The declining growth rates of consumer durables output and slower growth in exports are indications of slackening demand both in the domestic and international markets. Is the slowing domestic growth entirely due to global forces? In a structural sense, most demand-side factors are positive for sustained high growth, and the current slackening appears to be only a blip. A short-lived global slowdown should have some adverse impact on output growth rates in the short run, but cannot lead to long-term problems for the Indian growth story. The threats to long-term high growth, surprisingly, are most likely to be internal, just as the strong fundamentals of growth are.
The important point, however, is that the sustained high growth may not come without twists and turns. As there are no guarantees for an uninterrupted high growth trajectory, we need safety nets. An important strategy to minimise the risk, of course, is to diversify the portfolio of investment. The size and composition of public investment will be an important determinant of this.
Volatile agricultural output and prices were the source of all uncertainty in the past. With the declining importance of agricultural output in the economy, it is now actually the volatility in demand for non-agricultural products that is the source of uncertainty. The instability is not only in investment demand, but also consumption demand. Consumption expenditure is no longer on just essentials such as food and clothing. It is discretionary consumption, and consumer confidence counts. Expansion of consumer credit has also turned some of the current latent demand into effective demand, and therefore more growth, but it has also meant more volatility in demand. Financial sector instability arising from other parts of the world may well have consequences for consumer credit here. Stable growth in consumption demand cannot be taken for granted.
Inflation is a big concern. High rates of this can harm both producers and consumers. There was once a consensus that inflation had finally been tamed and reduced to around an annual 3%. However, recent experience suggests that holding inflation rates under 5% on a sustained basis will require much more efficient supply responses to demand stimulii. The longer duration of high prices of consumption goods makes it critical to formulate strategies aimed at quickening supply responses in critical goods and service sectors. Changing the output mix increasingly in favour of sectors where supply responses are faster would make output adjustments quicker, but may not entirely meet requirements.
Supply-side shocks such as high crude oil prices and inclement weather have shown that they can warp price conditions at any time. Although the current high oil and grain prices are not entirely results of supply squeezes, the potential for faster supply responses in some key commodities is clearly low, which means that the frequency of price shocks will remain worrisome. If these are allowed to disrupt the functioning of other sectors, their impact could be widespread enough to introduce output fluctuations at the aggregate level. The key, again, is to ensure that the scope for supply and demand mismatches is reduced.
What should be the strategies to minimise the likelihood of long-duration disruptions of India?s high-growth trajectory? A stable and prudent fiscal position would indeed be necessary. Only a stable expenditure path that can be sustained through revenues from high growth can ensure that the fiscal position would not become a source of instability. What this would also imply is that expenditure should be productive at least over a longer term, if not instantly. Actually, a stable public expenditure growth path can lend stability to demand conditions in the economy. The trick, of course, is to impart the expenditure path with fiscal sustainability.
Expenditures should support a broad spectrum of productive capacities. In this sense, expenditure on building infrastructure would clearly promote growth and minimise risks of volatile demand. Adjustments within production sectors, whether in terms of changing production lines or relocation of production facilities, would be far more economical and quicker if the physical infrastructure is affordable.
A broadbased strategy to improve supply responses could include an emphasis on technology development and adoption of new technologies. While strategic interventions in key sectors where supply responses are slow should receive high priority, policy support for technology development and the quick adoption of more productive technologies will become increasingly critical in establishing the basis for long-term sustained growth?which is productivity growth.
Safety nets can provide only short-term solace. It is unlikely that long-term safety measures can emerge without public policy support.
?Shashanka Bhide is senior research counsellor, NCAER. These are his personal views