Indian politicians and citizens are mostly in denial about the impact of the global meltdown on India. Politicians make brave statements laughing away the slowdown, saying India will be least hit and first out of the slump. Three stimulus packages in three months have been announced with fanfare. But the slowdown continues. Impatient citizens and Opposition parties demand additional stimuli. But this rests on the illusion that the economy will return to fast growth if only it imbibes enough caffeine.
Sorry, but this is not a problem of caffeine shortage. The world is going through the worst downswing since the Great Depression, and India willy nilly has to go downward with the rest of the world. We should expect the slowdown to continue for several quarters, until the world economy recovers. We must batten down our hatches and patiently ride out this storm.
Official data have just revealed the ugly truth that GDP growth declined to a dismal 5.3% in the October-December quarter, way below official expectations. Agriculture declined by an unexpected 2.2% in this period: poor harvests of sugarcane, cotton, pulses and oilseeds overwhelmed gains in rice, horticulture and animal husbandry. In this quarter, the Pay Commission award boosted community services growth by a whopping 17%. This is mostly illusory: higher pay does not mean better service. Despite this illusory boost, overall GDP growth only touched 5.3%.
This lends credence to the IMF’s forecast of 5.1% GDP growth for the calendar year 2009. We may experience some small improvement in the last quarter of 2009, but a return to fast growth will have to wait till late 2010, or even 2011.
Let nobody think that more stimulus packages will somehow save us. The slump was not caused by lack of government stimulus—it occurred despite an enormous stimulus from Chidambaram’s 2008 budget through the farm loan waiver, Pay Commission award, and spiraling subsidies for petroleum products, fertilizers and food. Because of these—and falling tax revenue—the overall fiscal deficit of the Centre and states in 2008-09 will be a massive 11% of GDP. Yet this massive stimulus proved helpless to combat the global downswing.
India’s 9% growth in the preceding five years was due to an unprecedented global boom, not great reforms or cleverness on our part. A huge global tide lifted all boats—even Africa grew at an unprecedented 6%. Alas, the tide is now falling, and lowering all boats. Drinking more caffeine will not raise India’s boat in a falling tide.
We must accept that we are part and parcel of the global economy. The global boom drove up our growth to 9% and the global slump has lowered it to 5%. We must abandon the illusion that we can somehow grow fast again while the rest of the world stagnates. We must learn to live with the global downswing, and ride out the storm. We cannot end the storm on our own: we must patiently wait for it to subside.
Meanwhile, our aim must be to alleviate pain, and build infrastructure for future growth. Seen in this light, the so-called stimulus packages are actually alleviation packages. They are worthwhile measures to alleviate economic pain, and stem deterioration. But they cannot stimulate the economy back to fast growth. This crisis was not caused by us and cannot be solved by us. Our role is to ride out the storm.
What policy lessons flow from this? First, lower your expectations and targets, for false hopes can lead to policy excesses. Second, overhaul procedures for infrastructure contracts, because red tape currently prevents accelerated spending in this vital sector.
Third, don’t cut taxes endlessly in the hope that this will revive the economy. Taxes should of course be cut in a downswing, but should then be raised again in the next upswing. Raising taxes is politically far more difficult than cutting them. I support the tax cuts so far, but oppose any further cuts on the ground that they will be too difficult to reverse later.
Instead, the Reserve Bank of India should loosen its purse strings, and pump more cash into the economy. Today, huge government deficits are swallowing up all bank finance, leaving little for corporations. This squeeze has lifted interest rates for corporations even as the RBI cuts its own rates. So, the RBI must abandon its taboo on buying government bonds, and print currency to finance the government’s deficit. This has inflationary potential, but inflation is not today’s problem. Politically, printing money is more easily reversible than cutting taxes further. That’s the way to go.