The Economic Times recently published a debate titled "Can global financial turmoil derail India's growth?" To me, it seems much more likely that domestic policies rather than the global turmoil would affect growth prospects, particularly with politics and the perceived needs of election strategy increasingly overtaking the logic of economics.
As it is, recent data clearly evidence slowdown in growth. For example, the rise in the IIP has dropped to an average of 6 per cent between November 2007 and January 2008, from a little over 14 per cent in the corresponding three months a year back.
The growth in capital goods has fallen particularly sharply to just 2 per cent in January, from 16 per cent a year back. Bank credit growth over the previous 12 months had slipped by March 14 to 22 per cent from 29 per cent a year back. This should be no surprise to those like this columnist who have consistently criticised the high real interest and exchange rates.
It is debatable to what extent the exchange rate policy is the result of "helplessness" in the face of capital inflows, the need to reduce the subsidy for the oil products marketing companies, or the desire to curtail overall inflation.
The monetary stance also has had mixed objectives - the central bank's discomfort with credit increase, howsoever necessary the latter may be for economic growth, and the inflation number as calculated by the changes in WPI.
By itself, this is a weak indicator of the impact of price rises on the consumer, or on the overall economy. Again, to the extent the WPI includes a number of items whose domestic prices are governed by the global market, national monetary policy has limited
impact. In fact, most central banks use core consumer price index as the variable they are most sensitive to, accepting their helplessness to control prices of energy and food items. (For the last six months or so, the US Federal Reserve has single-mindedly pursued expansionist monetary policy to ward off recession, preferring to take chances on the inflation front.)
But coming back to the domestic scene, as we anticipate the monetary policy statement, there is every prospect of lower growth and higher inflation (the last number was near 7 per cent).
To the extent our political masters perceive inflation to be a bigger problem in getting re-elected as compared to lower growth, one could expect a tighter monetary policy.
Whether it will do anything to bring down the rate of growth in WPI is a very moot factor: but, clearly, the authorities have to be "seen to be doing something" in support of their anti-inflation credentials.
The recent ban on export of rice and cut in import duties also seem to fall in this category. Until our political economy can resolve the obvious conflict between the need to improve the economics of agriculture (the loan waiver will do little in this direction) and the politically articulate urban middle class's demand for low food (and energy) prices, the needed policy clarity is unlikely to come.
Will our netas have the courage to tell the middle class that they have benefited the maximum from the growth of the last 15 years; that their incomes have gone up perhaps three times in real terms over this period; and that they cannot continue to be shielded from the global rise in prices of commodities like oil and foodgrains?
Growth and poverty
The following remarks attributed to the finance minister, and made within a week of each other, puzzle me:
'Those who say market growth is irrelevant and those who say the growth only helps the rich are the worst enemies of the poor. It is because of the growth the government is able to do many development programmes.' (Madurai, Times of India, Mar 23); '"India must touch a 10 per cent growth rate and sustain it for 10, 20 and 30 years" to make poverty part of India's history.' (Singapore, The Indian Express, Mar 27); "The government is determined to take fiscal, monetary and supply side measures to tackle inflation. If that means we have to live with a slightly lower growth rate, so be it." (Mumbai, The Economic Times, Mar 29).
Is it that the first two represent economic reality, and the last the political need in a pre-election year? For, it will be difficult to over-emphasise the need for growth. Back-of-the-envelope calculations suggest that a per cent drop in growth means lost output worth Rs 40/50,000 crore (Rs 400-500 billion), sacrificed wages of Rs 15,000 crore (Rs 150 billion) - or something like 2.5 mn (25 lakh) jobs paying Rs 5,000 per month!