Expert Zone

Straight from the Specialists

Invisible hand of market at work

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

India’s economic situation is at least grave, if not exactly in dire straits. Growth is at a decadal low, consumer inflation is persistently high, jobs have never been as scarce, the currency is volatile and the investment cycle is showing no signs of revival. Many of these problems are a result of bad policy and global economic conditions, but several are also the outcome of a natural economic cycle.

The Indian economy has developed several imbalances over the years as a result of bad policy and the usual cyclical fluctuations. The corporate sector went on an investment binge between 2005 and 2012 and is now saddled with significant amounts of excess capacity in several core sectors. The government itself went overboard with spending, first in 2009-2010 with the stimulus in response to the global financial crisis and then with its various populist programmes.

The result of these excesses is most obviously visible in the high current account deficit, retail inflation and property prices. After remaining in the 1 – 3 percent range for most of the last decade, the current account deficit rose to a high of over 6 percent of GDP in December. Consumer inflation too has remained above 9 percent ever since the stimulus began. And despite a weak jobs market and a slowing economy, property prices across the country kept rising till early 2012 and are still rising in some parts.

Rajan panel proposals not a cure for disparity among states

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The report of a committee headed by Raghuram Rajan on backward states has drawn attention to development disparities among states in India. Not that these were not known or assessed before. The report offers an index for identification of states according to the degree of backwardness and their share of financial assistance from the central government.

The committee’s recommendations, even if efficiently implemented, are not likely to show results soon. The per capita income in Bihar, for example, is a fourth of the per capita income of Goa and half that of Gujarat. But it is encouraging that GDP growth in backward states has recently accelerated and, to some extent, reduced the income gap. It took place because state governments realized that growth counts politically, not because of any additional assistance from the central government.

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