What a year it could have been. Rewind to January, look at the numbers and realise that India was on the verge of putting its economy on a speedboat that could have left China bobbing in its wake. But New Delhi missed the boat. The Manmohan Singh government faults the sub-prime crisis for this, but its own hubris is as much to blame.
Since 1991, the economy’s strongest engine has been the service sector, powered by a fuel mix largely made of consumption.
This has worked fine, giving India a healthy 8 per cent plus growth rate. What tantalised the policymakers, including the PM, was the possibility of revving up another engine and increasing the octane level of the fuel. The former would come in the form of ramped up investment, the latter through the continuing boom in manufacturing. Propelled by the two, the economy could reach 10 per cent-plus growth rates for over a decade or more.
Singh hinted at this in December 2007: “India is at a unique point in its history. Never before has the overall environment been as conducive to our sustained high growth as it is today. We are on the verge of finally living up to our full potential.” India’s economic growth over the past few years, he said at another point, “is unprecedented and leads us to wonder whether we have actually scaled another invisible barrier and placed our economy on a high growth path.”
This brave new India’s economic trajectory seemed imminent when 2008 began. Investment had soared over the past three years. If one added up all the investment expenditure in India, it equalled one-third of the GDP. Over half of this amount was pouring into industry. Manufacturing growth rate touched 12.5 per cent in 2006-07, matching the double-digit rate of the service sector.
Privately, UPA officials began talking about how the country was set for a big bang — “10 per cent growth for 10 years” — that would propel India out of the Third World.
But the government was counting its eggs before they hatched. Mesmerised by the rising gradient of every economic statistic, it gave up on reforms and began spending money in expectation of a cornucopia of tax revenues. The previous Reserve Bank Governor, Y.B. Reddy, warned that inflation clouds were gathering and that the government’s “throw money at the voters” policy was the equivalent of rain-seeding. When the price storm broke, the UPA’s calculations were washed away in the interest rate hikes and industrial slowdown. India’s economy was stumbling hard even before ‘sub-prime’ entered the lexicon.
Wall Street’s woes left India face down in the dirt. The cost of the UPA’s hubris has since become clear. By failing to carry out any economic reforms and, in effect, spending its taxes for the next few years, the government ensured it had no reserves to ride out the bad times. The lack of new reforms means there are no new embryonic growth areas in the economy.
The enormous wastage of funds on loan waivers and subsidies is why New Delhi can only roll out shoestring stimuli for the economy today.
In February, the PM had declared that sustained growth would be possible only if India got “both politics and prices right.” Ten months later, it is now clear his government got both wrong. Given the chasm that has opened up between the promise of the New Year and the dismal forecasts for 2009, it is perhaps no surprise that the UPA couldn’t quite accept how its fortunes had changed. New Delhi, as former Finance Secretary S. Narayan recently wrote, “was in denial for all these months” and it was only last week that the new RBI Governor, D. Subbarao, admitted India was in a recession. The government was repeatedly wrong in its predictions about the Sensex.
India will begin 2009 struggling to keep the economy above a low watermark of 6 per cent growth. The investment engine and manufacturing fuel additive that Singh had put so much hope in have stalled, just as they were starting to ignite. The savings rate, which increased to 33 per cent of GDP, was the main money source for the incipient investment boom, is almost certain to fall because the government is swimming in red ink and the private sector is strapped for cash. A recent study showed private sector investment in new projects had fallen 30 per cent from the previous year— and that was before the sub-prime crisis.
The government’s investment has, so far, largely been a mix of talk and red tape. With even the old consumer-services engine now faltering, the perception that there is no demand means many planned investment projects will never see the light of day even if interest rates fall in the coming year. No one else in the world is giving the Singh government any points for its economic management.
An economic advisor to Barack Obama’s team remarked recently, “The hope for India was that its private sector would be able to grow despite its dysfunctional government. Now we see the government can bring the private sector down with it.” A Wall Street analyst who watches China closely said earlier this year Beijing’s leadership, looking at the same figures that had so enthralled the PM, had fretted India might beat China in simple GDP growth terms sometime in the next few years. “Their calculation was that the government would make a mess of it and keep India down. They were right.”