Prime Minister Manmohan Singh’s address to the nation last Friday raises three important questions. One, why did the government wait so long to do what it did on September 13 and 14, since the parlous state of the economy was evident for quite some time to everyone including even Dr Singh? Two, how fair is the comparison between the current economic situation and what prevailed in 1991? And three, if this is not the time for easy options, what scope or opportunity does the government have for the hard options that Dr Singh said were necessary now?
More than a year ago, it had become clear that the Indian economy was sliding towards the twin-dangers of unsustainably high fiscal and current account deficits. Growth had begun to falter and inflation had not come under control. Fiscal deficit had risen from 4.9 per cent of gross domestic product, or GDP, in 2010-11 to 5.9 per cent in the following year. In the same period, revenue deficit had shown an even sharper spike — up from 3.3 per cent to 4.5 per cent of GDP.
On the external front, the current account deficit had widened from 2.7 per cent in 2010-11 to 4.2 per cent of GDP in 2011-12. In terms of the import cover the country’s foreign exchange reserves could provide, the situation was getting serious. Against their ability to meet import needs for 11.1 months in 2009-10, the reserves could meet only 9.6 months of imports in 2010-11 and, worse, only 7.1 months in 2011-12.
GDP growth had also slowed from 8.4 per cent in 2010-11 to 6.5 per cent in 2011-12. It is not that the growth engine slowed all of a sudden. For about a year since March 2011, the rise in GDP in every quarter has been slower than that in the previous one. The April-June 2012 GDP growth figure showed a marginal rise to 5.5 per cent for the first time since January-March 2011, when the growth rate had hit a high of 9.2 per cent. Inflation, based on the wholesale price index, has declined from the double-digit level seen last in September 2011, but it still hovers at seven per cent, not giving too much comfort to either policy makers or the people.
Even subsidies, a major problem area for the government, have been on the rise in the last couple of years. In the last three years, subsidies have stayed at an uncomfortably high level of over two per cent of GDP. In the current year, the government had planned a marginal reduction to 1.9 per cent of GDP, but this target, too, is unlikely to be achieved in view of the government’s failure to take any corrective action in the first half of the year.
So, the government knew of the deep financial mess it was in. What stopped it from taking action? If the government could take those steps 10 days ago, why weren’t they taken a year or six months earlier? At least, the petroleum subsidies, the largest chunk in the government’s subsidies bill, could have been tackled to a great extent. The prime minister’s address offers only one lame excuse: “We held back from raising prices further because I hoped that oil prices would decline.” That does not explain the delay entirely. On the contrary, it is a poor comment on his judgement as also perhaps on the advice rendered by his economic advisors who may have convinced him on the need to delay such a decision in the hope that international crude oil prices would soften.
The second question raised by the prime minister’s address pertains to a comparison of the current situation with the 1991 crisis. Yes, it is perhaps good to goad the government into action and convince the people in the name of a crisis, but the crisis of 1991 was far deeper than what prevails today. Fiscal deficit then was close to eight per cent of GDP, much higher than what it is today. Import cover then was only for two and a half months, compared to seven months now. The government’s total debt, too, was much higher in 1991 (61 per cent of GDP) than it is today (52 per cent).
With regard to subsidies and the current account deficit, of course, the situation in 1991 is comparable to the present situation. The subsidies then were more than two per cent of GDP as they are now and the current account deficit is over four per cent of GDP, while it was only three per cent then. The bigger crisis that faces the economy today is not so much about its macro-economic numbers, but the failure of the government to galvanise itself into necessary remedial action to repair the damage its policy paralysis of the past year or two has caused. Remembering 1991 is necessary as a cautionary tale, but that might also lead us to drawing wrong lessons from the current crisis.
Finally, the question that arises now is what leeway the prime minister has for taking hard options. In March 2011, in his address at the Annual Business Standard Awards, Dr Singh had said: “Let me assure you that I do have my fingers on the pulse of India today. I sense a mood for renewal, as I did 20 years ago. We did not disappoint India in the summer of 1991. We will grasp the nettle once again.” Whatever might have been the reasons, the summer of 2011 went by without any such promised action. It will require a lot of planning and courage for Dr Singh to carry out his latest promise of exercising the hard options, given the political logjam with which his government is faced. Support from the Samajwadi Party should make his government safe, but may create new hurdles in exercising those hard options. Many legislative reforms, the need of the hour, are likely to face a roadblock.
