India: the Economic Outlook in the Near to Medium Term
June 5, 2012
The international economic climate is of course not good. The problems of the Eurozone are festering and as long as they remain like that, there will always be a sense that some kind of bad event may pop up around the corner. However, given the amount of liquidity that has been pumped in by the ECB a crisis of the 2008 is unlikely. India, as also other developing countries are negatively impacted on account of the European problems in three ways. First their export markets are diminished, second global financing for projects is harder to obtain and finally both domestic and overseas investor confidence is affected adversely. Of course, this general malaise is tempered by the situation of individual developing economies and the actions that they individually take on various fronts.
About India, there is a surfeit of concern about the economic outlook – some real, others imaginary. Over the past few years, self-flagellation has seemingly become high fashion in the media and other forum of discourse. Being modest about one’s achievements is both prudent and in good taste; as indeed is being contrite about one’s failures. However, self-mortification without end is a waste of time and a waste of opportunity. Since the elite are well provided, the foregone opportunities will inevitably be at the expense of the not elite.
Over the past few years, three categories of real problems have reared up. The first from a build-up of macro-economic tension: They include inadequate recovery in the momentum of private investment in infrastructure after the global crisis of 2008–2009, compounded by a fiscal position under stress. Domestic inflation has also been much above comfort levels. These factors generate negative feedback to business confidence. The second category includes a variety of problems in the operational or executive domain. Some of them have been resolved in the last one year and others are in various stages of being resolved. The third is in the sphere of politics, where developments in the past few years have made decision-making harder.
On the macro-economic front, fixed investment rates had risen in the past eight years largely because of a big increase in corporate investment. However, private investment in infrastructure and industry remain subdued. In the fiscal year (FY) ending March 2005 private corporate fixed investment was 9% of GDP, which rose steadily to over 14% in FY2008, just before the global crisis. This resulted in the fixed investment rate peaking at nearly 33% of GDP in that year. Thereafter private corporate fixed investment slipped to 10% of GDP in the subsequent four years and overall fixed investment is down to little over 29% in FY2012. It is not that a fixed investment rate of 29–30% is something to mock at, since it can give us 7.5–8.0% overall growth. But the fixed investment ratio has been and could again be about 3–4 percentage points of GDP higher than it is. It would give the necessary lift to all-round activity, expand supply, reduce inflationary pressures and make the fiscal consolidation process easier.
Both inflation and fiscal deficits are well over the comfort level. Pessimism has coloured the atmosphere. One consequence has been the huge increase in household investment allocation to gold. Knock out gold import and it can be seen that the real merchandise trade deficit as a proportion of GDP has not worsened as much as the total. The ratio (excluding gold) was (–) 5% in both FY2006 and touched a high of (–) 7.8% in FY2009. It fell off thereafter and in FY2012 is estimated to be 6.5% of GDP. Thus on the trade front, despite very high crude oil prices, there has not been that much worsening in the trade deficit as is widely believed. That is for normal goods and services. That is, excluding gold the demand for which behaves like an asset, not like a commodity. The corollary is that if we can fix the problem by making it more attractive for Indian households to hold their savings in financial instruments we should be able to significantly reduce our current account deficit from the present very high levels of 3.5–4.0% of GDP.
Then again if we can contain the current account deficit to more manageable proportions and if we take the other necessary measures to improve the state of our economy, capital inflows will be higher and ipso facto financing that current account deficit will be fairly easy.
What we can do internally is to first work towards securing better co-ordination within the governmental system so that investors feel that risks emanating from this source are mitigated. We have had a measure of success here – especially in the coal, electricity and port sectors. Government executive decision making impacts the infrastructure space – energy, roads, railways and ports – the most powerfully and that has been our initial focus. India suffers from a want of the infrastructure that developed nations take for granted. The productivity of our people can only increase through a combination of the building of such assets on the one hand and improved education & the acquisition of skills on the other.
Projects where governmental action can have a proportionately larger impact and which then can positively impact other areas of the economy are being sought to be fast tracked. In the past five years, compared to earlier years, we have been able to build multiples of power generating & transmission capacity, multiples of roads – both highways and rural – greatly improve farm incomes and other livelihood opportunities. We seek to continue to pursue these ends energetically.
There are important issues, such as petroleum product subsidies, that have got caught up in politics and which have a large and material impact on government finance and hence on the economy at large. We have to gain some traction on these issues and one hopes that some of this will indeed transpire, perhaps at least partially, over the next few months.
Saumitra Chaudhuri
Member, Planning Commission & Member Advisory Council to the Prime Minister and the Government of India
