Limited space in the room
The government is rapidly scaling down its projections for growth in the current financial year. The Reserve Bank of India, which is principally responsible for the slowdown because of monetary tightening, kicked off the revised estimates by cutting its forecast of growth in the gross domestic product from 8% to 7.6%. The finance ministry followed this up in its mid-year review of the economy, where it lowered its target to 7.25-7.75% from budgeted expectations of 9%. On Sunday, Prime Minister Manmohan Singh, addressing a section of the Indian diaspora that sent home $55 billion in remittances in 2010, came up with an even lower figure of 7% GDP growth in 2012-13. This number is perilously close to the rate at which the economy limped along in 2008-09 as credit markets collapsed across the world. We pulled ourselves out of that hole fairly easily and Mr Singh is confident India can repeat the feat. Some of that confidence may be misplaced.
The crisis that confronts the world is more grave than the banking seizure of 2008. Then it was a question of governments spending taxpayer money liberally to bail out banks that had bought dodgy IOUs. In 2011, it was a question of bailing out governments that had spent far beyond their means, particularly in the euro zone. Such decisions cannot be taken as quickly as, say, recapitalising an ailing bank, simply because other governments-and in Europe's case a score of them-have to agree. The European Union (EU) has come out with a series of "definitive" solutions on restructuring the debt of its profligate members, none of which seemed such a great idea within weeks of its articulation. For the euro to survive, the EU must be able to cobble together a coordinated fiscal stance. This requires countries to surrender more sovereignty to the idea of Europe, a process that involves going back to the voter. The festering euro crisis is here to stay.
Mr Singh's government faces its own set of issues at home. The scope for fiscal expansion has shrunk dramatically with the deficit poised to overshoot its targeted 4.6% for 2012-13. Expenses, particularly on food and fuel subsidies, have mounted alarmingly, while a cooling economy has not delivered the tax revenue finance minister Pranab Mukherjee had assumed in his previous budget. Charges of corruption have stymied plans to raise more money by selling airwaves to telecom companies and market turbulence has claimed a casualty in the government's effort to sell stakes in state-run enterprises. Monetary easing, likewise, is limited by the spectre of persisting inflationary pressures. The central bank will be loath to see the gains from a series of interest rate hikes being squandered by undue haste in reversing them. Policy headroom in 2012 is so much smaller than it was in 2009. The climb will be longer this time around.