Sub-six per cent growth is an aberration the government must rectify fast. The real economy has capitulated to high interest rates brought on by runaway inflation. Farming is coming to grips with a delayed monsoon and some of the impact is visible in this quarter’s data. Factory output is frozen and now services are stalling. The only sector holding out is finance and here the government’s borrow-and- spend policy is playing out in the statistics. The government co-opts almost all of household savings and this shows up in the other head of social services when it spends that money. Reports from the rest of the services sector are stark: cargo handled by ports is down by 0.9% and airlines flew 6.3% fewer passengers in July-September 2012 than they did in the same three months a year ago.
It has been obvious to observers, notably the central bank, for some time now that the government will have to get its expenditure under control before the economy can step back on to a higher growth path. The RBI has made lower interest rates conditional on fiscal rectitude and the government has reacted by biting the reform bullet. Subsidy diversion is being trimmed through innovative cash transfers, an efficient goods and services tax is back on the table and infrastructure investments are sought to be put on the fast track. Finance minister P Chidambaram has committed himself to a fiscal consolidation roadmap even as the government gears up for a general election. But all of this is a race against time. The RBI does not see inflation cooling off enough for it to be able to cut interest rates before the fourth quarter of 2012-13. Till then the economy will be starved for credit, and investments, by the government’s welfare burden.