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Arvind Virmani & Charan Singh: Booster doses for economic growth

Identifying key sectors for policy attention and containing the Fisc will create conditions for faster growth

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The grew slowly at 3.2 per cent in 2012 as compared to 3.9 per cent in 2011, and is projected to grow by 3.5 per cent in 2013, according to the International Monetary Fund (IMF’s) most recent update to the (WEO) in October 2012. The growth rates for 2013 in most of the countries, both advanced and major emerging, have been revised downwards from the projections made in October 2012. The growth rates for many countries in the euro area and the US have also been revised downwards. In the emerging markets, downward revision in the projections have been made for Brazil, India, Russia, and South Africa, while the projections have been held steady for China and Mexico. The update mentions that the space for further policy easing has diminished, while supply bottlenecks and policy uncertainty have hampered growth in some economies, specifically mentioning Brazil and India.

The projections for growth rates for major emerging markets in the WEO update show an interesting trend. The increase in projected growth rate in 2013 for India at 1.4 percentage points over 2012 is substantial when compared with China or Russia, but it is still lower than that of Brazil. The incremental growth needs to be carefully interpreted, since the growth projection made in January 2012 for India for the year 2012 was seven per cent against 4.5 per cent being presented now in January 2013. Similarly, in January 2011, India was projected to record a growth rate of 8.4 per cent for 2011, while the actual presented now is 7.9 per cent. It would have been useful if the gave some reasons for such sharp differences in projections and actuals, since these can impact expectations and credit ratings of the country and also the credibility of IMF forecasts.

The analysis of growth rate of select major emerging markets over the last decade reveals that India and China emerged “relatively” unscathed while recording positive growth in 2009 when many other countries recorded large negative rate in the gross domestic product. However, since the high growth rate recorded by India in 2010, the growth rate in the economy has been sliding down. And that declining trend should be a concern for policy makers in India. To address the situation, some measures have been announced by the Government of India since October 2012, such as liberalising foreign direct investment and reducing subsidy on cooking gas and fuel, but probably much more needs to be done.

The market perceives some uncertainty in the policy making. This uncertainty could be manifold, but mainly reflects the policy on exchange rate, and fiscal deficits. The most immediate challenge is the restoration of fiscal stability and sustainability. Though it was necessary to stimulate demand through the Fisc after the global demand collapse in October 2008, this process should have been reversed in 2009-10. Unfortunately, expenditures trended upwards, a process that needs to be decisively reversed.

The government needs to identify key sectors that can spearhead growth. The most visible source of the growth slowdown is the decline in investment growth. The higher rate of growth recorded in some years has accentuated and magnified the price distortions arising from existing supply bottlenecks and created new ones. Policy and regulatory reforms are needed to introduce and/or enhance competition in the markets for land, infrastructure services, agriculture and skills. With careful calibration, increased competition will stimulate increased supply, help accelerate productivity growth, reduce rents and rent-seeking and sustain inclusive growth. Such growth has also accentuated conflicts over land and natural resources, between rent-accumulators and outsiders and between social and political groups. These must be resolved through economic policy and institutional reform, if fast growth is to be achieved and sustained. Coal nationalisation is well past its use-by date. A well-regulated coal sector with numerous private and public companies competing to explore for and produce coal is urgently needed. It would end the sad spectacle of hundreds of crores of investment in electricity languishing for lack of coal, while Delhi and many parts of North India face power cuts.
 

GROWTH RATES IN MAJOR EMERGING MARKETS (%)
Country 2004 2007 2008 2009 2010 2011 2012

2013 P

Brazil 5.7 6.1 5.2 -0.3 7.5 2.7 1.0 3.5
China 10.1 14.2 9.6 9.2 10.4 9.3 7.8 8.2
India 7.6 10.0 6.9 5.9 10.1 7.9 4.5 5.9
Mexico 4.0 3.2 1.2 -6.0 5.6 3.9 3.8 3.5
Russia 7.2 8.5 5.2 -7.8 4.3 4.3 3.6 3.7
South Africa 4.6 5.5 3.6 -1.5 2.9 3.5 2.3 2.8
P: Projections by the IMF                                                                                                                              Source: WEO, IMF

In the current situation in India, there is a trade-of between inflation and growth. The repo rate, the benchmark interest rate, had been above eight per cent for a long time from July 26, 2011 to January 29, 2013, while inflation rate had come down from the peak of above 10 per cent from March 2010 to July 2011 to hover at seven to 7.5 per cent in recent months. The reduction of repo rate by 25 basis points on January 29 is a welcome step and, if the finance minister delivers on his fiscal promise, as we believe he will, then the trade-off improves further for the Reserve Bank of India to reduce policy rates more aggressively.


 

Arvind Virmani is Non-Resident Senior Fellow, Brookings Institution, Washington DC and Charan Singh is RBI Chair Professor, IIM, Bangalore. These views are personal and not of the associated institutions

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