As we move into the second half of 2002, it is becoming increasingly clear that some tough times lie ahead for the global economy. Growth in the US economy has slowed in the second quarter; it was barely positive in Europe in the first quarter, and the second won?t be different. And then there is the Scylla of collapsing US asset prices as investors, particularly foreigners, switch to European assets, the Charybdis of the $400 billion current account hole in the US balance of payments, and the rising tide of budget deficits. Ulysses made the trip, just barely, and so will the world economy, and with crew intact. But Indian dreams of notching 8 per cent growth are just those ? dreams.
The present conjuncture presents us with many opportunities, but realism must inform the policy stance. Over the last five years (1998-2002) ? four of which were in the mellowness of a global boom, powered by explosive economic growth and surging investor confidence in the US ? the Indian economy averaged 5.4 per cent growth. During the same period, the combined deficit of the Centre and states, including that of state-owned utilities, rose by 70 per cent or 5 percentage points of GDP, from 7 to 12 per cent of GDP. For the record, in the previous five-year period (1993-1997), the same economy had averaged 6.7 per cent growth, while the overall government deficit hovered around 7 per cent. So much for the wonder drug called fiscal stimulus, whose salesmen never tire of hawking their mouldy ware.
As capital markets across the world wrestle with the legacies of the excesses of yesteryears, as ?irrational exuberance? metamorphoses, in Mr Greenspan?s words, into ?infectious greed?, and mere misdemeanour pales into the criminal, expansion of private spending ? consumption and investment ? will have to take a breather. Europe stands to benefit from the combination of a stronger currency (lower prices at home) and less of the ?infectious? legacy; but quite a bit of Europe?s growth in recent years has come from surging exports to the US, something that will be a casualty of contemporary developments. And European companies ? from Vivendi to Kirch ? are also troubled from years of over-reaching. The difficulties of the world?s second largest economy, Japan, continue, and matters will hardly be helped by a slowing American economy and a rising yen.
With this being the backdrop, the sensible thing for us in India would be to chart a cautious course. There is a big enough backlog to clear. From cleaning up the state-owned utilities, balancing government expenditure with its revenue potential, to fixing the distortions within government expenditure, the mess in the foodgrain, and the tangled finances of state-owned financial agents. Of privatising the privatisable. Then there are the legacies of inappropriate laws and worse execution. On some, there is visible movement; on others, not much.
There is no way forward without proceeding to clear the backlog. Convenient formulae happily assume away the institutional problems that have throttled investment and growth over the past so many years. Every housewife knows that cooking is a process. The choicest and most expensive of ingredients cooked badly are inedible. The cheap and the plain, tended to properly, can be mouth-watering. But the light of common sense does not illuminate the tireless efforts of mandarins and lobbyists. More is ever better. It is too much of a bother to figure out more efficient ways of spending the treasury. On the farm, in the factory, on the highway, everybody measures the output and its quality. But in government, the only metric of progress is more expenditure.
Besides improving on the less-than-edifying way that we carry on the business of government, what would be the other pay-offs in travelling this less glamorous path disavowing instant highs? It is that private economic agents have tired of talk. A credible course of action would do wonders to galvanise the domestic potential for higher levels of activity and give us more growth. Not 8 per cent for sure, but maybe 6.5-7 per cent, a great achievement in these times, and a sound platform for future growth when global conditions improve.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency) and editor of Money and Finance, the ICRA bulletin