How do we explain India’s economic woes?

June 5, 2012

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

Our GDP growth rates have slid consistently quarter on quarter from 8.5 to 5.3 pct. Surely this is in keeping with a glaring trend. Therefore, this sudden surge of emotions and panic after wallowing in so such mass self-deception is surprising to say the least.

The search for the customary foreign hand took us travelling to the euro zone and even as far as the United States. This well tested tactic had worked well for us in the past and our nation survived many a challenge possibly because bigger ones emerged to pale the older ones to insignificance.

This time around, the crisis seems to be for real and growing because band aids may be rendered ineffective. The solutions can no more be delivered by a mere stroke of the pen because this situation demands that we address core structural issues through a political consensus.

The Indian economy has been grievously wounded by fiscal profligacy resulting from what could possibly have been an ambitious political strategy having gone awry.

Expenditure is a reality while revenue always an aspiration. Conventional wisdom has for long asked for earnings to be augmented before embarking on incremental expenditure. However, if it is good for us to borrow in the hope that our earnings will always cover us, so should it be for our government.

Imagine what would happen if we were to then lose our job and not pay back our loans; and still worse — what if the money we borrowed was spent on lavish dinners with no asset to show to the lender.

This may be the simplistic explanation for our economic woes and we should be concerned that, the party is sure to end someday, possibly sooner than later.

When the Congress took charge in its previous term, like many of us, it must have quickly realised the need for a mandate with a clean majority, if it were to move ahead with its 1991 reform program agenda. This meant wresting back votes from across the spectrum of minorities.

A host of well-deserved pro-poor, especially rural, schemes were unleashed because they could be opposed only at one’s own electoral peril. Although the brownies did emerge, the time was not enough to materially improve the Congress’ electoral fortunes; they would almost certainly earn dividends in 2014.

All the reforms planned were expected to raise growth rates and revenues to amortize the deficit. Nothing happened and blaming the Left was convenient and even acceptable to the NDA. In 2010-11, the books balanced with one-offs like telecom auctions. The inflation though progressed from being demand-led to the supply side and the economy was heating up.

Early on in the current term, it may have dawned upon everyone that with almost every popular initiative out of the bag, there was really nothing left for them to dole out. A majority for the Congress could only come at the cost of various regional parties and of course the NDA. After all, the alliances were less ideological than they were exclusive.

Needless to say, thwarting all reform legislation would ensure the economy burst from its seams by showing up every possible structural imbalance which has festered within though hidden by a moderate growth rate. Inflation and corruption have historically been proven to be an electoral spoilsport in Indian politics and it is unlikely 2014 may be different. It is surprising how issues originating even as much as 6 to 7 years ago have suddenly surfaced one after the other.

Politics has its roots in economics or is it the other way around?

Therefore, while like the Romans who revelled in the thrills of the gladiatorial arena, we stay engaged in IPL celebrations and other frivolous controversies; it seems almost certain that, except for some tinkering on the periphery, we may not see any serious structural reforms till after the elections in 2014.

Hopefully, we won’t suffer a fractured mandate once again. It is indeed all Greek to me.

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