The new normal?

The percentage point gap between UPA I and II can be bridged

In its first five years in office, the Manmohan Singh government of the United Progressive Alliance (UPA-I) gave the country an unprecedented run of an average annual growth rate of around 9.0 per cent. In its last year in office, the economy slowed to a GDP growth rate of less than 7.0 per cent owing to the trans-Atlantic financial crisis and the consequent global economic slowdown. After that the Indian economy has not been able to cross the 9.0 per cent threshold. However, the average growth rate in UPA-II’s first two years (2009-11) is a little over 8.0 per cent. The latest GDP data show that in fiscal 2010-11 the economy grew at 8.5 per cent (close to the expected 8.6 per cent), but in the last quarter of 2010-11, the quarter-on-quarter growth rate of GDP slipped to 7.8 per cent. This slowdown is expected to extend into the first quarter of 2011-12 (April-June). There are two ways of looking at this news. The optimists would say that even a new normal of around 8.0 per cent GDP growth is good, considering global trends. India would still be among the world’s fastest-growing economies. Given the concerns about inflation and supply constraints at home, a slowdown from the heady 9.0 per cent of UPA-I to a more manageable 8.0 per cent of UPA-II may give comfort.

Many arguments can be put forward to justify the new normal, including the recent fashionable view that this would curb carbon emissions. However, the fact remains that India has demonstrated its ability to sustain 9.0 per cent growth and there is no reason why policy makers should not aim to return to that higher growth trajectory. If, despite the policy paralysis of the last year, the economy managed to grow by close to 8.0 per cent per year, with improved economic and political management, a return to the 9.0 per cent growth path is possible.

The real challenge is in the industrial sector – manufacturing, infrastructure and construction – where investment is sluggish. In fiscal 2010-11, quarter-on-quarter manufacturing output growth decelerated from 15.2 per cent in January-March 2010 to 5.5 per cent in January-March 2011. There was a similarly sharp deceleration in the mining and quarrying sector — the comparable numbers were 8.9 and 1.7, respectively. In the trade, hotels, transport and communications segment the quarter-on-quarter growth rate numbers were 13.7 per cent and 9.3 per cent. In the face of such a sharp deceleration in these sectors, what held up overall growth was an improved performance in banking and insurance and agriculture. The former saw the growth rate go up from 6.3 per cent to 9.0 per cent in the corresponding quarters and the latter saw a phenomenal jump in growth from the lowly 1.1 per cent in the last quarter of 2009-10 to 7.5 per cent in January-March 2011.

A focused improvement in the policy environment, with improved fiscal management, speedy implementation of new infrastructure projects, especially through public-private partnerships, and improved policy coordination between the Centre and states can once again unleash the animal spirits of enterprise and accelerate growth.