Indian Economy – The Vital Signs

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To the long record of government leaders promising jam tomorrow, we must add the prime minister’s forecast on Independence Day that GDP growth this year will be better than last year’s 6.5 %. Now, three months later, the finance minister has lowered expectations to the 5.5 % – 6.0 %t range, but he expects growth next year to be back upto 7 %. In other words, “jam tomorrow” once again. If you keep predicting this till kingdom come, it will eventually turn out to be true. But will it be next year, or the year after, or still later? And has the economy bottomed out, as Montek Singh Ahluwalia says, although the latest monthly industrial production, trade and inflation figures are as depressing as any? Could we, instead, be heading for more bad, indeed worse, news? The pointers to the future are the macroeconomic numbers – the fiscal deficit, the trade deficit, and the level of inflation – which you could say are the equivalent of the system’s pulse rate, blood pressure and temperature. All of them are higher than normal, or what is desirable; indeed they are higher than what is being recorded by most other economies. And all three readings have stayed stubbornly high despite the government’s ministrations. In short, India’s economy has been and continues to be off balance. The more accurate metaphor would be “over-heated”, except that it is odd to say so when growth is slower than it has been in a decade. Still, the logical conclusion would be that the system needs to slow down some more, so that its vital signs get closer to normalcy, before structural adjustment measures (ie., real reforms) prepare the ground once again for faster growth. In short, not jam tomorrow but more pain before (at some point) the good times return.