The Hindu Business Line : ‘India’s response to slowdown seems misdirected, may stoke inflation’

Hyderabad, March 22 India’s policy response to the economic slowdown “seems misdirected and could end up stoking inflation,” according to Prof T.N. Srinivasan, Professor of Economics, Yale University and Visiting Fellow, Stanford Centre for International Development.

At the Indian School of Business on Saturday, he said the bulk of the stimulus package is oriented towards boosting domestic demand. But India’s problem is not of GDP decline but GDP growth decline, which started before the financial crisis hit. The deceleration could be attributed to institutional constraints and structural problems such as poorly functioning infrastructure and labour market regulations, apart from a slowdown in exports.

Economic downers

It is these domestic constraints that have made the 8-9 per cent annual growth in the last three years unsustainable. It is not evident that even taking into account the falling rate of growth of exports, growth in aggregate demand has slowed significantly. So, “mechanically imitating the Americans or others makes no sense.” At least it is a relief that the stimulus package was modest in size, he said.

This was among the reasons for not being optimistic about India being among the early economies to break out of the crisis, Prof Srinivasan said.

Listing a few more, he said, the outcome of Parliamentary elections later this year are not easy to predict. The worst-case scenario is the possibility of a coalition of diverse regional parties without a coherent economic view, which could have an adverse impact on economic stability.

Despite having benefited from opening up the heavily-controlled economy, the commitment of politicians to a liberal, open and market economy is not deep. This was reflected in the bias towards its strategy in heavy industries with emphasis on import substitution, public ownership and labour policies.

Though a large share of the total assets of the banking system was still in the public sector, the Government has a strong influence on directing them to the so-called priority sectors which, he felt, were a major constraint on developing an efficient, safer and growing financial intermediation.

However, the long-term prospects continue to be bright for India once the crisis fades away and domestic reforms and investments happen, Prof Srinivasan said, addressing the third annual joint emerging market finance conference organised by the Centre for Analytical Finance, Indian School of Business, Wharton Financial Institutions Centre and the Swedish Institute for Financial Research.

Avoid knew-jerk reaction

He cautioned against overreacting to the crisis. Detractors of market economy were talking about the end of the market system. Prof Srinivasan hoped that knee-jerk reactions to the crisis do not leave a “residue of hastily implemented and ill-thought out reforms.”

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