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Task is cut out for next custodians of India's economic growth

ht view Updated: Feb 18, 2014 00:15 IST
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The-decline-in-excise-duty-that-the-Union-finance-minister-has-proposed-ought-to-go-some-distance-in-reviving-the-manufacturing-sector-This-sector-has-the-maximum-potential-for-employment-generation-that-would-ultimately-contribute-to-poverty-alleviation

No serious observer of the Indian political economic scene should have expected any major new policy announcement in the interim budget 2014 presented by Union finance minister P Chidambaram. After all, the country is now at the very last stage of the UPA 2 government. All eyes and attention are now focused on the general elections in May 2014. In the fitness of things, it would also not have been proper on the part of the Union finance minister to bring about any major policy changes. Any such change in direction must be the privilege of the steerers of the economy in the new government, and must therefore await the presentation of a full budget for 2014-15 that might be expected in June or July.

This interim budget was therefore essentially a vote on account, to enable ministries and government departments to obtain parliamentary approval for the expenditures to be undertaken in the coming months. Accordingly Chidambaram has struck the right note by proposing no changes in the income tax slabs. In the sphere of indirect taxes, excise duty on consumer durables and capital goods have been only moderately cut from 12% to 10%. Excise duty on small cars has been reduced from 12% to 8%, no doubt to give a fillip to the auto sector which has been facing sluggish demand.

Interim Budget 2014: Chidambaram goes big on the element of surprise

This should be as good a moment as any to make an assessment of the economic performance of the two UPA governments in a period just short of a decade. From all accounts the political prospects of the ruling party appear to be going through rough weather. But if one were to dispassionately assess the economic performance, there are certainly some aspects that would have to be regarded as positive.

At the outset, one must not forget that during the three years 2005-06 till 2007-08 the economy grew at a GDP growth rate of 9% plus. Again in 2010-11, the growth rate achieved was 8.9%. Thus, in four years out of the last 10, the growth rate has been remarkably high, placing India along with China among the fastest growing economies of the world.

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It must be mentioned here that these two are the only billion plus economies of the world, accounting for just under 40% of the world's labour force. Both these, especially India, are also the two significant low wage economies of the world. Rapid growth in these two economies is bound to affect the pattern of production and trade in the world at large in the years to come.

One must also emphasise here that the Indian economy has been recording a reasonably high savings rate in recent years. It was as high as 36.8% of GDP in 2007-08. Of course, with the recent slowdown of the economy the savings rate too has declined. In 2012-13 the savings rate was 31%. With the aggregate capital output ratio of around four, the crude Harrod-Domar formulation would suggest a growth rate of around 8%.

However, due to a number of infrastructural constraints, implementation delays as well as some of the political fallouts of corruption the actual growth rate realised very recently has been much less. The GDP growth rate during 2012-13 was a mere 4.5% and in the past year the growth rate has only been marginally higher at 4.9%.

Highlights of P Chidambaram's interim budget 2014

This has not been the only difficulty with the Indian economy in the last two to three years. Inflation continues to simmer. Even though the consumer price index (CPI)-based inflation has declined somewhat in the past two months, it is still as high as 8.79% and too high for comfort. Food inflation is even higher, at 9.9%. News from the industrial front has not been optimistic for some time. Industrial output declined by 0.6% in December, a contraction for the third consecutive month. Manufacturing, too, declined in December 2013.

Under the circumstances the decline in excise duty that the finance minister has proposed ought to go some distance in reviving the manufacturing sector. It should be remembered that it is this sector which has the maximum potential for employment generation that would ultimately contribute to poverty alleviation.

It should need no belabouring that a systemic new thinking has to inform government policy-making, but this can only be taken up by the new government after May. India has among the worst social sector indicators in the world and despite extravagant claims in many quarters, we are in the bottom rungs of the human development index.

A number of studies reveal that even though enrolment ratios have been rising the quality of our primary education is abysmally poor. Till 2008 expenditure on public health in India was less than 1% of GDP. This figure has now barely been tipped and it stands at 1.2% of GDP. China's figure in contrast is 2.9% of GDP, and the figure for most European countries is in the range of about 7 to 8%.

The UPA government may justly take credit for introducing a number of imaginative schemes such as the MGNREGA which have on the whole altered the scenario of rural employment and poverty alleviation. There are several problems in its implementation that have come to light which need to be corrected, but there are also plenty of success stories that have already been well acknowledged.

Economic policy-making in the years to come has to refocus attention on many of these aspects, but certainly an interim budget is not the occasion to expect such major policy corrections.

( Pulin B Nayak is professor of Economics at the Delhi School of Economics. The views expressed by the author are personal.)