Saturday 15 Jun 2024

Sluggish growth: The fault, dear MMS, is not in our stars

IMF has advised Indian leaders not to blame external factors for the slowdown but on themselves

Ashish Mehta / For The Goan | FEBRUARY 16, 2013, 11:49 AM IST

The Central Statistical Organisation (CSO) has estimatedIndia’s economic growth rate for the current fiscal at 5 percent, the lowest ina decade. That was not surprising. On Wednesday, the International MonetaryFund not only made that prognosis but also did some diagnosis.

For quite some time, Prime Minister Manmohan Singh, FinanceMinister P Chidambaram, his predecessor who is now our president, planningcommission deputy chairman Montek Singh Ahluwalia and others responsible fortaking our economy where it is going have blamed the external scenario for thedownturn. From the financial meltdown to the overall weak global conditions, muchhas been cited for the simple reality that economic activity on the ground hereis not picking up.

IMF, however, has advised the above-mentioned not to blameit elsewhere but on themselves. Along with the annual formal consultations withIndia, the IMF prepared a report, released this week. This is what it has tosay on ‘Growth Slowdown’:

“GDP growth has slowed more than external factors canexplain. Falling infrastructure and corporate investment led the slowdown,though exports and private consumption are now also suffering. Global factorshave hurt exports and weighed on investment, but India’s growth has slowed bymore than the decline in trading partners’ growth would imply. Capital inflowsremain resilient and international financing conditions favorable, suggestingthat so far the financial channel has not been prominent in the transmission ofexternal shocks.”

The solution IMF has advised is something Manmohan Singh etal are trying very hard to implement in the face of justifiable opposition: fasterreforms especially in land acquisition, labour laws and so on. They find amention in the following key issues IMF placed on the table for discussions:

Outlook and Risks

The economy has slowed markedly due to a confluence ofstructural, external and other factors. Recent measures taken by theauthorities have boosted confidence, but the near-term outlook is for a subduedrecovery with still elevated inflation as investment has been significantly hitand supply bottlenecks will ease only slowly. Risks are on the downside, butstronger structural reform could lead to better outcomes.

Structural Reform

Building on recent progress is crucial, especially toaddress supply constraints in energy and move the pricing of various naturalresources toward a market basis. Progress on taxation, land acquisition, andlabor market reform, along with 12th Plan goals on infrastructure, skillsmismatches, and social outcomes, are necessary to return to a rapid rate ofgrowth and poverty reduction.

Demand-Management Policies

The Finance Minister’s renewed commitment to fiscalconsolidation is welcome, as is the plan to switch to cash transfers, whichshould improve expenditure efficiency over the medium term. Sustainable fiscalconsolidation and reorientation of spending toward investment and socialsectors, however, will require tough choices on subsidy reform and an overhaulof taxation. Maintaining policy interest rates unchanged until inflation isclearly on a downward trend is the best way for monetary policy to supportgrowth. The floating rupee and continued prudent liberalization of the capitalaccount will improve resilience to external shocks.

Financial Reforms

Tightening mechanisms to address deteriorating asset qualitywill promote healthier banks’ balance sheets, but supporting faster growth andreaching Basel III targets will also require capital injections in publicbanks. In addition, addressing concentration risks, strengthening creditorrights, and supporting capital market development will lay the groundwork for astronger recovery.

Jobless growth

Meanwhile, ahead of Chidambaram’s eighth budget and the UPAII’s election budget, bad news continue to pour. The planning commission’s ownthink tank, no less, has slammed the government’s economic policies for“jobless growth” — even if that growth comes to a mere 5 percent.

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