Based on October IIP data, I was calling this article ‘Green Shoots’ but was planning to urge caution and the need to consolidate, given the volatility at home and abroad. But all such niceties were set aside after the CSO’s estimate of a declining IIP of 3.2 per cent in November.

With agricultural output doing poorly in the kharif and the unusual warming in the winter not a happy augury for rabi, the onus to turn out a ‘good’ economy performance rests largely on the services sector.

Manufacturing has been in the doldrums in spite of cheerleader statements by officials and friendly ‘corporates’. But in terms of economic fundamentals, there has been a decline in investment share of GDP by around two percentage points in the recent past and roughly double that in the last four years.

False hopes

Economists in the government have been highlighting this. The Chief Economic Adviser has been constantly arguing for a pick-up in public investment. At this stage, he sees it as the most urgent step and the Governor of the RBI does so, too. The consensus among economists is of this being an urgent policy measure. They cite the poor performance of manufacturing.

It is time some senior economic policy experts working in government got out of the practice of predicting (as they have since 2012 onwards) that the manufacturing sector will revive “in the next quarter.”

The more disturbing policy stance is to say that at the highest level, policies are being taken to expedite government expenditure by removing bottlenecks and improving efficiency.

The finance minister and the Prime Minister have correctly argued for the removal of obstacles to implementation of public expenditure. However, it would be safe to assume that the ratio of the actual expenditure to Budget expenditure and the effectiveness of this expenditure will remain as in the recent past, in the short run. Hence, for now, it is necessary to raise public investment so that it ‘crowds in’ corporate investment and the increase in demand gives the industrial sector the confidence that it requires so badly.

Fiscal stimulus

The policy stance must change from that of keeping the fiscal deficit constant and expecting an improvement in public investment to emerge from effective expenditure and implementation.

This has been tried for a number of quarters and has failed, because of which manufacturing growth has suffered. Together with the difficulties in agriculture, this means growth possibilities lie around the 6-per cent mark rather than the 7 per cent-plus, which most economists believe India is capable of achieving.

The decline in export growth rates in a year in which global economy is recovering is also a matter of concern, as external demand is not playing a stimulus role.

The rise in prices, particularly food prices, is of a structural nature and this time it is surprisingly taking place in a period of low growth.

The strategy of improving agricultural infrastructure in a decentralised manner may, it can be hoped, in the long run reduce the pressure of food prices, as it will be a structural response to the problem.

It will be prudent to raise public investment. If this takes place in priority sectors such as infrastructure, particularly in agricultural markets, agro processing and in the 100 Smart Cities, it will help.

Investment in Smart Cities will help lift rural incomes. This implies a larger deficit will pay itself. It would be prudent to accept the Opposition’s plea that wider coverage and more effective GST will be beneficial and push the economy with full steam ahead.

The writer is Chancellor, Central University of Gujarat, and a former Union minister

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