The gathering clouds

Too many negative voices on the economy

The plot indeed thickens on India’s economic front. A pessimistic outlook for the second decade of its reforms by a leading international magazine, The Economist, and a downgrade of the country’s ratings outlook by Fitch add to the onset of gloom over recent performance. While reforms since 1991 resulted in faster growth and improved the balance of payments, the second decade of reforms began on a dull note: growth slowed to less than 6 per cent last fiscal. A series of scandals intensified the crisis of governance. The dismantling of quantitative restrictions has “spooked” India’s farmers and industrialists. And the end game has begun for the saga of the Dabhol Power Company versus Maharashtra’s electricity board — which is sending out signals that India is not serious about power sector reform. The government nevertheless hopes to raise growth to 8 per cent and attract FDI of $10bn, up from $2bn now. But these targets are not easy: they entail raising investment from 25 per cent to 38 per cent of GDP and policies that “rekindle the excitement of the early 1990s”, to borrow an expression from The Economist.

Nowhere is this more evident than on the fiscal front. The combined deficit of the centre and the states is 10 per cent of GDP, hardly different from the early 1990s. Failure to address such fiscal imbalances resulted in the change in India’s rating from stable to negative by Fitch. The latest official numbers also point to a slippage from budgetary targets for 2001-2002: the government’s borrowings in April-May work out to more than half of the target for the fiscal. Thanks to this binge, real interest rates remain high; resources are crowded out for private investment and a stop-go growth cycle has been triggered. Last fiscal, the centre’s fiscal deficit was limited to 5.2 per cent of GDP through cuts in spending. This is bad news for raising growth, as plan capital expenditures were slashed. Additional resources will be available for such expenditures only if revenue deficits are controlled — but this is not happening. This implies recourse to more borrowings, pushing the fisc deeper into an internal debt trap. It is time for serious stocktaking, not for quibbling on judgements, however pessimistic.