It is true that the job of the politicians is to show that what they are doing is set to translate into a better future, and to that extent Prime Minister Narendra Modi and Finance Minister Arun Jaitley have done well by trying to capitalize on India being the country with the best growth figures across the world at present, 7.2% in FY15 and 7.6% in FY16, to woo foreign investors.
But, they must be extremely cautious in projecting a significant jump in the GDP growth going ahead.
A substantial part of Indian economy’s problem today – stuck projects, bad loans and lack of investment – is because people took the UPA’s 10% growth dream as a done deal.
The NDA government must learn from this experience and tread cautiously on projecting higher growth figures, especially because even the current growth projections of around 7.5% is based on the new GDP series, that would be just little over 5% according to the old series applied till FY14, and the global growth prospects are also not that encouraging.
So, when RBI Governor Raghuram Rajan’s reaction to India being the bright spot in the world economy is – ‘Andhon mein kana raja’ or ‘In the land of the blind, the one-eyed man is king’ – it has to be taken note of in the right perspective.
There may be a debate on whether he should have used this phrase or not, but that hardly takes away anything from the fact that India’s growth is looking impressive because other major countries are in bad shape.
The IMF’s Global Financial Stability Report (GFSR) released last week points out that the advanced economies are facing increased uncertainty and ‘setbacks to growth and confidence’.
In case of the emerging markets, a decline in oil and commodity prices continue to be a major pressure, though India is among the few countries benefitting from lower oil prices; and heightened uncertainty in China is spilling over to other countries.
The market volatility witnessed in the first two months of this year may be due to the rising economic, financial, and political risks as well as weakened confidence in the policies.
It is true that the improvement in market sentiment since February, supported by higher oil and commodity prices, stronger data out of the US, and supportive actions by central banks did recover the situation to a certain extent, but the net impact has been a further dent in confidence.
The more worrying part is, if the policymakers fail to take corrective policy measures, both the growth and the financial stability are set to get further dented, and the GFSR projects that the world output could fall by 3.9% relative to the baseline by 2021.
It is this backdrop which makes Rajan’s speech at the 12th NIBM Convocation in Pune yesterday, so critical, in which he pointed out: “We must remember that our international reputation is of a country with great promise, which has under-delivered in the past. This is why we are still the poorest country on a per capita basis among the BRICS. We need to change perceptions by delivering steadily on our promise for a long time – by implementing, implementing, and implementing. We cannot get carried away by our current superiority in growth, for as soon as we believe in our own superiority and start distributing future wealth as if we already have it, we stop doing all that is required to continue growing. This movie has played too many times in India’s past for us to not know how it ends”.
Getting euphoric on growth, ignoring the ground realities, would lead to major setbacks in coming years, and there would be no point in remembering what Raghuram Rajan, who predicted the 2008 global financial crisis, is saying today with regard to the Indian economy.