Taking an economy down from a 9.2% rate of growth to 5.3% in a year takes some doing. It almost seems like two countries, sitting in the debris left behind by a policy regime that has crash-landed the economy without any emergency. There was no drought, no calamity (unless one considers this government as one). And, in the analysis of most pundits, this is the Asian economy with the least linkages with the rest of the world.
On Thursday, the question that every analyst found difficult to answer is, what next? The nonplussed feeling comes from the data itself.
From October 2011 to March 2012, capital goods production in India has declined for four of the six months. Yet fourth quarter gross fixed capital formation has turned nicely positive and has checked the pace of decline in the annual numbers as per the latest GDP data (see table). The turnaround is all the more surprising as the persisting slowdown is also corroborated by the data on the pace of plan expenditure spend for fiscal 2011-12, released again on Thursday; the amount spend on capital head of plan (broadly investment) expenditure in 2011-12 has been less than 85% of the target.
Finance minister Pranab Mukherjee has, however, solemnly announced there is a turnaround in the rate of capital formation and so the factors that made for the slowdown ?have bottomed out?. In other words, there has been a crash but, then, there is no need to do anything more. The economy will sort of auto assemble and get back to its flight path.
The crash, for the record, was a combination of Greek crisis, RBI cussedness in not lowering interest rates and, just possibly, some delay in environmental clearances, Mukherjee added. What makes the analysts and market people concerned is that from here on, the government needs to show it is following a policy of reviving private sector demand, cutting down fiscal excess and pushing for growth-inducing policies.
What they got instead by the evening is a circular from the finance ministry to all line ministries to cut down 10% of their non-plan expenditures. This should be great news if it had meant a cut in subsidies. But the circular does not say so. The circular does not mention this at all and only says other than committed expenditures?which are interest payments, salaries and pensions, and tax allocation to states?everything else should come under the guillotine. But since subsidies are clearly apportioned against specific plans, like the Food Security Bill for instance, even though paid from non-plan heads, they are exempt.
Excluding all of them, then, the government will spend R1,61,351 crore in fiscal 2012-13. Even if one assumes there is no salary element in the rest (there is), this will hand Mukherjee a savings of R16,000 crore?about 0.2% of the GDP. The economy will surely need far more than these austerity measures to make the difficult climb-back this year.
The GDP data also shows that many of the assumptions that underlay this year?s budget need to be revisited. The disappearance of manufacturing from India is probably the most serious issue that needs to be fixed. It has turned in a growth rate of 2.5%. With agriculture repaying the compliment with a 2.8% rate of growth too, this means close to 70% of the Indian workforce has laboured in sectors where growth is less than 3%. Which means they are far worse off from an aam aadmi government?when you consider the modest increase of 5% in per capita income recorded by the population.
The huge outpouring of discontent in the streets at times, therefore, expresses a resentment against this lack of growth. But it has been misread by New Delhi as a reason to stop working.
Unless this disconnect is repaired, 2012-13 could again turn out to be a bad year. In any case, it takes a lot more effort to reverse a breakdown than to engineer one. It took a year of prevaricating to slip Indian growth by nine years. Restoring the engines will take a far longer lead time, as the impasse on coal-power linkages are showing. The telecom story is way beyond 2012 and revival in manufacturing at steel plants will have to cut through several booby traps. Railways and aviation have their own snarls, which seem way beyond the ability of this government to cut through. Meanwhile, workhorses like textiles and small enterprises that generate exports and employ millions are falling off the map.
What the government is hoping at this stage is that front-loading the bad news will create a base effect for the new year. A 5.3% rate of growth of the GDP in the fourth quarter is a wonderful take away to make fiscal 2012-13 end with a bang. That is how it would look in an ideal world, at least. But this is also the year when the finance minister may change. Election or no-election, this may also be the last chance for this government to do what it does best?spend more lavishly on a raft of programmes to make the fiscal deficit soar better than any bird.
If one argues that, except the base effect, none of the above will happen and the government at Raisina Hill will hunker down to good old hard work, you are then left wondering why was it necessary to wait three years to do so and send the economy through the wringers at all. Among the many firsts this government can take credit for, then, is to pull the GDP growth down to the original Hindu rate of growth of 3.5%. That?s what the number 5.3 reversed reads. And given the spate of data goof-ups from our statistics office recently, this may be premonitional.
subhomoy.bhattacharjee@expressindia.com