While Left populism has failed us, Narendra Modi may yet spell out how he will change policy—if his party lets him
The revised GDP growth estimates for 2012-13 should not cause any surprise. They may yet be revised up or down but the message is clear. The economy is not out of trouble. It was obvious at the time of the last Budget and I, among many others, more or less said that the economy was going downhill. P Chidambaram must now regret that he had to give up the finance minister job after 26/11 to take up the ministry of home affairs. While he did a good job there, he is now back in the finance ministry with not enough time to fix the mess. Elections beckon and soon the populist pressures will mount up, to do even more damage to the economy.
At the root of the problem is the failure to tackle persistent inflation in the Indian economy. The UPA-2 was never able to get any sense of urgency in the foodgrain price inflation, which began after the drought of 2009. Ever since then, it has failed to do anything serious about the supply-side policies or restrain government consumption expenditure. Every so often, the various powers that be promised that inflation would come down in six months. Yet we have had inflation in high single digits for four years now. Households have dipped into their savings to keep up with their rising EMIs. The household savings rate has thereby slumped. The inevitable impact on investment has followed. Add to that the delays in completion of infrastructure projects, and the supply bottlenecks have increased. At the same time, given the populist pressures, the procurement prices of foodgrains have been going up quite fast. The cut in fuel subsidies has been slow and reluctant. MGNREGA has been kept up.
The government has been somewhat half-hearted about the inflation as well as the growth slump. From its Left has come the argument that growth is not sufficient for inclusive development. Indeed, high growth has sharpened inequality. So, it is as if low GDP growth is a solution. Chidambaram does not subscribe to this fallacy but, as elections come near, the Congress Left is bound to tilt the policy away from growth and towards redistribution.
There should be no conflict between growth and redistribution. Indeed, the growth strategy chosen should tackle distribution as one