Low growth can fuel price rise
Dec 07 2012
How do you see growth prospects this year, considering that economic growth has slowed down in the first two quarters at 5.5 per cent and 5.3 per cent?
I won’t take that in any negative way. Even at the time of the first quarter (April-June) results, I had pointed out that agriculture estimates were principally driven by our agriculture year, i.e., July to June. In the second quarter (July-September), we have moved to a new agriculture year. If you factor that correction, I do not think the second quarter results show that much difference from first quarter results. A lot of analysts have been saying that they do not expect any significant improvement in performance in second quarter. Taking that into account, I do not think we should read more than what the figures reveal.
GDP at market price came down sharply in the first two quarters because of the huge outgo on subsidies. Is it not a worrying sign as real growth is much less than what the figures reveal?
That is a statistical identity. The difference between GDP at factor cost and market prices is GDP at basic prices plus indirect taxes less subsidies. (It is also known as expenditure-based GDP). That is statistical. The reason why GDP at market prices came below GDP at factor cost in the first and second quarters is because net growth in taxes minus subsidies was negative. This is because growth in subsidies in the two quarters has been faster than tax revenue. That is why it is less.
Is it not worrying?
Whether it is good or bad cannot be inferred from statistical identity. If subsidy is good, then there is no harm in it.
Several rating agencies fear that growth may slow down further and it could be even below five per cent this financial year. Does it mean we are returning to the period of Hindu rate of growth? What is your assessment?
Once again, rating agencies are projecting a certain set of apprehensions based on their perspective how the things are going to be. In so far as projections based on underlying macro data is concerned, growth is likely to be 5.5-6 per cent. Most of them are broadly between 5.5-6 per cent. Some have projected less than 5.5 per cent, because they have confused GDP at factor cost with GDP at market prices.
Usually GDP at market prices is higher and if it falls below GDP at factor, is it not a matter of concern?
There is no such thing that it should be higher. It is entirely possible that when you experience recession, you may boost subsides to boost growth. That happens to any economy. Whether subsidies are good or not is independent of this statistical relation.
There are fears that the global economy may not recover even next year. So in such a scenario, is 8.2 per cent average growth projected in the 12th Plan document for next five years achievable?
India’s growth potential is influenced only partially by the global situation. We have large growth potential from better distribution of gains inside the economy. If you think of sources of growth, one of factors has been that large part of society is functioning below capacity because of institutional and infrastructure constraints. India still has a large potential on the ground. Policies directed towards those can improve growth substantially. India is still low on urbanisation. Through planning and policy processes, adequate diversification in rural areas, people and areas currently growing less than potential, will grow faster.
At the moment, as an economist, I feel we are growing well below our growth potential.
If you say global factors do not matter much, why is it that our growth has slowed down?
None of the things I have mentioned happen instantaneously. When there is a global crisis, if you expect to switch on or switch off automatically like electricity, this does not happen. Social transformation is slower. They are being put in place. You are seeing very good demand originating in small towns and rural areas. A lot of them are shifting focus on growing consumer demand. In 1999-2000, there was talk of jobless growth. The same thing is said now. What Indian industry needs is refocusing.
A crisis has happened. The earlier driver of growth has lost momentum. Now you are shifting drivers. The problem in the United States and other advanced countries is that drivers have been exhausted. In India the drivers are still there.
You have not answered whether 8.2 per cent average growth in 12th Plan should be revised downwards?
At this stage, it is difficult to suggest what should be the growth projections. It is very difficult to whether it is achievable or not. We shall try and achieve it.
In recent months, the IIP figures show a marked slowdown in capital goods. That means manufacturing is not picking up. In such a scenario how can we expect growth to revive?
This is a problem of the chicken-and-egg situation. While domestic capital goods has not picked up, it may be that as the growth progress you will see domestic capital goods picking up. It is not clear what is the leading element in this and how the process of revival will sequence. You can merely infer by saying this is statistics.
Should stimulating growth at this stage get precedence over controlling inflation?
These are not easy questions to answer. It is not the case where our inflation rate is comfortable, nor our fiscal position to disregard the implication on fiscal deficit and go ahead with releasing money in the economy. What is needed is a careful and balanced policy. There is considerable space in existing policy for better focusing.
There are fears that in the government’s zeal to contain expenditure, some projects may be starved of funds. Do you see that happening?
In case of expenditure, if we make better use of the money allocated, you will get your results. To a large extent, that is the thrust of the current expenditure policy. Whatever is spent is better utilised. As I understand, the government has adopted a two-pronged strategy, that where it is possible to curtail expenditure, there will be a cut and where expenditure is essential, money would be made available. They are doing a balancing act of reducing unproductive expenditure and releasing money where it is needed.
Is there a trade off between growth and inflation?
This is a false dichotomy. One of the policies to tackle inflation is faster growth. It may well be the case that lower growth is worsening our inflation problem. There should be a mix of policy that ensures that inflation is tackled without significantly retarding growth.
Should cost of funds be reduced to push growth at this stage?
That is a difficult question to answer. How do you ensure you do not create a general free run by reducing interest rates? That balancing act is tough to follow. The best way is to lower the price more through targeted policy intervention. This is always a generic problem. Price instrument like interest rate facilitates all forms of expansion.
Industry is sitting on huge pile of cash and not investing. Why is it so?
I do not know what is happening. They are perhaps looking for an enabling mechanism to facilitate investment. There may be other factors hindering investment, but not cost of funds. The fact that they are sitting on a huge pile of cash indicates that huge cost of funds is not the issue that is coming in the way of their investment.