Tightroping the growth

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Economics, they say, is the painful elaboration of the obvious. Any housewife, pensioner, middle income salaried person and student in India would have told us of the pinch they are facing in making ends meet, with prices of many household items having gone up much faster than their incomes. Their counterparts globally have revived painful memories of bellbottoms and platform shoes, harking back to the bad old days of the nineteen seventies when the dirty word was “stagflation”. At the same time, lay-offs and slower hiring in many sectors like textiles, IT and others had taken some shine off emerging India.

The Economic Survey of 2007-08 is a systematic look into exactly this situation. In common with much of the global economy, India’s policymakers now have to walk a tightrope between stimulating a sputtering economic growth engine and an inflation tinderbox.

Inflation in India has moved up very rapidly from 3.07% in mid-October to 4.35% now. The good news is that the Survey thinks that inflation will remain moderate in 2008. Although economic growth has not collapsed in India, as has been the apprehension in many developed countries in 2008, there is a distinct slowdown in industrial activity, and as a knock-on, in selected service sectors. This is not a surprise, given the harsh application of monetary policy brakes over the past year and a half to cool down the economy. Real interest rates (that is, interest rates adjusted for inflation), while having dropped over the past few months, continue to remain high and are a further disincentive to invest in an uncertain economic environment. At the same time, India’s exposure to the global economy has increased from around half of GDP in 2002 to over 100% as of now. Our estimates indicate that exports add between a fifth and a quarter of India’s manufacturing value added, and that has taken a hit both from a global slowdown and a stronger Rupee. This strength is also starker in comparison with the static or depreciated currencies of many of our export competing neighbours.