It may seem premature to be discussing a recovery from India's current economic crisis when economic growth has collapsed to 4.4 per cent and is still slowing, manufacturing output is actually falling, job losses are mounting, consumer inflation remains high, the rupee and external finances are still very stressed and the fiscal deficit continues to widen (over 60 per cent of the full-year estimate in the first third of the fiscal year). Most investment banks and multilateral agencies are now pegging GDP growth for 2013-14 at or around a dismal four per cent. Nevertheless, with a bit of luck and a dash of optimism, one could envisage the current year as the nadir of this crisis and begin to focus on the shape of the post-crisis recovery.
The last time the Indian economy was in a comparable mess was in 1991, 22 years ago. Then, as we all remember, the newly formed Rao-Singh government launched a programme of stabilisation and structural reforms that helped restore economic buoyancy with remarkable alacrity. GDP growth, which had plummeted to 1.4 per cent in 1991-92, rebounded to 5.4 per cent in 1992-93 and accelerated steadily to average over seven per cent in the three years from 1994-95 to 1996-97. If something similar could be engineered in the coming years, we could easily revert to nine per cent plus growth by 2016. Alas, the likelihood of such a strong recovery looks vanishingly small. Let me outline some of the reasons for this bearish outlook.
Global economic environment
Although 1991 was a bad year for the world economy thanks to the "first Gulf War", the associated oil price spike, the break-up of the Soviet empire and the recession in the United States, global economic fortunes recovered quickly during the US-led "Clinton boom" of 1992 onwards, providing a strong, supportive backdrop to India's reform efforts. Today, despite some recent optimism, the strength and durability of the US recovery are still debatable. Europe remains mired in near-recessionary conditions, Japan's recovery is still modest and China's growth has slowed. It is very unlikely that the next five years of world economic growth will come near the record of 1992-97. Global liquidity will almost certainly tighten and interest rates increase. So, India's recovery will probably have to contend with a less favourable external environment than in the 1990s.
Tractability of the reform agenda
The economic reforms of the early 1990s were wide-ranging and potent. Fortunately, some of the key ones could be implemented through administrative action by a determined central government: industrial decontrol, opening up to foreign trade and investment, the switch to a market-based exchange rate regime, the lifting of financial repression, major tax reforms and so on. Contrast this with the so-called "second generation reforms" that have been stalled for years and need to be implemented to revive strong, sustained growth of the Indian economy. They include: reform of overly rigid labour laws; revamping of the policy and regulatory framework for key infrastructure and energy sectors; major redesign of urban policy; serious reforms of the public education and health systems and so forth.
These reforms, though necessary, are difficult to design and implement and often require hard-to-achieve legislative action. That is one reason they have been waiting in the wings for so long. Moreover, they generally need active co-operation and co-ordination between central and state governments, ingredients that have proven elusive in an increasingly fractious polity. So the prospects for early and coherent implementation of the necessary reforms are not too good, to put it mildly.
Political appetite and administrative capacity to implement reforms
At present, it is hard to discern a comparable degree of familiarity and support for the necessary reform agenda in the key central government agencies, let alone the state governments that would need to be involved. In the absence of such techno-administrative consensus, it is hardly surprising that the political commitment is also weak, especially given the unusual weakness of the current political executive. Coherent and decisive policy making is complicated by the growing role of non-governmental players, ranging from civil society groups to crony capitalists. Ergo, the prospects for strong reforms are dim for these reasons also.
Baggage of recent history
Quite apart from the low politico-administrative tractability of the reforms necessary to revive growth, the burden of recent history may also retard a swift recovery. In particular, the last few years' proliferation of ill-designed but expensive entitlement programmes will pre-empt fiscal space for more genuinely developmental public expenditure and challenge macro stability. The recent law on land acquisition will further burden an industrial sector seriously damaged by anti-industry policies, including misguided exchange rate appreciation and capricious tax measures.
Put differently, where will growth of output and employment come from in the years ahead? In the last 15 years, services have been the main engine of overall economic growth. Perhaps inevitably, that engine has begun to sputter and may be hard to reactivate. The prolonged neglect of manufacturing has to be swiftly reversed and supportive policies deployed. The recent rupee depreciation offers substantial encouragement to import substitution and exports. But to fully exploit these opportunities, it is vital to have supportive infrastructure, tax and labour market policies.
All things considered, the outlook for a strong and sustained recovery from the ongoing crisis is not very promising. Almost certainly, it will not match the speedy resurgence after the 1991 crisis. If 2013-14 really does turn out to be the nadir of the present crisis - and there is no guarantee of that - it may be realistic to expect economic growth in the ensuing three years to average five to seven per cent.
The writer is honorary professor, Icrier, and former chief economic adviser to the government of India.
Views are personal