Like, under the umbrella of fiscal prudence, can we increase fuel prices at the cost of inflation?

?Contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find that one of them is wrong?. So Ayn Rand wrote in Atlas Shrugged.

The problem with interpreting the GDP growth number for FY12 is that we all assumed, especially after the Lehman crisis, that our growth was decoupled from that in the West and that the path was, to begin with, exponential. No wonder we spoke of a double-digit GDP growth rate for the next five years. Subsequently, we assumed a linear growth path and thought that 8-9% was good enough. Therefore, when the number comes down to 6.5%, it has predictably elicited a hysterical response from the analysts, with critics revelling in the helplessness of the government. Governance deficit and policy paralysis, the twin terms that have been the critics? delight all through the year, have been put forward as the reason for the slowdown.

But, frankly, if we look at the growth numbers in a dispassionate manner, they are not disastrous, though the environment is disconcerting and requires attention. Likening the current economic picture with 1991 and raising the spectre of stagflation, though an attractive proposition, may be an exaggeration. Growth is still positive in the slowdown phase and one of the highest in the world, with only China being ahead at 8.3%. The other BRICS nations are growing at less than 3.5% per annum.

Yes, the assumptions that we made to begin with were overboard as anecdotal evidence shows that when countries have grown in the last two decades they are susceptible to business cycles, which are accentuated further in this globalised world. China probably has been the only exception and they too have witnessed a setback this year. Further, we need to resolve several contradictions along the way before we move forward and, therefore, the coming year will be painful.

On the positive side, while our agricultural policies and systems need improvement, output performance has been steady. The services sector continues to contribute positively to growth, though we should understand that this is a supporting sector and requires agriculture and industry to grow to maintain momentum in the medium term. After all, we do not require finance or transportation if there is no production taking place. Therefore, unlike in western nations where the service sector dominates and drives growth, we cannot expect too much unilaterally from this sector.

This clearly means that we need a thrust coming from industry. Currently, the dilemmas that the policymakers have are challenging. Can we lower interest rates when inflation is high? Is corporate investment more important than consumer spending, considering that inflation is eating into consumption and creating fresh capacities will not work unless there is demand? Lowering interest rates at a time when inflation is high means negative returns for savers. Is this fair? Under the umbrella of fiscal prudence, can we increase fuel prices at the cost of inflation? Should land laws be pro-industry even though it hurts the farmers? Can we promote mining at the cost of environment? Is more foreign investment in retail a panacea for agriculture considering that there will be other social issues to contend with? Will more FDI in insurance actually improve insurance standards and bring about rural penetration, which has not been seen in banking or are we just craving for foreign funds given that the rupee is depreciating? Clearly, there are no easy answers here and these issues cannot be decided in favour of India Inc as governments have to balance social and political compulsions with pure economic demands.

So where does this leave us? GDP growth in FY13 will probably be better than that of last year, with a slice of luck and the low base effect. A good monsoon, though not always associated with higher production, can still help to maintain growth, though the inter-crop performance will still be varied. Industry is one sector that has to perform. Currently, the sector is bogged down by three factors?high interest rates coming in the way of investment, high inflation eroding profits and absence of economic reforms. While various attempted have been made by the government and RBI to address these issues, solutions have not really been obtained. In such a situation, India Inc has to seriously think of innovative ways out.

One must remember that we have had similar situations in the past where there were no reforms, inflation was high, rupee under pressure and interest rates high (MLR at 16%). Yet industry had performed commendably. Therefore, industry needs to work harder on creating demand through probably better rural penetration and cost control, as most certainly the recovery will take place, though the timing is unknown. Therefore, industrial growth should revive, albeit marginally, in FY13. One can assume that services will continue to support growth with growth rate of between 8.5-9%. Therefore, prospects are still quite satisfactory and the fact that oil prices are coming down is a relief, because rising crude has the potential to throw countries into prolonged state of stagnation.

The government, on its part, will have to look at making incremental changes in policy where possible, where there is less controversy. Tax laws are less sensitive and can be addressed while marginal changes can be brought about through capping of subsides, cutting non-plan expenditure (already announced), attracting foreign banks (will help sentiment) and increasing investment in infrastructure. Industry, on its part, should work hard on improving efficiency and be prepared for another year of low performance as the economy recovers, albeit very gradually.

The author is chief economist, CARE Ratings. These are his personal views