What does good economic health look like ? Many are expressing concerns about the state of the Indian economy. Why doesn’t something ‘feel’ right ? The rising costs of Indian democracy will be in economic terms: direct financial cost of elections and non-functioning of Parliament, the opportunity cost manifested in time lost in productive activity undermining the demographic dividend and capital investment. For analytical convenience, we will discuss the current state of Indian economy under following heads:
There is a complex macro- economic challenge on the horizon. Conditions in the economy are now quite daunting. The populists always propose simple solutions to everything without recognizing the complexity. According to Raghuram Rajan, ‘we are today in the world of populism; who always have simple, clear and absolute wrong solutions to everything’. He maintained that distorting price in a significant way eventually leads to misallocation of resources and hurts the economy in the long term. Benign oil prices are not an occasion for complacency. Marginal policy adjustments will not work. Bold actions are required. India’s macro-economic fundamentals are improving and rupee is resilient against its peers, but sluggishness in domestic demand and private investment call for higher public investment at a time when the government is committed to fiscal consolidation. Public investment financed by the government’s own or borrowed resources do not provide an adequate answer to the macro- economic problem of relatively low investment.
Regardless of the causes, the weak exports performance has been a drag on growth. This drag has been about 1*0 percentage point. Macro- economic stability relies immensely on policy credibility and that would
be the platform on which the growth will be built to sustain the country for many years to come. Raghuram Rajan is of the view that macroeconomic stability during the global turmoil cannot be risked and the government and RBI should continue to bring down inflation.
Inflation and Composition of Price Rise
Stabilising inflation became the top macro objective, ahead of growth. And both monetary and fiscal policies remained geared to compressing demand and tame CPI inflation, the new monetary policy anchor. Inflation rates have fallen but remain among the highest in the major economies. The Consumer Price Index (CPI) remains at 5-61 per cent (combined) in December 2015. CPI (Rural) and CPI (Urban) was 6-32 per cent and 4-73 per cent respectively in the same month. Consumer Food Price Index, however, was a bit higher at 6-40 per cent for the same period. The Wholesale Price Index (WPI), which measures changes in producer prices, has declined by eight percentage points. The GDP deflator, which is used to convert nominal to real GDP, reflects roughly 70 per cent of the WPI and 30 per cent of the CPI.
Inflation has continued to moderate steadily. However, the spectre of rising prices has returned to haunt the Reserve Bank of India, which raised its inflation projection to about 5% for the year ending March 2017, lower than 5-61% estimated in December 2015.
Growth and its Pattern
India is not growing as it should. The economy remains on shaky ground. GDP growth, aided by a sharp fall in oil prices, was officially estimated around 7 per cent in 2015. Going ahead in 2016-17, growth is expected to strengthen gradually, RBI
has projected the gross value added (GVA) growth for the next fiscal at 7-6 per cent.
The hope for a substantial growth in 2016-17 revolves around the behaviour of private corporate investment or private investment in general. There are no easy policy choices in India. Higher growth will be rewarded only if it doesn’t come at the altar of macroeconomic stability. The pure economic drivers of growth remain the same : investment in public infrastructure, private equipment and machinery, and human capital, along with innovation and adaptation to improve the efficiency of resource use and what economists call ‘total factor productivity’. The constraints on India’s growth are weak infrastructure, a vulnerability to inflation, regulatory complexity and policy uncertainty. If these are addressed, the growth outlook would improve. Nirvikar Singh has suggested that “improvements in organisational efficiency, in both the private and public sectors are a vital and possibly underestimated factor for future Indian growth”.
In a situation when private investment is not forthcoming, public investment has a “Vole not only as a source of aggregate demand but also as catalyst. This it does by anchoring profit expectations. Private investment is based on expectations of profit. Profit expectations, far from being known with certainty, are highly subjective. They are based on anticipations of the future state of the economy about which little is known. However, private investors need to have an idea of it as demand for their products depends upon the aggregate demand and this depends upon investment, both public and private. In the absence of public investment, each private investor must guess what the others are going to do. To use the pithy phrase of John Maynard Keynes, investors now end up ‘chasing each other’s tails’.