There is a general sense of gloom in the economy about the growth prospects in this and the coming year. This is largely fuelled by the drop in Indian exports and the general slowdown of the global economy. What is true elsewhere must be true here too! This is a complete shift of our attitude from what it was prior to the nineties. Then, the standard refrain was that ?in a country like India, economics does not work the way it does in other countries?. We were wrong then. Now, everything that one wants to know about India is available in the projections on to India of what is happening to the global economy. And, we are wrong now.
Yes, the global financial meltdown has affected exports significantly, especially in particular sectors, like textiles and gems and jewellery. It has affected jobs in the financial sector and, hence, the salaries and job offers received by our graduates from the prestigious business schools. It has led to the return to India of many IT specialists working in foreign lands. And, most importantly, it has affected those in the corporate sector who had large exposures (real or financial) in the global market.
But, we have always known that the Indian growth story is one driven by domestic demand. So, when global markets slow down, and we are not dependent on foreign trade to the same extent that China, East Asia or developed countries are, why should there be such a huge impact on our own growth? This is a simple question that few asked when trying to gauge the prospects for Indian growth in the immediate future.
Well, the press and various industry associations are now coming up with reports about how the Indian rural sector is supporting the turnaround since the last quarter of the previous calendar year. The cement industry, the auto industry, the fast moving consumer goods industry are surging ahead on rural demand, while mid-cap companies with large rural bases are easily weathering the global recession.
If this is indeed happening, first let us ask why is this the case? We have already mentioned that India was a domestic demand-driven growth story. There were two massive fiscal stimuli given in December and January. In the budget last year, tax exemption limits were raised and later in the year the Pay Commission report was implemented. All of this adds to domestic demand; the December-January stimuli through greater investment and the tax and salary packages through increases in household spending. Inflation was an issue in the initial stages of the last fiscal year, but then it got tempered in the second half.
But, what has this got to do with rural demand? Well, for the first time in many years, the rural economy was doing better than before. Recall that agricultural growth was a whopping 4% in 2007-08. Add to that the spread of the NREGS to the entire rural sector and the impact that this has had on the rural wages in districts where they have been well implemented. (This is not to say that there are no leaks in its implementation but to highlight the fact that more money has been flowing in to rural sectors.) Indeed, there is very little to suggest that the global financial crisis has had an impact on rural India outside of remittances from family members working in the urban production units of export led industries like gems and jewellery.
The second question to ask is, why did we not know this before? Why were we crying our hearts out in the fear that the Indian economy will be severely affected by the global financial crisis? Well, here there is an institutional problem. Macroeconomics in India is restricted in two ways. One is the complete disregard for economic theory and the total focus on empirical data and their analysis done for foreign countries in the foreign publications. Second, and actually one that has led to the first, is the complete lack of current data. It is unfortunate that what is coming out in the press today was not available to any body when it was happening. In a fast changing world, a proactive government needs current data to decide on policy interventions. Our statistical system, though authentic in many ways, is woefully back-dated for policy purposes. For instance, the reports in the press cannot be checked unless the consumption survey being carried out now becomes available. From past experiences with such data and their publication, I am afraid we will know about last year?s rural demand not before the end of this year. How can the government make policy based on such information?
It is time we felt less gloomy about our immediate future and pushed ahead on our original plans of consumption and investment. And, it is high time the government gave serious thought to developing a system of collecting parsimonious but recent information on economic indicators.
The author is with the India Development Foundation
