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Never Less Than Eight

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His Economic Advisory Council (EAC) has given the Prime Minister another look into the future. It begins by admitting that its last forecast was wrong: growth in 2011-12 would be more like 8.2 than the 9 per cent it had promised. It excuses itself by citing inflation and a slowdown in investment. It would be safe to predict that the PMEAC will never be pleasantly surprised: its growth forecasts will always exceed actual growth. There is nothing wrong with that; the council is entitled to think that it is more important to cheer up the Prime Minister than to educate him. And excuses can always be found for being wrong; there will always be some misfortune that was not anticipated.

Two have been cited this time: a fall in the ratio of investment to income, and inflation. Just why they were not anticipated is, however, unclear. It is in the nature of investment that it fluctuates; booms are followed by slumps. The only reason for not anticipating a slump would be if the council thought that cycles had been abolished in India — that its economy is so dynamic and its entrepreneurs so prescient that they always fulfil their plans exactly. The ratio of investment to income had already begun to fall when the council made its last prediction. It felt that the decline had lasted long enough and would be reversed; it was not. And as to inflation, it is difficult to understand why the council finds it so unpredictable. The Indian economy has a high trend rate of inflation; if prices did not go up by 8-10 per cent, Indians would feel deprived. They have not received inflation as a gift of God, but of the government. It keeps buying foodgrains at rising prices, and keeps their market starved of stocks; and it keeps spending far more than it receives and pumping purchasing power into the economy.

Once bitten, twice shy; this time the council has found a thick bunch of reasons, including weak monsoon, inflationary macroeconomic policies and corruption. As if that was not enough, it consulted important businessmen, who gave it their own list, including infrastructural bottlenecks, surplus capacity in manufacturing, rising costs, credit shortage, etc.

One would have thought that such a powerful battery of negative factors would lead the council to bring down its growth forecast radically. It did reduce it: from 8.5 per cent in 2010-11 to 8.2 per cent in 2011-12. Most of the difference is due to lower growth projected in agriculture — 3 per cent against 6.6 per cent; if the country is lucky enough to have a good monsoon this year, growth will exceed last year's! This is not responsible prediction; it is irrepressible optimism.

The council is so closely focused on the coming year that it has no sense of long-term trends. India saw a manufacturing boom, fuelled by high liquidity and low interest rates, in the early years of the past decade. The boom ended in 2008 because of overcapacity as well as a worsening of the balance of payments; although the council does not like to admit it, the global downturn did affect our payments. Then the picture was obscured by the splurge of government expenditure directed at winning the general election, as well as a construction boom. But the underlying cycle can be ignored only at the forecaster's peril. The businessmen consulted by the council gave a long list of reasons why the investment climate is poor. Anyone can think up reasons; the point is, that businessmen are in poor spirits. The main reason for that is profits: profit margins have been under pressure, and continue to be so. The council's belief that the downturn has run its course and the economy is ready for another ride of 8 per cent and plus ignores this basic business reality.

There is one further factor affecting big business. In a number of industries, particularly vehicles, Indian manufacturers have saturated domestic markets; and given the state of India's ports and financial infrastructure, it is difficult to build up exports based on domestic production. So a number of business houses have been expanding abroad.

Their success there is by no means as assured as in India. For one thing, markets abroad are growing much more slowly; for another, the political and business environment abroad is not equally friendly. So many of them have run into difficulties; Airtel's reverses in Africa are the most conspicuous. The difficulties could be surmounted if the government and business were to work together to smooth the path abroad. But that kind of cooperation, which comes naturally to east Asian nations, is still foreign to us. And its lack is a major obstacle to success abroad.

(This story was published in Businessworld Issue Dated 22-08-2011)