It’s neither theoretical nor economic. India’s rapidly-slowing GDP growth is no longer an issue to be debated among economists, policymakers, businesspersons, central bankers. Its impact has expanded and is now hurting the key constituency economics was supposed to address and serve but has forgotten — people. And in the overall environment of economic inertia that gets the government to throw a few crumbs of hope every other week, we are increasingly being led like lambs towards an economic slaughterhouse that could result in it mushrooming into an internal security issue.
Citing high inflation, RBI governor D Subbarao decided to keep interest rates high in his first quarter review of monetary policy 2012-13. So, the financial cost of doing business or buying a house remains high. Had high interest rates been able to control rising prices, nobody would have questioned. But they haven’t and projected inflation rate for March 2013 has been raised to 7.0% from 6.5%. What has happened instead is that economic growth has slowed down to a little over 5% from 10% and RBI has lowered the GDP growth projection to 6.5% from 7.3%.
So, the economic question narrows down to a choice between which is worse: high inflation rate or low economic growth. By and large economists are arguing for keeping interest rates high until the government fixes its fiscal backyard in a wider context of global uncertainty. Why should RBI do the government’s job, they ask. Besides, if the inflation rate is allowed to skyrocket, it will have repercussions on internal security, as food prices get out of the hands of the poor. There will be food riots, they argue. The good news here: no government likes a high inflation rate, so the issue will get political backing.
A new and bigger internal security question, however, is now coming on the growth side. “Every percentage point fall in economic growth reduces the number of new jobs created by 10 million,” a senior official told me. “If these young people remain unemployed, they become a key constituency of Maoist intrusions and ideology. At some point, it becomes a matter of internal security.” Economic growth, he argued, was of crucial importance. The idea of economic growth as a national priority, however, is new and will take some time to settle down before its security ramifications are understood and taken seriously. Particularly, when the present political dispensation believes that growth is an elitist idea.
If there is choice, my view is best expressed through the words of the outgoing chief economic advisor Kaushik Basu: “We should go for 10% inflation and 11% growth.” But if the expressions of both — a high inflation rate as well as a low economic growth — are now spilling over beyond the domain of economic issues into components that can disrupt internal security, they need to be resolved on a never-seen-before and possibly never-imagined priority.
A third view that looks beyond both suggests that we need to look at high economic growth and low inflation. "High inflation need not accompany high growth," a senior official said. "We can have high growth with low inflation." What that magic potion is, I have no idea --- over the next few months, expect new reams of newsprint devoted to this thought.
But if high inflation and low economic growth, independently and together, are going to end up as national security issues rather than economic ones, I believe the government as well as RBI need to shake hands and make serious attempts to work together. The luxury and time for fun and games is getting over. Let us not wait for a crisis to fix this equation --- the cost could be more than money.