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HindustanTimes Mon,21 Apr 2014

PM’s optimism is not baseless

Hindustan Times  New Delhi, March 08, 2013
First Published: 21:48 IST(8/3/2013) | Last Updated: 01:36 IST(9/3/2013)

Prime Minister Manmohan Singh’s optimism that the economy will return to 7-8% growth over the next three years is not unfounded.

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Moody’s Analytics, a sister concern of credit rating agency Moody’s Investor Services, sees growth accelerating to 6.2% in 2013-14 and to 7% the year after.

Mr Singh’s reply to the motion of thanks is in sync with the president’s speech at the beginning of the budget session which referred to some very tough decisions the government had taken, even at the cost of splintering the ruling coalition, to get the economy back on track.

The PM is clear that the tempo of reforms which acquired pace towards the end of the UPA’s second term is unlikely to flag in an election year.

Mr Mukherjee, too, had warned lawmakers that an aspirational young India needs more opportunities than provided by the current rate of growth but the trend line will depend on the extent the nation can take difficult decisions about managing its economy.

One big test between the two speeches was finance minister P Chidambaram’s budget, which did its bit to shore up the government’s reformist credentials.

The economy is slated for phased fiscal and current account corrections. The growth-inflation dynamic, which has been by and large adverse for three years running, is also heading towards normalcy thanks to the single-minded efforts of the central bank.

Credit rating agencies are watching these two developments closely before they take a call on de-rating India. So far the government has managed to push the eventuality beyond March 2013.

Moody’s Analytics in its latest report on India sees the headwinds — an export squeeze due to a global slowdown, a fiscal blowout, the local credit crunch and finally guillotined government expenditure in the third quarter — receding. Moody’s, however, flags a serious concern.

India’s potential to grow is around 7%. If policymakers push for more, the economy will overheat as it did in the past couple of years.

Some of India’s declining economic potential is captured by a Planning Commission working paper on diminishing productivity gains.

Total factor productivity, which is driven among other things by technological change, the policy environment and infrastructure, peaked in 2006-07 and now contributes a percentage point less to overall growth.

The economy is relatively capital-scarce and there is little incentive to innovate and adopt new technologies at low levels of capital accumulation.

Any slackening of the reforms momentum risks discouraging innovation and investment.

The study concludes a business as usual approach will deliver 7% average growth over the Twelfth Five Year Plan (2012-17), a considerable regression from the preceding decade.

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