In Focus

India: Tough Journey Ahead

The year which has gone by was an extraordinary year. Not extraordinary in the sense which we constantly heard even a year back, in terms of rapid growth or the story of a shining India, but extraordinary as a story with the name – from riches to rags. This is a story of hardship as Indian economy reeled under the monstrous world economic crisis.

All was going well and fine till the last year. Though, there were problems of inflation for some period of time, and the continuous series of farmers’ suicide went unabated. But anyway, these issues had ceased to be of great significance to our policy makers. In general, the buzz was that India is emerging. But suddenly the bubble busted. It started with the collapse of financial institutions in the US. The initial reaction was that India is insulated to a large extent from the world crisis. But ultimately, we realised that we have indeed imported the crisis to our homeland.

Economic Growth
The rate of GDP growth in the year 2008-09 came down drastically from the above 9 per cent growth rates of previous three years. The official indication of a downturn came with the projection of a 7 per cent GDP growth rate for 2008-09 in the Mid-Year Review (Department of Economic Affairs, December 2008), as compared to 9 per cent GDP growth rate in 2007-08. However, the May 2009 revised estimates by the Central Statistical Organisation (CSO) showed even a lower GDP growth rate of 6.7 per cent for 2008-09 which meant a significant 2.3 per cent decline from previous year’s growth rate.

The growth rate was slower in the second half of the year 2008-09, growing by only 5.8 per cent in the 2nd and the 3rd quarters. The first two quarters registered growth rates of 7.8 per cent and 7.7 per cent respectively.

The CSO has estimated the GDP growth rate in 1st quarter of 2009-10 as 6.1 per cent. So till now, there is no significant chance of a recovery in the year 2009-10.

Price Rise
At the same time, India witnessed a 13-year high wholesale price index (WPI) inflation of more than 12 per cent in the three months of July, august and September in 2008. The increase of prices of the essential commodities was much higher. Subsequently, the inflation declined, coming down to 1.2 per cent in March 2009. However, even at that time, inflation rates based on consumer price index of industrial workers and that of agricultural labourers (CPI-IW and CPI-AL respectively) continued to be 8 per cent and 9 per cent respectively. In June 2009, when the Wholesale Price Index (WPI) inflation rates came down to negative, the CPI-IW & CPI-AL inflation rates were still as high as 9.29 per cent and 11.52 per cent respectively. Thus the statistical ‘decrease’ in inflation was of no relief to the common man.

Employment Situation
Along with steep rise in prices, there came the dagger of job losses. In a survey conducted by the Labour Bureau, the government estimated a total 5.89 lakhs of job-losses during the period October 2008-January 2009 in the overall economy. Gross underestimation of this survey was made amply clear by another survey of the Gujarat government. After a spate of suicides among diamond workers in Gujarat, the government of Gujarat conducted a survey which showed that 4,13,780 diamond workers have lost their job in Gujarat alone.

Key Government Initiatives
Extraordinary times call for extraordinary actions – so said our finance minister in his 2009-10 budget speech as the 2nd time elected UPA government initiated policy measures to reverse the downturn.

Increasing Budget Expenditure: In order to provide fiscal stimulus to the economy, government has increased its total budget expenditure from 16.9 per cent of the GDP in 2008-09 (Revised Estimates) to 17.4 per cent of GDP in 2009-10. This is a move in the right direction, but the meager effort may very well fall short of the desired destination, which is clear from the first quarter GDP growth rate of 2009-10.
Cautious with financial sector reforms: The budget speech of the finance minister did not include measures like increasing FDI cap in insurance sector, or deregulating the banking sector – policies which the previous UPA pursued aggressively only to be faced by stiff resistance from the Left. Rather, the global financial crisis made the finance minister praise “Indira Gandhi’s bold decision to nationalise our banking system”, which “appeared … wise and visionary … over the past few months”.
Increasing fiscal boost: Ignoring the FRBM Act, the Budget 2009-10 has allowed an estimated fiscal deficit of 6.9 per cent in order to provide stimulus to the economy.
NREGA: Budget allocations for NREGA for 2009-10 has been increased by Rs 2350 crore from what was actually spent in 2008-09. However, with the promise of increasing the NREGA minimum wages to Rs 100 per day, the magnitude of increase in allocation does not mean any substantial increase in rural employment.
Farm loan: This year also, the government will carry on with paying out the rest of the farm loan waiver amounts – a scheme which was started in 2008. The government has also promised cheaper credit for the farm sector.

Major Policy Drawbacks
There are some serious policy drawbacks of the government which drew criticisms from various sections.

Food policy: The UPA government has decided to bring a Food Act which would increase in the price of foodgrains by Re. 1 per kg for the Antodaya families (the poorest of the poor among BPL families) and a reduction in the allocation of food quota by 10 kg per family for all BPL families, including the Antodaya families.
Welfare programmes: Allocated expenditure in welfare programmes has not increased by any noticeable margin. Infact, allocation on social security for labour has been reduced over what was actually spent last year.
Fertilizer subsidy: There has been a whopping Rs. 25,000 crore reduction in fertilizer subsidy in Budget 2009-10 over what has been actually spent in 2008-09. In this state of general economic crisis, and a particularly grim agrarian situation, reduction in fertilizer subsidy may prove disastrous.

The Bright Side
The developed countries are experiencing massive shrinkage of their GDP, while we are at least growing, albeit at a slower pace. The first quarter growth rate of 6.1 per cent of India in 2009-10 is the second highest in the world. Contrasting it with the IMF estimate that the world GDP will contract by 1.4 per cent in 2009, we are clearly in a better position.

The root of the crisis – the breakdown of financial systems – never actually came to India. And, thanks to the resistance of the left, with our financial sector not so much liberalized, the Indian banks are at a much healthier state compared to the other countries.

The Path Ahead
Though the first quarterly GDP growth rate of 2009-10 has shown slight improvement over the growth rates in the last two quarters of 2008-09, it is too early to predict the possibility or extent of a recovery back to the high growth days. With severely low rainfall particularly in the kharif season, there is a real fear of drought-driven-inflation as well as reduction of rural demand. In these cases, the possibility of any turn-around will become very bleak. At this juncture, what required is policy maneuver to steer the economy out of troubled waters. Concerted efforts of the other countries will also bear significant effects on India’s fortunes in this highly integrated world economic system.