Global slowdown exacerbates India’s follies

At last week’s ET Now conclave, finance minister Palaniappan Chidambaram defended India’s poor growth performance, ascribing it mainly to a global slowdown. Many will dismiss this as the whining of a ruling party that has messed up badly and may suffer its worst-ever drubbing in the 2014 general election.

Chidambaram has been unlucky to be hit by a downward global spiral. But that’s not enough to excuse the disgraceful economic performance of the last three years. GDP growth has halved, from 9.3% in 2010-11 to 4.6% in the first half of this financial year.

The International Monetary Fund’s World Economic Outlook gives details of country performance across the globe. This shows that world GDP grew strongly by 5.3% in 2010, but then slipped steadily to 3.9%, 3.2% and 2.9% in the next three years. India too slipped in the same period, lending some substance to Chidambaram’s claim. However, India has gone downhill much faster than other developing countries , thanks to economic mismanagement.

The growth figures of the IMF differ significantly from the government’s official data. The IMF says that India grew by 10.6% in 2010, declining to 6.3% in 2011, 3.2% in 2012, and to an estimated 3.8% in 2013.

India’s own data says that GDP growth has halved. But the IMF data says that India’s growth has fallen by two-thirds, a much bigger and truly bad crash.

What explains the difference between the IMF and Indian growth figures? One reason is highly technical: the IMF measures GDP at market price, whereas India measures GDP at factor cost. The main difference is that the IMF method includes indirect taxes and subsidies (this is, in fact, international practice). Again, the IMF typically produces data for a calendar year, while India’s produces data for a financial year (April to March).

Forget these technicalities. The key point is that since the IMF method takes into account the impact of indirect taxes and subsidies, its estimates are a better guide to the impact on the common man. The common man is up in revolt because growth has fallen by two-thirds while inflation has soared.

China has also slowed down in the last three years, but by much less. Its GDP growth was 10.4% in 2010, followed by 9.3%, 7.7 & and 7.6% in the next three years. Anybody who dreams of India catching up with China will dream a long time.

How does a global slowdown hit India? Mainly through trade. Because of its emphasis on blind self-sufficiency, Indian trade (exports plus imports) were down to just above 10% of GDP in the 1980s. But after the reforms of 1991, India has steadily become more strongly integrated with the global economy. Trade plus remittances exceed 45% of GDP. So, India is affected much more strongly by global trends than in the first four decades of independence. Greater globalization helped India ride the global boom of 2004-11 and grow at a record rate. But the slowing of the global economy has helped push India down in the last three years.

The volume of world trade (as distinct from its value) rose very strongly by 12.9% in 2010. But in the next three years it decelerated sharply to 6.1%, 2.7% and 2.9%. This hit all countries including India. But it hit India especially hard, thanks to local blundering. Our own policy failures and paralysis worsened an already difficult situation. The silver lining is that India’s exports have, after a long period of stagnation, registered double-digit growth in July-October, aided by a cheap rupee.

Chidambaram can blame maybe half of India’s slowdown on global trends. But the other half is due squarely to faulty policies. India used to grow faster than the emerging market average, but has been slower than the average from 2011 onward. The global climate has been bad, but India’s performance has been even worse.

What of the future? The IMF paints an optimistic picture. It projects world GDP rising from 2.9% in 2013 to 3.6% in 2014. The volume of world trade is projected to rise even faster, from 2.9% to 4.9%. The IMF believes this will help India’s GDP growth go from 3.8% to 5.1%.

Maybe so. But the revival will come too late to save this Congress government from electoral defeat in 2014. The next government will start with an unearned bonus through rising global growth. It will get a second unearned bonus through the lagged effect of Chidambaram’s recent initiatives (such as clearing Rs 3 lakh crore worth of projects). But instead of resting on these unearned laurels, it must resume purposive reform to get India back to at least 7% GDP growth.

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