How will 2008 be remembered? Since 2003, India broke away from an earlier growth rate trend of 6.5% and approached 9%. This year will therefore be remembered for a return to the back-to-business trajectory. More specifically, 2008-09 will probably see 7% and 2009-10 something like 6%. When will India return to 9%? At one level, this is contingent on global recovery. The IMF expects recovery to occur in the second half of 2009, probably an extremely optimistic view. Global recovery will be a long haul, perhaps 3 years. And for both China and India, it is time to bury the decoupling hypothesis. Or at least, explain what one means by decoupling. To the extent one means that long-term growth trends in these two countries, and elsewhere in Asia, have broken away from long-term growth trends in developed countries, there is decoupling. However, cyclical movements in developed countries are also replicated in countries like India, and in that sense, there is no decoupling. Not only is India?s financial sector not decoupled, its financial and real sectors have linkages. India?s export/GDP ratio is 14% with goods alone and 21% if services are included. A zero growth in exports therefore shaves off almost 3% points from GDP growth.
While 2008 will be remembered for the global financial crisis and the slowdown, any attempt to link slowdown to the global financial crisis is fallacious for two reasons. First, the slowdown preceded September 2008 and every indicator showed this. The slowdown was attributable to the tight monetary policy pursued by the government to contain inflation. Whether decline in the point-to-point WPI had anything to do with monetary policy is a question that should have an obvious answer. Therefore, 2008 should partly be remembered as the year of looking for external scapegoats, like the global crisis. That?s always easier than pointing a figure inwards. Having said this, when faced with a slowdown, what counter-cyclical policies can one introduce? That brings one to the monetary policy versus fiscal policy debate. When talking about fiscal stimuli, one doesn?t have in mind developed countries alone. There are also economies like Malaysia, South Korea, Russia and China. One might think the government has unveiled a fiscal package. However, it is too insignificant to make a dent. 0.5% of GDP is not worth sniffing it. So why couldn?t North Block do what several other governments in the world are doing?
Again, there is no option but to point the finger inwards. The Central government?s fiscal deficit is 8.5% of GDP. If one adds the states, we are at pre-reform levels of 11%. There is no fiscal room, because fiscal reform wasn?t undertaken in the good years, when the economy was growing at 9% and tax revenues were buoyant. There is a tax (both direct and indirect) reform agenda of unifying and standardising rates and removing exemptions, which also helps reduce compliance costs. The unified sales tax is a legacy of NDA. Beyond that, has there been a single step towards the tax reform agenda, or even the goal of an uniform GST (goods and services tax) from 2010, beyond mentioning it as a goal? None whatsoever. Indeed, discretion and special dispensation has grown. If revenue has increased, that?s largely because of growth and better compliance that resulted from earlier reforms. Have we moved on containing expenditure? Nothing there either. When was the last time one heard of the outlay-outcome exercise, mentioned in 2005 as a budget promise? So-called flagship schemes have expanded, there have been schemes like farmers? debt relief and national employment guarantee, not to speak of the 6th Pay Commission.
There is a Fiscal Responsibility and Budget Management (FRBM) Act, with a terminal year of 2009-10. There is no way the incoming finance minister can adhere to those targets. And once one adds fertiliser and oil bonds and food subsidies, one understands why there is an upward pressure on interest rates and little fiscal latitude. What of monetary policy? Countries like Indonesia, Malaysia, South Korea and Thailand have relaxed monetary policy, as has RBI, now that inflation has declined. Where has that liquidity infusion vanished and why is that not reflected in greater bank lending or flows into the capital market? There are issues like sentiments, attractiveness of government bonds and inadequate financial sector reforms, the latter implying that monetary policy is less effective than it should be. But that apart, dollar outflows also explain where much of that liquidity has disappeared. To state it differently, many of our problems can be ascribed to exchange rate policy too. That?s the reason 2008 shouldn?t be remembered by India for the global financial crisis. It should be remembered for four and a half years of mismanagement that prevented any sensible response to the global slowdown.
The author is a noted economist
