A forced optimism

Mid-Year Analysis insists economy can be fixed, but admits guilt too

The government has finally been forced to confront the reality that the Indian growth story is in trouble. The Mid-Year Analysis from the Ministry of Finance has acknowledged some sobering facts. First, that growth in the first half of the financial year has been stuck at 7.3 per cent, with the second quarter showing only 6.9 per cent growth. Second, on inflation, that “the overall picture during the current fiscal so far has been one of persistently high headline inflation”. Third, that industry is being strangled: “The slowdown in the manufacturing sector... has not only been prolonged but appears to be sharper than initially estimated.” And fourth, that the fiscal deficit is swelling way beyond the target that had been announced in the Budget.

However, this acknowledgement is not entirely clear-eyed. Growth is acknowledged as being low, but the Analysis nevertheless insists that “the momentum in the second quarter of the current fiscal has been better than the headline indicator,” which “augurs well for the outcome in terms of GDP growth for the year as a whole.” Yet the Ministry’s own analysis of fixed investment, a crucial driver and signal of recovery, says that “growth particularly slowed down in fixed investment in the second quarter.” The Analysis does go further than most discussions on inflation, by pointing out that prices have risen more in India than in other inflation-ridden emerging markets, which was due to “an unusual combination of domestic factors and structural reasons.” But it is on the matter of expenditure, revenue and the fiscal deficit that the Analysis is most problematic, in that it appears somewhat divorced from the reality of India's fiscal over-stretch. Remember the Analysis is no longer just a description of trends and policies; it is now also a required statement of the government’s performance on meeting its obligations under the Fiscal Responsibility and Budget Management Act, 2003. It is true, though, that the government seems to accept that it will be unable to meet its deficit target — or, as the Analysis delicately puts it, “performance during the first half on the fiscal front poses some risks… which, if not addressed appropriately, may lead to slippage from the path of fiscal consolidation.” Yet, it is insistent that the overall fiscal policy stance “remains on the consolidation track, even though there may be a small transgression this year.” This argument is hard to sustain, as it is clear that even the reduction in the deficit achieved last year came on the back of the 3G auction windfall. What is interesting to read, therefore, are the reasons that are given for each “transgression”: in almost every case, structural rigidities are blamed. What does that mean, in this context, but an unwillingness or inability to reform?

It is interesting that while the words in the Analysis are reassuring, the numbers are not — and that when each transgression and failure is dissected, the blame inevitably is assigned to structural problems. Indeed, the section on subsidy payments makes this explicit, by saying that such payments are the central “structural problem of government finances which needs to be addressed through policy initiatives.” That the Analysis puts the best face possible to the consequences of the government’s failure to act is true; but it could also be read as an admission of guilt.