Growth hit by poor policy environment

The performance of our economy in the current year is rightly perceived as a matter of concern. However, one cannot be oblivious to the global and domestic factors at work.

The global economy is passing through a prolonged phase of unprecedented crisis, subjecting every economy to a slowdown. The less that is said about the advanced industrial economies, the better. But the emergence of ‘Emerging Market Economies' (EMEs) is at stake as well, as they too are going through growth compression.

Leading the slowdown in the EMEs is perhaps the Chinese economy. Let us take that as a benchmark for evaluation of our own economic performance.

INDIA'S GDP

For the past several years, we have been maintaining a growth gap of approximately 2.5 per cent vis-à-vis China. In the current year (2012), China's GDP is estimated to grow approximately 8.5 per cent. Its growth for 2011 has been perhaps around 9 per cent.

Against this, in 2010-11, our GDP grew 8.4 per cent. In the current year (2011-12), it is likely to grow 7 per cent. In the first half of 2011-12, GDP grew 7.3 per cent. The third quarter GDP witnessed a steep fall to 6.1 per cent, but April-December growth worked out to 6.9 per cent, which is also the Central Statistical Organisation's estimate of growth for the full fiscal.

But since the fourth quarter usually brings in a somewhat better performance, the full fiscal year growth may be 7 per cent or a little more. The existing growth gap vis-à-vis China is unlikely to widen.

In the context of the global economy having probably grown 3 per cent in 2011, we haven't done too badly.

We are even defying the gravitational pull of adverse global economic environment, in the sense that (i) the services sector that has maximum exposure to global environment continues to do well with more than 9 per cent growth, (ii) growth in export earnings remains in double digits (with estimated 15 per cent growth in 2011-12) and (iii) invisible earnings are expected to be around $105 billion, up from $84.6 billion in 2010-11.

Thus, the economy remains firmly perched on the growth trajectory. Like every other EME, we too are waiting for a turnaround in the advanced economies, and developments in the US and the EU are of relevance to us as well.

In our case, concern isn't over the falling growth rate. We have lived through periods of low growth, and yet the absolute GDP increased steadily from $950 billion in 2006-07 to (estimated) $1.85 trillion in 2011-12, taking the per capita GDP from $847 to $1,535 during that period, thanks to some stabilisation in population growth.

We are in an interesting situation, where growth is falling, but per capita income and purchasing power are rising, which, in turn, is creating demand pressure.

In this context, we should focus on reviving supply-side dynamism, so that growth returns to its upward path.

All that we need is a conducive environment for growth, the absence of which is a serious concern. To be a little harsh, the growth environment is deteriorating, and putting the brakes on growth drivers.

SOCIO-POLITICAL ENVIRONMENT

It is a matter of concern that while supply side hurdles are growing, the demand side impetus remains strong, creating inflation-related pressures.

We should be seriously worried that the environment for doing business is getting worse, with rising hurdles, leading to rising costs and growing inefficiency. The question we should be asking ourselves is: where are we on the scale of efficiency and productivity? Efficient economic governance and administration cannot be underscored enough.

As for the socio-political environment, the pattern and quality of discourse in the country on this score needs a shift in favour of development, growth and modernisation.

The socio-political environment exerts a significant influence on the growth environment. We can draw useful lessons from Brazil in recent years, where successive governments could make a significant impact on poverty reduction, and ensure productive engagement through pragmatic policies.

While the global economic situation does impact our economic performance, what matters most in our case is how carefully we attend to the problems within.

Continuation of reform, especially in the field of infrastructure, FDI and agricultural production and marketing, will help stabilise the economy on a higher growth plane.

A view is increasingly gaining ground that the economy isn't capable of sustaining high growth, and that we may have to settle for 7-8 per cent growth, which is sustainable.

If this is true, we have no reason to be alarmed by the low growth rate this year. But I disagree with such a perception. We can surely achieve and sustain 9-10 per cent growth, if only we are more attentive to the needs of the economy and business, and keep unwanted hurdles at bay.

We need to act faster in framing appropriate policies and implementing them.

COMMENT NOW