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BW Businessworld

India’s Little Slumps

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It is difficult to believe that the growth of national income exceeded 8 per cent at this time last year. True; it fell below 8 per cent in the second quarter of 2008. But it was only slightly below that magic figure; that is why the devout optimists could delude themselves that there was a momentary slip and that India would resume its rightful ascent before too long.

For them, the latest figure of 5.3 per cent for the last quarter of 2008 has been a wake up call. Growth is now seen to be unequivocally and undeniably falling. The trumpeters of India’s rosy destiny have fallen silent. The only man who could not contain himself was Suresh Tendulkar, the recently anointed chief of the Prime Minister’s Economic Council. In his earlier, unofficial incarnation as professor in Delhi School of Economics, he was known to be sober and cautious. But like everyone in the government, he too has caught the patriotic fever. Tendulkar pins his faith on the huge amounts of uncovered expenditure the government has been announcing from time to time. A slump is commonly believed to be due to a fall in total expenditure; so in Tendulkar’s thinking, more government expenditure must revive the economy. Surging waves of cash will soon start beating on the dancing bears of India; it is only a matter of months before they will be drowned, and rampaging bulls will make India run at 8 per cent and more.

Those who want to hope should not look at reality. But those who are prepared to stare reality in the face can learn something from the latest GDP figures. What is most striking is the decline in agricultural growth, from 6.9 per cent to minus 2.2 per cent between the last quarters of 2007 and 2008 — a fall of 9.1 per cent. If all else had remained the same, that fall would by itself have brought down growth by 2.3 per cent, from 8.9 per cent to 6.6 per cent. And yet, this fall is a statistical artifice — it shows base effect. Because growth in the last quarter of 2007 was so high, the base was inflated, and growth from it would have been brought down. Agricultural growth over two years from the last quarter of 2006 comes to 4 per cent — an annual average of 2 per cent, which while not spectacular is still respectable. If agricultural production had grown at the normal 2.5 per cent, the overall growth rate would have been a per cent higher. It gives less reason to shed tears.

Hence, if the policymakers were not lost in their dreams and were to learn to read figures, they would discover more solid reasons for optimism. But then they would also have become aware of their achievement. Community, social and personal services grew by 17 per cent in the last quarter. These are just a camouflage for government services, and these are not measured by the good they do to the people, but by the money the government spends. The UPA government’s spending spree has inflated GDP; if its expenditure had grown at the same rate as the economy, the overall growth rate would have been 1 per cent lower. And if the bogus growth embodied in government expenditure were removed, the growth rate would come down to 4 per cent or thereabouts.

Thus, the bad luck in agriculture offsets the bad content of government growth; if both effects were discounted, the growth rate would be pretty close to the estimated 5.3 per cent. So it is impossible to avoid the conclusion that growth has slowed down precipitately in the last quarter. What is even more disturbing is that the slowdown is no longer confined to manufacturing. It has already spread to construction, hotels, trade, transport and communication; rapidly it is enveloping the whole economy.

This is no longer a sectoral slowdown; it is comprehensive, macroeconomic disaster. It is so serious that it is virtually impossible for the government to combat it. That should comfort our rulers, for they can continue to do what they are good at. They can continue to spend more and bloat the government, for government expenditure benefits the political class. And for the rest, they can make periodic statements that the catastrophe is nearly over, and that the economy will turn around in the three months, six months, or any other period of their choice.

(Businessworld Issue Dated 10-16 March 2009)


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