slowdown this time, policy paralysis, demand compression, not amenable, fiscal or monetary fixes

Viewed purely in statistical terms, the year 2008-09 was the worst in recent times for the Indian economy, with average industrial growth of 2.5 per cent. The period from December 2008 to June 2009 registered seven consecutive months of negative growth, making it a textbook recession. The Centre's fiscal deficit, too, rose from 2.5 per cent to 6 per cent of GDP in 2008-09, marking the largest ever deterioration for any single year. But if one were to look beyond bland statistics, 2008-09 was not at all as bad as the fiscal that has just gone by. What has made 2011-12 worse is that it has been brought about not by any worldwide economic crisis of the kind unleashed by Lehman Brothers' collapse in September 2008, but by causes largely internal.

The crisis then, involved the economy suffering a sudden demand compression, which was therefore eminently amenable to conventional fiscal and monetary quick-fixes. These helped industrial growth recover to 5.3 per cent in 2009-10 and 8.2 per cent in 2010-11. But in the year just gone by, growth plunged to 2.8 per cent. However, unlike in 2008, the crisis has set in gradually. Since it is a disaster that did not descend suddenly from the heavens, the policymakers were slow in recognising it as it was building up. Moreover, there were no obvious external triggers a la Lehman or American subprime mortgages, to help them see the slowdown as a crisis confronting the economy. Rather, the factors at work were less glamorous, having to do with governance and policy paralysis issues back home. This was a case of corporates, for reasons right or wrong, losing faith in the Government's ability to facilitate investments — whether by way of enabling land acquisition, expediting environmental clearances or mediating conflicting stakeholder interests in individual projects. The Government, on its part, did little to dispel this impression. On the contrary, faced with increasing allegations of corruption and scams, it lost all stomach for taking big policy decisions. That only further reinforced its image of being anti-reform or even anti-corporate: The latest Union Budget proposals on retrospective tax law amendments or anti-avoidance rules did not help matters either.

If the current crisis is fundamentally one of ‘confidence', and not unforeseen demand constraints, the solutions clearly cannot lie in mere interest rate reductions or fiscal pump-priming. The headroom for these options are, in any case, limited now, compared with 2008. In 2008, investors were temporarily befuddled more than demoralised. There was no loss of confidence per se; the Government's quick response at that time actually made them believe even more in the India Growth Story. But today, that sense of confidence, which induces entrepreneurs to invest in new plant and machinery, is missing. Reviving those ‘animal spirits' is going to be a much more challenging proposition.

(This article was published on May 13, 2012)
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