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BW Businessworld

Pressure Points

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The Central Statistical Office (CSO) had released quick estimates of growth in the current fiscal on 7 February. It forecast 6.9 per cent growth. The estimate caused unease in official circles. For them, growth at 8 per cent and more is an article of faith; 6.9 per cent is fate mocking faith. Faith bestows a great benefit on the faithful — they never run out of hope. So, one after another, the faithful reminded the rest that India ran its financial year from April to March, and the CSO had released growth estimates for only the first half. There was still half a year left, in which growth could shoot up to restore the annual growth to 7 per cent — they did not dare hope for 8 per cent any more.

That hope received a blow when the CSO released the estimate for the last quarter of 2011 showing 6.1 per cent growth. Successive quarters of this financial year have shown growth coming down from 7.7 to 6.9 and then 6.1 per cent. Ending the year with an 8 per cent growth would require the last quarter's figure to be 9.3 per cent. Not even diehard optimists could hope for that. But 7.3 per cent in the last quarter would see us through to 7 per cent for the financial year. That was something they could dare hope for.

These optimistic reactions are understandable. Those in the government have a sense of ownership in growth. They think they create it, and that a decline in it is an insult to their talents. This ambition would be commendable if it were combined with the ability to generate growth. But such a combination is too much to hope for. If it exists, it will exhibit itself in future growth. Those not in the government are not blessed with the power to make growth. The best they can do is to ask why it came down, and what that portends for the future.

Of the sectors into which the CSO divides the economy, agriculture grows the most slowly: 3 per cent is high for it, and a higher growth rate can occur only after a drought or a calamity. Of the other sectors, only two grew more slowly than GDP in the last quarter, namely mining and manufacturing. The growth of both has been weak or negative for a number of quarters. In other words, India is experiencing an industrial slump, which started some time ago. It is not an aberration or an expression of base effect. Industrial growth has really come down to a crawl, and is not far from disappearing.

The slump in growth of mining output has much to do with Coal India's plight. It was one of the government's best performing companies. It had a simple business: it removed soil and exposed coal deposits, it scoured them out, and shipped them to state-owned electricity boards. It did not have to worry if they did not pay. That was a small matter of debts within the government. That model has stopped working. To increase output, it has to open mines in tribal areas, and another part of the government has stopped it from doing so. It has been looking desperately for reserves to exploit abroad. But coal from them will be more expensive, and state electricity boards will not be prepared to pay.
The slump in industrial output is almost entirely due to the fall in the investment rate. It has affected the demand for engineering goods. A reversal of the construction boom has coincided with it. As a result, construction materials' output is also growing more slowly.

This is the background against which the coming budget must be framed: the finance minister has a major slowdown to contend with, and the religious faith of his advisers in 8 per cent growth cannot reverse it. He will have to do something more than pray with them. He could try a stimulus. But that is just another name for fiscal deficit, and he has been running up huge deficits for some years, so increasing the deficit will cost a lot in terms of either inflation or an increase in public debt or both. He could also try a reduction in taxes, though it would go against the government's socialist stance. But people may just save what he adds to their income, in which case there will be no increase in demand and no stimulus to the economy. So the best he can do is to give incentives to investment, especially in infrastructure. And now that Pakistan is going to start importing from India, it would not be a bad idea to give it a modest loan to buy our goods and services. He should teach the Pakistanis to get familiar with Indian products, in the hope that they will soon get addicted.

In particular, India is a competitive producer of industrial equipment, while Pakistan imports it at far greater cost from the west. The finance minister should give big Indian engineering and construction firms money to give credit to Pakistani customers, and finance modernisation of the Karachi port.

(This story was published in Businessworld Issue Dated 19-03-2012)