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    Down, But Certainly Not Out    

Omkar Goswami


Many members of the fourth estate were jumping like over-excited kangaroos from the afternoon of Thursday, 7 February. The Central Statistical Office (CSO) had forecast its advance estimate of India’s GDP growth for 2012-13 at 5 per cent. If that were true, it would be the lowest growth in a decade.

Almost immediately, the pundits at the pulpits said their usual things. Those outside the government said that it was terrible; it was due to more than three years of economic neglect by the government; and that we had better pull up our socks in the remaining year and a half.

Those in government took a different tack. The subtle response came from the Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia: he was not sure that the CSO did its estimation correctly given the number of times these estimates were revised in the past. A blunter riposte came from the ministry of finance: it claimed that extrapolations of a historically declining trend fail to predict turning points; rejected the CSO’s estimate; and continued to peg GDP growth for 2011-12 at 5.5 per cent.

I fail to understand what the buzz is about. Before the CSO’s prognosis, the general consensus among economists was GDP growth in the range of 5.2 to 5.3 per cent. The finance ministry was expecting 5.5 per cent. Since when did a difference of 20-30 basis points, or even 50 basis points versus what still remains an agency’s GDP growth forecast create such a hullaballoo? The CSO has often revised its forecasts and, indeed, its preliminary estimates — more than once for a given year and in both directions. So, why such excitement?

I am not being flippant. There is no doubt that the central government did little in terms of reforms and a lot in raising the fiscal deficit for the first three years since the United Progressive Alliance (UPA) was re-elected in 2009. Yet, even if one accepts the CSO’s 5 per cent forecast for 2012-13, the growth during the last four years has been reasonable, averaging a tad above 6.6 per cent per year. Sure, it isn’t the 9 per cent plus growth that we achieved in three of the five years of UPA-1; but that could never have happened in the post-Lehman world. Yes, we could have done better. However, bottoming out at 5 per cent or 5.5 per cent growth is not the end of the world.

The question is whether we have bottomed out. It is difficult to state with precision, but the consensus is that we have. I serve on boards of companies that encompass different sectors of the economy. Net of seasonal effects, the data for the third quarter have been better than earlier. Cement has seen a healthy growth in sales and production; so, too, fast moving consumer goods; steel sales are better than before, especially for rounds; and the auto sector, long suffering from a slump, seems to have woken up, if only just.

I believe that if we see three things on a consistent basis for the next fifteen months, the animal spirits which generated consistently high growth will return. The first is the government engaging in a series of reforms throughout the period covering foreign direct investment, removal of barriers to entry, resolution of coal linkages to get thermal power back on track, regular divestment of shares of state owned enterprises and creating a better investment climate. The second is to present a fiscally prudent budget that focuses on better tax administration and collection, eliminating wasteful expenditure and a lower fiscal and revenue deficit target for 2013-14. The third is for the Reserve Bank of India (RBI) to play a more accommodative role. India needs a steady reduction in interest rates. This is no time for the RBI to prove its independence in the garb of being an anti-inflation hawk.

If we see such reforms, as I believe we shall, I am willing to bet on a growth rate between 6 per cent and 6.5 per cent for 2012-13. I am more optimistic than I was a year earlier. Let us hope that we have put the worst behind us.
Published: Business World, March 2013


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