FE Editorial : In a stall

The Financial Express
Posted: 2008-12-03 22:29:14+05:30 IST
Updated: Dec 03, 2008 at 2229 hrs IST

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: It’s now official that India recorded a growth rate of 7.6% in the second quarter of 2008-09, around a fifth lower than in the corresponding quarter of the previous year. The slowdown has also moved into a fourth successive quarter. Growth rates in agriculture and industry slumped by more than a third to 2.7% and 6.1%, respectively. The services sector remained more resilient, with growth slipping by less than a percentage point to 9.6%. Given the financial crisis—the full effects of which will be seen in the results for the next quarter—it’s not surprising that finance, insurance, real estate and business services grew at less than the aggregate for services. Surprisingly, despite the persistent slowdown, investment sentiments continue to be buoyant, with the ratio of the gross fixed capital formation-to-GDP at market prices going up to a new high of 37.6%, which was almost two percentage points higher than the rates registered in the second quarter of 2007-08. But buoyant investment has been unable to restrain a sharp slump in the construction sector, where growth slipped by more than two percentage points to 9.7%, probably indicating a sharp fall in housing construction and a sharper increase in investments in machinery and equipment.

The growth rate is expected to be lower in the next two quarters and perhaps at an even lower level in 2009-10. What may help pull growth up towards 8%? The external environment won’t help for at least two years. Are any domestic changes likely? Government pronouncements have harped on public expenditure. The problem isn’t public expenditure, but its composition. Rarely does public expenditure create assets. Typically, it takes the form of consumption expenditure and, since it needs financing, triggers the kind of macro crisis India witnessed in 1990-91. Keynes wrote in a time of depression with unemployed resources. Invoking his principles when resources have opportunity costs is dysfunctional. Any proposed public expenditure will divert resources from more productive sectors, including investments, and one should underline that infrastructure will be especially hit because of global developments. Given this, regardless of the composition of the new government, 8% is unlikely, unless substantive domestic reforms are introduced in the rural sector, infrastructure and law. This government’s reluctance to reform and its lame-duck status over the next six months doesn’t give much reason for hope. The fault clearly doesn’t lie in India’s stars, but in its ministers.