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
