the government's quiet confidence that the worst may be behind us. The finance ministry's mid-year review of the economy sees the gross domestic product growing at around 6% after having clocked 5.4% in the first half of the financial year.
Little on the plate: Mumbai, July 19
The numbers will indeed improve in the New Year but they may be slightly flattering. The October factory data looks impressive until you notice this growth is against a 5% contraction in output in October 2011. For every month that industrial growth sputtered in 2011-12, the numbers a year later will look unusually robust, a phenomenon statisticians describe as a low base effect.
The economy went into a deep dive in the second quarter of 2011-12, when GDP growth dipped to 6.7% from 8% in the previous three months. Over the next two quarters, growth slid further to 6.1% and then to 5.3%. By the time of the next budget, the official data will indeed show that the slowdown has been arrested. Three months later, this trend will be confirmed in the GDP numbers for the fourth quarter of 2012-13.
The central bank, historically more conservative, expects the economy to behave pretty much as the government does. In the Reserve Bank of India's (RBI) October assessment, the economy should chug along at 5.8% in 2012-13. Independent observers concur. The National Council of Applied Economic Research (NCAER), a think-tank, puts the figure at 5.9 %.
While output figures may be jumpy next year, headline inflation is taking a stubborn ride downhill. Wholesale price inflation has averaged 7.7% in the first half of 2012-13, down from 8.9% in 2011-12 and 9.6% the year before. And this is where the consensus breaks. The government sees the number dipping to 6.8-7% by March 2013. The central bank, however, puts the year-end inflation at 7.5%. The NCAER forecast of average inflation in 2012-13 is 7.4%.
Even the most optimistic view - that of the government - means prices this year will outrun incomes again. This will be the third year the UPA has surrendered the gains of growth to rising prices. Inflation in 2010-11 was 9.6%, tolerable when the economy was growing at 8.4%. In 2011-12, inflation at 8.9 was 2.3 percentage points higher than the GDP growth rate of 6.5%. This year, inflation will again be a full percentage point higher than growth.
In three out of four years of its second term, the UPA has thus seen real incomes erode for a wide section of its voters. The UPA has pulled quite a few rabbits out of the reforms hat since September to revive investment, but 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.
But there is a bigger worry that unless the growth-inflation dynamic is altered the economy will not find its way back into the 8% plus growth rates it had taken for granted barely five years ago. 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 appears the economy's trend growth line has shifted downwards.
P Chidambaram would like Indians to save 36% of their income, a rate briefly achieved in 2007-08 during his previous stint as finance minister just before the global credit crisis struck. Scaling up to that level is simply not possible if real incomes are declining for the majority of our workers.
"If left unchecked, persistent inflation, no matter what the drivers are, could unhinge inflation expectations," RBI governor Duvvuri Subbarao said after reviewing and keeping interest rates unchanged in December. "And, eventually, inflation gets generalised, as indeed has happened."
The statistic to watch out for in the New Year will be the most obdurate one. The sobering reality of galloping food prices - partly caused by rising living standards - is no longer restricted to the managers of the economy. It periodically pops up in the wider political discourse. The spectre over India in 2013, as it has been for the previous three years, is of inflation that not only threatens economic growth prospects but also risks excluding millions of people a Robin Hood government is trying to drag inside the circle of prosperity.