The Hindu Business Line : Spooking growth

Last week two sets of data had the nation captivated and spooked. If the Central Statistical Organisation (CSO) forecasts on GDP growth in the current fiscal, at 9.2 per cent, enchanted the market, the inflation rate at 6.58 per cent made it jittery. Both figures were records, the GDP growth being the highest in decades (save in 1988-89 when it grew at 10.1 per cent) and the inflation in its steepest climb since 2004. Both data represent, respectively, what is right with the economy and where it could all unravel. The 9-per cent-plus forecast, based on a stirring industry performance, is the outcome of policy changes since 1991 and industry's response to them. But the CSO estimates show up the absence of that symbiosis in other sectors; electricity, gas and water and, most of all, agriculture where GDP has declined from 10 per cent in 2003 to 2.73 per cent in 2006. The numbers for these sectors tell a story of neglect, of the absence of the kind of policies that has changed the face of industry. The cost of policy indifference is now upon the country in the form of spiralling inflation whose cause lies principally in those neglected sectors.

It appears the Centre has left inflation-control to the Reserve Bank of India. Whether such instruments work at all or with a time lag, the fact that prices are climbing every day warrants a quicker and determined response from all ministries in accordance with a plan to pull the laggard sectors into the growth stream. That strategy seems to be missing with each ministry responding in knee-jerk fashion — banning exports, cutting Customs duties, or importing foodgrains. This need not be the case. GDP growth since 2003 contains all the clues for a plan that looks to inclusive growth. For a start, policy changes since 1991 are responsible for current GDP rates in the organised sector; in hindsight, such an alteration in that sector was the easy part. Reforming the farm sector or ensuring gas, water and electricity to those that do not have them require tough decisions that may appear politically suicidal to start with but which will pay dividends later.

The core concern of those changes must be to attract investments based on opportunities and transparency and not on Planning Commission grants or patronage. Mercifully, capital scarcity is a thing of the past; Foreign Direct Investments cannot wait to get in, even as domestic capital formation (GDCF) has risen from negative levels to double-digit in just three years. More than ever before, growth with equity is necessary today and even within reach but the time to act is now. Inflation leaves policymakers with little time to procrastinate. Rising prices hit the poor hardest; but they can erode the growth process itself if left unchecked.