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Surrendering to price rise

india Updated: Jun 11, 2012 02:10 IST

The annual report card on the government’s economic management is out. It’s not a pretty picture. The economy has slowed to a growth rate of 6.5% in 2011-12, from 8.4% the year before. This is lower than the official projection in February that the gross domestic product would grow by 6.9% in the 12 months to March 2012. All spheres of economic activity are feeling the squeeze: farm and factory output grew at nearly a third of the pace in 2010-11. The famous resilience of India’s service sector is cracking too.

Growth in trade, hospitality, transport and communications is a percentage point lower, as it is in finance, insurance, real estate, and business services. Construction has taken an unusually big hit from rising raw material and credit costs and growth decelerated from 8% to 5.3%. The output of mines, which actually shrank, faces a regulatory gridlock over environmental clearances and land acquisition.

This is the second year that the UPA has surrendered the gains of growth to rising prices. Inflation in 2010-11 was 9.1%, tolerable when the economy was growing at 8.4%. In 2011-12, inflation at 8.5 was a full 2 percentage points higher than the GDP growth rate of 6.5%. Inflation ranged from 7.4% in manufacturing to 8.8% in agriculture and nearly 10% in some service sectors. The story on inflation is not all bad, however, it has been on a secular decline from 9.7% in the first quarter to 6.7% in the last, when the GDP grew a mere 5.3%. The central bank’s monetary tightening has delivered on prices, but it comes at a pretty steep cost to India’s economic momentum.

Climbing out of this trough is a tall order. India invested 32% of its GDP in 2011-12, this sets the outer limit of GDP growth in this year at 8%. Indians set aside 30.6% of their income to build production capacities in the second half of 2011-12, at this rate another half a percentage point gets shaved off growth. It now looks extremely unlikely that the economy will revert to the 8.5% trend line this year or the next. Unless the UPA pulls a rabbit out of the reforms hat to revive investment, prices are poised to outrace growth in the run-up to the 2014 general elections. The Congress cannot be oblivious to the impact that can have on the ballot box. At the very least, finance minister Pranab Mukherjee must apply himself to the job of containing the fiscal bloat. The economic options are running out fast, so could the political ones.