The third-quarter growth figure of 5.3% is Indias worst quarterly performance in 2008-09 and the first sub-6% growth in many, many months. Expert projections on the third-quarter figure were higher. The CSOs advance estimate for 2008-09, 7.1%, will obtain only if fourth-quarter growth is significantly higher than 7%. That seems a brave assumption to make, even making generous assumptions on the effect of three fiscal stimuli. Does 5.3% growth for October-December mean that pessimists were right about the short- and medium-term effects of the financial crisis and world recession Probabably, but one should not ignore the sharp slowdown in agriculture which contracted by 2.2%significantly more than the 0.2% decline in manufacturing in the October-November period. Still the role of Indias own anti-growth medicinethe tight money policy that continued right until the global crisis hitsurely had a major role to play. The key figure to track will be investment. That government is dissavinghigh deficitsand corporate profits are shrinking mean national savings will almost certainly be sharply lower in the near future than it has been of late. This has implications for investment. If the investment-GDP ratio drops by seven to eight percentage points, the implications for growth will be hugely negative. This warning has implications for three policy areas: public finance, the interest rate/rupee and foreign capital.
Public finances need structural change. The next government will have to sell PSU stakes, even consider outright sale. The ridiculous delay over 3G auctioning has cost India fiscally. But telecom is still a growth area; so a good auction design can still get good money. If public finances can be brought into shape, the pressure on interest rates from high borrowing can be controlled. Temporarily, deficit monetisation should be considered and RBI must focus on growth, not the exchange rate. Yes, the rupee is low. No, we should not consider high interest rates as useful just because it can backstop the rupee. RBIs policy rates now should be deployed radicallya 50-basis points cut, which seems to be the Street expectation, wont cut it. Policy on foreign capital may seem to be a quixotic idea when deleveraging is still happening and quasi-nationalised global banks are likely to focus more on the home country. But capital is still available for a country that has huge latent consumption and investment demand and the institutional potential to deliver a good policy framework for investment. A few key policy changes in infrastructure, for example, can get long-term foreign capital interested again. In sum, the first few months of the next government can make or break Indias prospects. GDP needs GDP: good domestic politics.