Crisis is a strong word, although the domestic economy is in a pretty desperate situation. In 2012, real growth was 5 percent, in the past six months, it has become 4.5 percent. This year, from 6.7 percent, the government (not the RBI) has scaled down projections to 5.5 percent. This suggests we will do something like 4.5 percent.
Irrespective of debates about poverty lines, the National Sample Survey (NSS) data show a decline in poverty. That’s primarily because of growth, which is good for poverty reduction and employment generation. The NSS data also shows a slowdown in job creation. Exports of goods and services aren’t doing terribly well and there’s no way the global economy is going to have a complete recovery in the next two years. Investments — both public and private — are down, and the efficiency of capital usage has declined. That’s largely because of projects that are stuck and the Cabinet Committee on Infrastructure (CCI) hasn’t been able to solve the problem.
With some caveats about rural demand, consumption expenditure is also suffering. So where are the growth drivers? Even if one ignores onions, retail inflation is chugging along at 9.5 percent. While the global commodity and imported part of this is no longer that bad, that’s not true of food or manufacturing product inflation.
This is bad news in every way. But if crisis is interpreted as someone holding a gun at your head, none of this represents a crisis. This is nothing more than settling down for a lower growth and higher inflation trajectory, with its consequent costs. The crisis, as in 1990-91, has been triggered by the external sector. We have a current account deficit and that’s not because of petroleum and gold alone. Despite what the finance minister has said about red lines, normally, the current account deficit to the GDP ratio this year would have been around 4.5 percent, way above comfort zones. We have begun to import items (iron ore, coal), which we should have been producing at home.
A current account deficit isn’t, per se, the problem, as long as we can finance it. In spite of the recent flurry, FDI isn’t falling over backwards to come to India. Why should it? Domestic capital is also running away, to Africa and other destinations. With the end of the US stimulus, FII portfolios have turned volatile. This isn’t only about what is happening today. It is also about projections towards the end of the financial year, when there is a bunching together of debt repayments, including a sizeable private debt. Thus, it is also about expectations and negative sentiments.
This isn’t 1990-91, when the exchange rate was administered. So the rupee can take the hit. While that has implications for inflation, RBI intervention in forex markets doesn’t come without a cost. As it is, because of inflation, the RBI can’t reduce policy rates. The current account deficit and rupee depreciation are symptoms, not the disease. I don’t like the knee-jerk medication being dished out. I don’t like hikes in import duties for gold and non-essential stuff. I don’t like capital controls. I don’t like artificially high interest rates for NRIs or through quasi-sovereign bonds. I don’t like going to the IMF, if that’s what we end up doing. So what do we do?
As explained above, the external sector is a symptom. Let’s sort out procedures (land, forest, environment), so that all investments — and not just FDI — are triggered. Let’s slash public expenditure and reduce fiscal deficits, more than in a token way. Let the rupee slide and absorb adjustment costs. Let’s aggressively sell off PSU equity globally, so that we attract some dollar inflows, irrespective of the fact that this is not the best of times. Let’s reform and deepen and broaden forex markets, so that they are less susceptible to FII inflows. These are the kinds of things that will show we use the crisis to reform and not to deform the process of reforms.