The growth story is under some strain. India took note of the last downturn around six months late. By that time, the American and Chinese stimulus were well under way. This column had argued since September that year that a stimulus was called for, but the illusion was kept up that our economy was insulated from the Lehman failure. The delay cost us a half percentage point of GDP and anyway our stimulus did not have the infrastructure component that the others did. But the economy responded well and soon the loss of around a million jobs in export sectors like diamond polishing and made-ups was a memory. Interestingly, as growth recovered, apart from the current FM, there was little acceptance that we were following a Keynesian path, and the talk of labour reform (presumably reducing wage costs in a demand-deficient economy?), free trade revival, etc, continued. In actual practice, there was a more realistic policy stance. For example, a CBDT paper on taxation as a part of the stimulus strategy talked of inverted tariffs for capital and intermediates and such other not-very-neo-classical policies. All in all, India did well in the stimulus and if investment was not there, it sensibly implemented social programmes like NREGA.
By now the world is hesitantly but firmly getting out of the worst. Most countries that are our competitors have recovered on the growth front and have done so with price stability and many have near-zero interest rates. India, on the other hand, is crossing the price precipice. Its fiscal deficit at 8.5% and current account deficit at 3% is one of the highest in its history and also amongst nations that matter now. Public debt as percentage of GDP is around 80%, which is distinctly uncomfortable. These figures fare poorly in global comparisons. Indian inflation has reached 10%, close to the trend rate of the period of a closed economy in which interest and exchange rates were insulated from market forces and global competition.
There is a structural component to inflation, largely stoked by food and fuel. Even if we factor in the weather, the growth rate in agriculture is around 3% and hitting a per capita growth rate of more than 6%, a general food inflation is the consequence. It is not cereal-centred, since the country has reached an income level where even the poor households have a diversified consumption basket. India developed advanced tools to track consumer behaviour of rich and poor households separately since the 1970s when a task force I chaired defined the poverty line, but also built up linear expenditure systems of consumer behaviour. The income elasticities of poor households in the 1990s were very low but they were high for non-cereal food commodities. The situation is worsened by the near stagnation in agricultural output in the 2008-10 period. It can be onions, tomatoes, milk or any of a range of food commodities that give up. We are recognising grudgingly that the world cannot feed India, although trade is to be valued for other reasons.
Some of the best younger Indians, alas outside our shores, have done some excellent work to show that the degree of industrial concentration is not much less after the 1992 reform. I know them from their college days when Asok Mody came to me for the first time and of course Anusha Chari?s version was reported in a Brookings meeting some time ago. Our pundits have no time for scholarly work, the two-minute byte being their stock in trade. Instead of commending that work, apparently a senior Indian close to policymaking circles is reported to have pooh-poohed it, but now that The Economist has blown the lid in Dancing elephants, superficial comment is best ignored . My only regret is that, work on India, of the kind done at home for decades, is now done only in universities abroad as our own education system is systematically undermined. But only the very brave will posit a neo-classical supply curve for their policy prescriptions either for the industrial or the agricultural sector.
Wage and commodity inflation is now general in its consequences and a slew of corporate results have declared dismal PBT figures in this quarter on account of rising costs. We are near the precipice after which prices chase costs. Stock prices are taking the brunt. Apart from a dim recognition of the facts, a fascinating response has been to keep on repeating neo-classical prescriptions in a completely structural economic context in ?a habituated through the decade manner?. With prices rising, labour reform is the panacea to many. Others are in favour of interest rate reductions with a double-digit price rise. Why organised labour or banks will commit hara-kiri is a mystery and a question not raised. Fiscal tightening is also not on the agenda since anyway reform means reducing tax rates.
There are other ways. When constraints of this kind emerge as you approach fuller utilisation of resources, a wages and incomes policy is called for. If per capita consumption can only rise by 6% in real terms, corporate, workers and politicians have to get signals that the weighted average of their claims can?t rise beyond that. President Obama made tax concessions for the rich a policy issue before Christmas. We need the intellectual strength to state the facts and the policy systems to follow through with details. But we may instead get another dose of platitudes on reform dished out as salvation.
?The author is a former Union minister
