Today in New Delhi, India
Mar 22, 2019-Friday
New Delhi
  • Humidity
  • Wind

Gambling for growth again

India faces a tough task of balancing spending cuts, a necessary evil, with keeping people satisfied by providing everything cheap, from food to fuel. Gaurav Choudhury and Zia Haq write. Graphics: World economy's new pecking order

business Updated: Mar 10, 2013 01:43 IST
Gaurav Choudhury and Zia Haq
Gaurav Choudhury and Zia Haq
Hindustan Times
P Chidambaram,Swami Vivekananda,hindustan times

Towards the end of his budget address on February 28, finance minister P Chidambaram quoted Swami Vivekananda on the importance of making right choices, signaling a break from conventional wisdom.

India's budget speeches, which millions look forward to for sops and concessions, would no longer be about pleasant surprises but hard decisions, such as spending cuts.

This would mean that every household must pay higher to lead a better life.

"By 2025, we could become a $ 5 trillion economy, and among the top five in the world. What we will become depends on us and on the choices that we make," Chidambaram said, about setting the priorities right.

Size, Growth & Quality Of Life
India's growth is set to slump to a 10-year low of 5% in 2012-13, proving fears of a widespread slowdown. Factories are producing less, exports are shrinking, investment is down to trickle, and companies are offering fewer jobs, while prices continue to be high.

The alarmingly slow growth, worst since the drought-year of 2002-03, could imply that India will no longer remain the world's second fastest growing major economy behind China. China's economy grew 7.9% in 2012 while estimates put Indonesia's growth at over 6% last year.

Yet, despite the slowdown, India's per capita income, calculated by evenly dividing the national income among the population, is nearly Rs 70,000 a year. The figure gives an idea of the standard of living of average Indians, although it may hide a stark reality: much of the growth in income may have been driven by the wealthiest.

In 2011, the 100 richest Indians had a combined net-worth of $241billion or Rs 12,06375 crore, representing 16% of the India's gross domestic product. Within the discipline of mainstream economics, an intense debate is on about the need to move beyond the orthodox thesis of national income or GDP-focused growth paradigm, largely benchmarked to the United States.

According to YV Reddy, former RBI governor and chairman of the 14 Finance Commission, "the new approach does not replace the notions of output or income that contribute to well-being but is considered an antidote to the tendency of economists to focus exclusively on the material determinants of social welfare, such as the gross domestic product (GDP)". A consideration has to be made between "happiness and a longer term and broader goal of life satisfaction".

Structural Inflation
Inflation is not what it used to be. Economists are splitting their hairs in trying to ensure growth, while keeping prices in check and their latest worry is that food prices are revealing a new pattern.

As the tens of millions of people shift to higher standards of living, the focus is changing from basic needs of nutrition such as rice and coarse grains to more aspirational products like protein rich eggs, meat and fish.

Data over the last few years show that prices of protein-rich food items such as pulses, milk, eggs and fish have risen faster that overall food prices. At relatively low levels of per capita income, carbohydrate-rich diets, based on cereals such as wheat and rice, dominate protein-based diets. This trend is showing signs of reversing with rising incomes.

Experts reckon that for a variety of welfare schemes such as the National Rural Employment Guarantee Act (NREGA), there has been rise in rural wages, prompting higher sales of so-called "urban" goods in the countryside.

"We are beginning to see substantial increases in consumer demand at a very localised level. Once we recognise that rural consumption demand pattern has changed to the extent that people in rural areas are demanding stuff that they did not consume earlier, we really have to take a serious relook at our conventional approach to price management," said Pronab Sen, former chief statistician of India. Graphics: World economy's new pecking order

When expenses go up, the first thing people notice is food prices, the single biggest slab of their monthly expenditure. A critical impact has been on household savings.

Indians traditionally save good amounts in bank deposits, a key driver of prosperity. Savings are now rapidly falling. Financial savings accounted for 55% of total household savings during the 1990s. This share fell to 36% in 2011-12. The current shortfall is nearly by Rs 90,000 crore. "Kya bachta hai (There's nothing to save," says Bhavni Devi, a roadside cigarette vendor.

It's not just soaring food prices that are hurting your pocket. Payments for utilities, such as telephone services and electricity, have surged significantly and a visit to a beauty parlour or a salon is more expensive now than, say, a year ago. Pumping iron at the gym, or a weekly visit to the movies at a multiplex also costs more now.

All these mirror the constraints of an economy caught in a peculiar flux, summed up aptly by Reserve Bank of India governor D Subbarao.

"Twenty years ago when I had a thick mop of hair, I used to pay R25 for a haircut. Ten years ago, after my hair started thinning, I was paying R50 for a haircut. And now, when I have virtually no hair left, I am paying R150 for a hair-cut. I struggle to determine how much of that is inflation and how much is the premium I pay the barber for the privilege of cutting the governor's non-existent hair," Subbarao lamented in a speech last year.

Economists caution that inflation is perhaps far deeply embedded in the Indian economy than what the wholesale or consumer price indices reveal, amid an ongoing debate about the efficacy of India's inflation control measures.

"There is no cost-of-living index that appropriately measures services inflation in India. That is why the RBI's household's perception survey on inflation is always higher than WPI or CPI," said Samiran Chakraborty, regional head of research, South Asia, StanChart.

Jobless And Growing
Elevated prices-retail inflation was 10.79% in January-have hurt family budgets hard, especially at a time when thousands of factories and firms in India, squeezed by costly input and borrowing costs, have offered meagre salary hikes and are holding back expansion or hiring.

There is no current data available, but inflation is likely pushing millions who had just climbed out of poverty (measured at the ability to spend $1.25 a day) back in, worsening India's worrisome under- and unemployment.

This unemployment comes at a time when every sector is short of skilled workers - from masons to teachers to waiters to engineers - a reflection of an education system that is not imparting skills the economy needs.

Spinning new jobs, therefore, is critical for India's long-term socio-economic equilibrium.

Large corporations are important, but as many experts point out, they are, in a sense, incidental. The future lies in the estimated 40 million small, micro and medium enterprises that are spread across the dank tanneries of Mumbai's Dharavi slum township, in the room-sized waste-recycling units of outer Delhi and elsewhere in the country.

Put together, these grubby factories contribute towards half of India's factory output, 45% of exports and employ more than 60 million people (India's high-profile service sector employs no more than 40 million). "Every one percentage point growth in the manufacturing sector would create 20-30 million additional jobs," a senior government official, who did not wish to be identified, told HT.

"Industrial growth, particularly manufacturing sector growth must underpin resilient GDP growth. The MSME sector has a crucial role to play in enabling this, and the extension of benefits for a period of three years to a higher category bodes well for increased participation in the sector," said Vivan Sharan, Associate Fellow at Observer Research Foundation, a Delhi-based think-tank.

Least recognised is the ailing agriculture sector, which employs half of India's population, about 600 million people, produces no more than 15% of GDP and lives from monsoon to monsoon. Without any rapid improvement in infrastructure, education, or institutions, fewer jobs would be created outside of the farms increasing pressure on land and lowering incomes.

"The central long-run question facing India is where will good jobs come from? Productive jobs are vital for growth. And a good job is the best form of inclusion. Experience of other countries suggests that number of people dependent on agriculture will have to shrink if per capita incomes in agriculture are to go up substantially," said Raghuram G Rajan, India's chief economic adviser.

For this to happen, growth or a rise in earnings and investment are necessary conditions. Achieve this, and jobs and the ability to spend will follow.

First Published: Mar 10, 2013 00:26 IST