T N Ninan: Blind-sided

Policy makers are supposed to be better at assessing trends than mere flacks, since they have better access to information and (presumably) better judgement. So it has been a mystery as to why virtually all the wise economists in the government, starting with the prime minister, have been unable these last few months to see what has been staring everyone else in the face, namely the economic slowdown. Not just Manmohan Singh but also C Rangarajan, Kaushik Basu and others have all been growth optimists when the growth indicators have pointed downwards. Now, with the fourth quarter GDP numbers confirming the slowdown, they are all scrambling to lower expectations.

The slowdown which government spokesmen have woken up to belatedly was no hidden mystery weeks and even months ago. Private sector economists said on Budget day itself that 9 per cent growth this year would be difficult to pull off. And while it’s not wise to say “I told you so” (readers might point to the times when one has been wrong!), I did write in these columns in January that “If this year’s GDP growth ends up at 8.5 per cent, it would be unrealistic to expect more than 8 per cent next year — especially since there will be no agricultural kicker, and no advantage of a set of low base-year figures. Even 8 per cent … wouldn’t be bad going, but it is not the 9-10 per cent growth for 2011-12 that the prime minister forecast earlier this month…”

It wasn’t just the prime minister who was talking of 9 per cent and more for 2011-12. The chief economic advisor talked of 9 per cent in his Economic Survey in late February, and the finance minister built that into his Budget assumptions. Dr Rangarajan, as chair of the Prime Minister’s Economic Advisory Council, was talking in February of 9 per cent for both 2010-11 and 2011-12, and even now he does not rule out 9 per cent for this year. It was left to D Subbarao at the Reserve Bank of India (RBI) to provide the cold shower. After saying mistakenly in January that “the risk to growth was on the upside”, it trimmed its sails in March and signalled that there was a threat to the “current growth trajectory” (which, bear in mind, was already below 9 per cent). The RBI followed that up last month with its 8 per cent forecast for this year, and the Planning Commission quickly dropped its own talk of 9 per cent.

As it happens, it required no great skill to read the storm signals. CII’s Business Confidence Index had dipped in the October-December quarter, investment demand was tapering off, and rising interest rates were bound to curb credit-driven demand for cars and housing — as is now evident. Indeed, the chief economic advisor himself was forecasting in December that the industrial production numbers would henceforth show slower growth — which they did. Why, if you take away the boost provided by the agriculture bounce-back after two flat years, the non-agriculture GDP growth for the last year as a whole (at about 8.8 per cent) was slower than the 9.6 per cent non-agriculture growth of 2009-10.

The problem with pushing for faster growth in today’s environment is that the government is struggling to control the fiscal deficit, even as the RBI battles inflation. Both policy goals are GDP-contracting in orientation, and it does not help that the government has a cupboard that looks like Mother Hubbard’s when it comes to economic reform. The economy retains its capacity to surprise on the upside (just look at the export surge), but the over-all odds are quite long.