For politics' sake, govt must get economics right

How big is a 0.4 percentage point fall in the 2011-12 GDP growth projection that the government announced today -or how small? Ask builders and bankers and an entire volley of wails hits you. Between a galloping inflation rate of close to 10% and rising interest rates, their business is under severe stress. Worse, for manufacturing that rose 5.6% in May, the slowest in nine months, this lower projection to 8.6% will impact the government's tax revenues, with which it supports social sector expenditure.

For those who are part of the India growth story that has been accelerating over the past two years, this will hurt. Sure, companies at the forefront of this growth in sectors like consumer durables or infrastructure can manage this cut in growth rate. What they are unable to cope with is the uncertainty around this slowdown - whether it will flatten out and rise in a few months or continue to fall.

If you are an employee, start toning down your raise expectations this year. If you are an investor, get ready to face lower returns on your equity investments - the Sensex fell 152 points today, it could look at a bigger fall over the next few days, right up to July 26 when Reserve Bank of India governor D Subbarao raises policy rates once again by 0.25 percentage points. As a consumer, however, you will benefit from this squeeze as companies try to keep up with the slowdown and start offering discounts to keep inventories under control. How the consumption story plays out against falling incomes, however, remains to be seen.

But the bigger growth story lies outside, in rural areas. The wage structure functioning under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has made farm labour scarce. According to a July 15 report in this newspaper, since the time MGNREGA was introduced, the cost of agriculture labour has gone up to 43% from 16%. Which means that even though the scale and starting base is small, a larger number of our citizens - the rural sector employs 70% of India's workforce - are watching their incomes rise. I personally know of large and wealthy farmers who are very unhappy.

From the political economy lens, this is good news as income disparities reduce, even if marginally. But lest politics get the better of the economy, the government needs to keep the growth story that's funding these schemes going.


also read


Challenge for Goliaths: how to become David

blog comments powered by Disqus