Regardless of this year's GDP, the Indian economy is in a crisis policymakers will not admit.
Early this month, Mr Pranab Mukherjee finally admitted to a lower GDP but hastened to add that the rate would be above 7.5 per cent, the number that the RBI had put out. He also promised a commitment to reforms. This was ironical because it came on the eve of a drubbing from various States and the Opposition over its ‘star' reform. Last Friday, the FM had to admit that mid-term poll uncertainties and lack of numbers in Parliament had stymied FDI in retail.
Just how important are the GDP numbers — in other words would a GDP rate around 7 per cent really tell us how healthy the growth is? And second, how much does political strength count for those reforms (and FDI in retail is not one of them) that would really spur growth?
Right now, key indicators such as consumption, investment and even exports do not leave much hope for a growth above the latest forecast. Between the second quarter that showed up the economy in poor light and the next two what can the government do to raise the level of confidence enough to generate a rebound of investment sentiment?
Could the trigger come from the RBI? Curbing its tendency to raise rates or better still, lowering them would help, the argument goes. But would they?
An exhausted economy
Not likely. First, signals transmitting lower rates always take time to take effect, as the RBI has repeatedly complained.
But more important, the RBI's return to an easy money policy will not work because the economy is bedevilled by some systemic problems that have usually been skirted by the government. The real problem that afflicts the economy is that it has exhausted all possibilities of expansion generated by successive waves of reforms over more than the last two decades.
The cumulative impact of the reforms of the 1990s that continued till 2002-03 created capacities that were fully utilised by the organised sectors by 2008-09, the high point of GDP expansion.
For the economy to grow at that level, the limits that the last stage of meaningful reforms implicitly set have to be breached.
These limits are not novel, nor have they been created out of thin air or by the Opposition or a foreign hand. Poor physical and social infrastructure has dogged the organised economy's stakeholders; only now it hurts their bottomline. It is not that such infrastructure has not grown; the issue is that the economy has outpaced its sluggish and indifferent expansion.
When complaints of power outages, of lack of skilled personnel and poor productivity levels send consultants scurrying to reinvent solutions and themselves, what we witness is the fact that the economy is running out of fuel and has nowhere to go.
But how did it get this far in the first place?
First and last reform wave
In the two decades or more to 2002-03 successive coalition governments introduced some key reforms that cleared the way for a vaunting GDP rate: abolition of licensing that introduced the idea of competition, financial and capital market reforms that opened up the banking and stock market to global capital and new technology and crucially, telecom reforms coinciding with the new millennium that allowed swathes of Indians to offer a multitude of ‘Services' from carpentry to call centres; graduated and calibrated tax reforms of the nineties that increased compliance and purchasing power of both consumers and producers.
The post-dotcom acceleration in ITES globally helped India's ‘infant' industry but if India made its mark earlier than any other ‘emerging' economy in the IT space it was principally on account of policies that encouraged the globalisation of the IT sector—and later, of the organised economy
Reluctantly at first, then with rising enthusiasm, the manufacturing sector responded to the spurt in purchasing power generated principally via globalising ITES services.
The multiplier effect took shape; the existing infrastructure and the opening of the airwaves as it were, provided the grounds for output expansion as never before.
By the time the UPA government first came to power, India's growth had risen on the back of these reforms and by utilising the infrastructure ‘capacities' created by decades of planning, however inefficiently (roads, power) or organically (higher education).
UPA-I had to little other than cheer the economy along; when it tried, as with the SEZ it bungled and created a new flashpoint of violence in the countryside.
The economy peaked in 2008-09 with 9 per cent GDP. The slide that followed the global meltdown was read as an outcome of India's ‘coupling'; but consumption and investment demand was largely domestically driven.
To that extent it was affected more by the inability of infrastructure to meet the growing appetite for better and more roads, power, and new-age skills and, governance. The shortages and costs of oil and coal are starting to tell.
The most crucial reforms now needed are as old as the Indian republic itself. They concern governance and do not need the Opposition's approval.
To decisively create appropriate legislation and an environment for quick decisions, transparent bids, accountable delivery schedules that can help investments in universal infrastructure does not need Parliamentary numbers; more than FDI in retail, they will get the economy moving more determinedly. And they will get the UPA its votes.