The government can look back on its handling of the economy over the last two years with a degree of satisfaction. That national income grew 7.4 per cent in 2009-10 owes itself in large measure to an industrial revival in which manufacturing output grew by 10.8 per cent, up from a stricken 3.2 per cent the year before.
This is testimony to how tax cuts and income giveaways helped India Inc ride out of its deepest crisis in living memory. The services sector, where the stimulus — the government reckons it spent 3.5 per cent of the GDP in 2008-09 — wasn’t as concentrated is still to shake off its fright. Services growth in 2009-10 at 8.5 per cent is lower than the 9.8 per cent of 2008-09. Truant rains kept farm output static. This in itself is commendable because the irrigation-fed winter crop managed to wipe out the monsoon losses.
The tricky bit now is to keep this growth momentum alive while winding down the huge debt the government has piled up in the immediate crisis period. Asset sales like stakes in state-owned enterprises and natural resources such as radio frequencies will help. But these are one-offs and can’t substitute for actual belt-tightening. The government has a roadmap laid out by the 13th Finance Commission, it needs the political will to adhere to these deficit reduction targets. The drama unfolding in Europe holds out ample lessons on the dangers of fiscal profligacy.
Although India has managed its affairs better than most, it has veered far from the path of fiscal rectitude it was treading on for the better part of this decade.
The maturity on display in our handling of this particular blip in the business cycle is remarkable because cyclicity is a relatively recent phenomenon in the Indian economic landscape. Consumption demand is yet to reach its trend growth, while investment despite the good headline numbers is driven by higher utilisation rather than new capacity. The surge in government expenditure is abating at a time when the other two components of demand are yet to find their feet.
This tentativeness has much to do with a price line that continues to remain abnormally high. Food inflation has moved into the core manufacturing sector and this imposes its own set of imperatives. India is passing through a critical juncture between expansive and contractionary policy. Not the time to take our eyes off the road.