs monthly GDP model) is as follows. If normal rainfall yields a certain output, then normal rainfall in the second year will yield a zero growth in output. Rainfall matters most for growth when it has a large deviation from that in the previous year.

Perusal of the table leads to the following conclusions:

*The NDA period was witness to one of the worst six-year rainfall periods in Indian history (rainfall data since 1871). The rainfall index was negative -15.6, i.e., rainfall was about 16% below normal. Agricultural growth was predicted to be only 1% per annum, yet the actual average was 2.7%.

*There were hardly any incentives given to farmers in the form of higher relative prices for crops. WPI inflation during this period averaged 4.9 % , while procurement price inflation averaged 5.2% per annum. The average relative price of agricultural goods increased by 0.7% per annum.

*Now, along comes the UPA. Procurement prices are raised without hesitation, and at an average compounded rate of close to 9% per annum between 2004 and 2012. But in the three years preceding the 2009 election, such prices were raised at an average rate of 12.1% per annum, about 4% a year more than the WPI. Relative prices of agricultural goods increased at a historic record pace of 6.4% per year during the years of the UPA political economy. Even for the entire nine-year period, relative prices increased at 2.7% per year, again a record for India (and most likely the worldnote, this is the change in the ratio of procurement prices to non-agricultural GDP prices that one is talking about). The inherent nature of most relative prices is to stay constant for short periods of time, say 5 to 10 years.

*Did UPA and India at least get some additional output, and lower food prices, from all of these incentives for higher production Indeed notagriculture inflation has NEVER been so continuously high, and especially in the context of agricultural output increasing at above 3% per annum for eight years. What makes the performance worse than terrible is that UPA had the Gods on its sidethe rainfall index was above normal (0.8 versus 0) during their tenure, and rainfall was especially buoyant during FY07 and FY09an index of 13.3, one of the best three-year rainfall periods in Indian history. However, and this is the critical performance line, for the nine-year UPA period FY05 to FY13, actual agricultural growth of 3.1% was 0.2% a year below the rainfall-only predicted growth of 3.3%!

History is history, but can good rainfall save the UPA in FY14 There has been good rainfall, no question about it, and non-agricultural growth is insipid, at best. And if agricultural growth is 6%-plus, this can provide the UPA with an extra 0.5% growth and perhaps propel GDP growth to above 5%. The rainfall-only model predicts agricultural growth of only 4.1% in FY14. A large part of the reason for the unexceptional increase projected for FY14 is because FY13 was not such a bad rainfall yearrainfall during June-September in 2012 was 824mm compared to 698mm in the genuinely bad rainfall year of FY10.

So, if you are looking for GDP growth in FY14 at even close to 5%, you have to look at the skies to deliver a different manna than exuberant rainfall.

The author is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin, a leading financial information company