The economy, as the government sees it, is wobbly but isn’t falling off the deep end. A couple of points shaved off growth in the year to March 2009 is not an unmanageable diversion from the long-term trend of 9 per cent is the way the Finance Ministry’s mid-year review of the economy puts it. High savings and investment, strong consumption demand in the countryside on the back of good harvests, the damping effect of a sizeable services economy on business cycles, ambitious public expenditure programmes to crank up infrastructure and wide scope for monetary expansion should, the government hopes, see us through the biggest crisis buffeting the world economy since the Great Depression. Valid assumptions all, yet they cloak the fact that North Block is hoping to ride out the tempest without too much of a policy tweak.
Savings, investment and consumption are forces that keep the growth trend line aloft and it would be a triumph of hope over reality to expect them to play a counter-cyclical role. That is the preserve of fiscal and monetary policy. The government admits there is significant headroom in the latter, but its silence on the former is ominous. The Reserve Bank, having run a tight money policy in the first half of the year, has the elbow room to reduce interest rates for the next 12 months. The same cannot be said about fiscal expansion; the government had overshot its revenue deficit target in the first six months of the year, before tax receipts began to be savaged in September. Flooding the economy with money may be necessary to climb out of the trough, but the sufficient condition requires demand to be bumped up through public expenditure when households and producers are winding down their spending.
To be fair, the mid-year review is not a platform to list policy options. The snapshot of the economy it captures, however, brings into focus the constraints facing the government. A roadmap drawn up in 2004 had committed to a zero revenue deficit by 2008-09 and the Finance Ministry has delayed it by a year to accommodate heavy election year spending. The tendency to give fiscal rectitude a pause runs strong though we’ve been resisting it since the crisis broke. But it’s early days yet.