T N Ninan: Ready for 6.5 per cent?

A 6.5% rate of growth in 2012-13 seems plausible, even probable. If that comes about, it will be the worst performance since 2002-03

A year ago at this time, the headlines were almost uniformly upbeat. The quarterly GDP numbers had been unexpectedly buoyant, and corporate India was talking of good sales figures. Though the telecom scandal had begun to roll out, it had not led to the resignation and arrests of ministers and corporate chieftains. Anna Hazare was still quietly eating meals in Ralegan Siddhi and, equally quietly, Kiran Bedi was busy over-billing people for her travel. Inflation was high, but so was growth, and interest rates were not high enough to hurt. Despite the gathering storms, the headlines reflected a generally optimistic mood. Indeed, the stock market was on its way from a Sensex level of 19,000 to its January peak of about 20,500, and some market pundits were forecasting 22,000 in December 2011 — a long way up from the current level of 16,000 plus. Now some pundits are predicting that the Sensex at this time next year will have dropped way down to 12,000! Could they be wrong again? A year from now, could the mood have swung right back to optimism?

If you look for pointers in these pages (and, to adapt Arthur Miller’s aphorism, a good business newspaper should be an economy in conversation with itself), three perspectives were offered in the last three days. Writing on this page on Wednesday, Abheek Barua said that he saw growth slowing further next year (to sub-seven per cent), and pointed to the under-appreciated problem of macroeconomic mismanagement, which bothered him more than the lack of reform; in particular, he talked of the massive fiscal over-stretch. His advice to investors: take your money and run if the market rallies. A day later, Shankar Acharya made no forecasts but pointed to dysfunctional politics and the prospect of continuing policy stasis as the issues that surprised him in 2011; there was no suggestion that things would improve. Finally yesterday, Akash Prakash admitted that “the positive buzz about India that took years to build has now dissipated”. He saw growth next year being no more than 6.5 per cent.

However, it isn’t that an alternative scenario is not possible. Prakash himself spelt out three good reasons for a more upbeat outlook: the decline in the rupee’s external value improves Indian industry’s competitiveness, inflation is coming down so interest rates will follow, and global corporate giants are busy putting more money here and planting deeper roots. And while the external environment is unlikely to provide any kickers for growth, one could argue that if the German chancellor gets her way on European reform within her time-table that stretches to December 2012, and if the nascent US upturn gathers momentum, then the global scenario could look less disaster-prone a year from now.

But even after providing for an uptick in the mood during 2012, and therefore a stock market revival, the likely outcome is that growth will have slowed. Consumers have begun to hurt from the high interest rates, and demand is unlikely to revive quickly, as jobs are becoming scarce and salary hikes are likely to be modest — not enough in most cases to neutralise the increase in monthly loan repayment installments following the interest rate hikes. Corporate investment will not revive till interest rates have dropped some way down, and a cautious Reserve Bank that believes in “baby steps” will take months before it brings down interest rates to levels that change the calculus on business risk. So a 6.5 per cent rate of growth in 2012-13 seems plausible, even probable. If that comes about, it will be the worst performance since 2002-03, when it was four per cent because of a poor monsoon.