Column Economics after politics

Written by Bibek Debroy | Updated: Jul 11 2008, 02:55am hrs
Amidst this glorious uncertainty, there is some predictability. If you travel out of India now, you are certain to confront three questions. First, when are elections and how long will the government last Second, what happens to the nuclear deal Third, how bad is economic slowdown and when will growth recover Lets take the third question. Is there any official government source that is supposed to give us growth projections for 2008-09 Not quite. This is not Planning Commissions cup of tea. Economic Survey is typically for the year that is over, not for the year that follows. At one point, PMs Economic Advisory Council indulged in this business. For 2006-07, it produced an economic outlook and a separate inflation outlook. For 2007-08, it produced an economic outlook and a separate review of the economy. For 2008-09, it has evidently decided not to stick its neck out, though the 2007-08 report mentioned 8.5% real growth forecast for 2008-09, the official target so to speak. This vacuum leaves the field open for non-official forecasters, some of whom use models and give us predictions up to the second decimal point, though no one subsequently remembers how wrong they were.

Of course, the greater the band, the safer the prediction. For instance, an East Asian newspaper quoted an expert, who said that in the medium-term, Indian growth would be between 5% and 8%. Apart from medium-term not being defined, that 5% to 8% band is so broad that the expert cant possibly be wrong. Lets take 2008-09. The dip against 2007-08 can be ascribed to three inter-related factorsglobal (often read US) slowdown, high fuel prices and anti-inflationary policies contributing to tight monetary regimes. On global slowdown, one cant do better than World Banks recent Global Development Finance report. The turmoil in US and international financial markets has affected South Asia primarily through a falloff in portfolio inflows and weakness in local equity markets, with the latter most pronounced in India. Further effects on the real side of the economy are likely to be muted compared with other regions. The decline in share of the United States and the European Union in South Asias export market in recent years has been offset by a concomitant increase in China and oil-exporting countries shares, so effects on export volumes should be less severe than in other regions. Moreover, although South Asias integration with the global economy advanced rapidly in recent years, it remains the least integrated among developing regions.

The global slowdown is a convenient scapegoat. This doesnt mean there is no quantitative impact, but the effect is much less than we commonly assume, particularly in the real sector. In a slightly different sense, this is also true of fuel prices. The Indian economy is no longer what it was in the late 1970s and early 1980s and there is no BoP (balance of payments) issue. There are issues of deficits (not captured in fiscal deficit figures) and messing up the fertiliser and petroleum sectors, but these can be distilled out in the form of the higher interest rate regime.

To return to 2008-09, the range of forecasts is more like 7% to 8%. Anyone who has got a decimal point is suggesting more accuracy than it is possible to obtain. Those who err on the side of 8% essentially believe there is enough growth momentum for the tight monetary regime not to bite that much, both for consumption and investment. In 2009-10, growth is expected to recover7.5% for the World Bank (which has 7% in 2008-09 and 8% in 2010-11), 8% for IMF and 8.5% for ADB (Asian Development Outlook).

Of these, ADB is the most careful in spelling out five assumptions that ensure recoverydomestic food supply situation will improve, inflation will be controlled in 2008-09, monetary policy will be relaxed in 2009-10, petroleum-product prices will be adjusted in 2009-10 and not before and rupee/dollar exchange rate will be relatively stable. In a recent interview, the Deputy Chairman of the Planning Commission also suggested that the bugbear of inflation would be out of the way in 2009-10. None of this incorporates the first question one began with. When are elections and how long will the government last

How that answer plays out and when the next government comes in and in what shape will determine how strong the reform agenda will be in 2009-10. So its too early to say whether thats the year the economy takes off again.

The author is a noted economist