Economic outlook & opportunity

It would have been hard to convince people a year ago that in June 2010, we would be looking at yearon-year growth of 19% for manufacturing output or 36% for exports. Or, for that matter, that we would have had double-digit inflation for four months in a row to May.

The Indian economy has indeed bounced back sharply from the downswing induced by the global financial crisis. It is now poised to consolidate the recovery of economic expansion, especially that in investment, and set the stage for a new round of sustained investment and growth.

We should, however, not fall prey to the illusion that we are entirely out of the woods. This is especially true given that the advanced economies have yet to overcome the effects of the crises and that they now face new problems flowing from their overstretched public finances.

In this, both Europe and the US are both in a difficult position, although the erosion of confidence in Europe, particularly in the eurozone, is more pronounced. India’s problems have been compounded by the very high inflation that has hit us so early into this new phase of growth.

In large measure, this was due to the adverse expectations on food prices flowing from the very poor monsoon of 2009 and the devastating late season floods in parts of southern India, the sizeable loss of foodgrain output and the unhappy coincidence that it overlapped a year in which international cotton and sugar prices tested new records. It was also a year that held salutary lessons on how to improve on the speed and design of our interventions to try and contain such price storms.

The fixed investment rate held up well through the crisis. It was 31.4% of GDP in 2006-07 , rising to 33% in 2007-08 , last year of the global boom, remained there in 2008-09 , and was only marginally lower at 32.4% in 2009-10 .

True, the overall investment rate did fall from the 2007-08 level of 37.7% of GDP to 34.9% in 2008-09 and to an estimated 36% in 2009-10 .

But that was due to a drawdown of inventory, not a decline in the fixed investment rate. However, the resilience exhibited in fixed asset creation through the crisis does not necessarily mean that the Indian corporate sector, which had not rolled back its ongoing asset-creation programmes, would not have reconsidered its portfolio of new projects.

Surely, the effects of seeing once-great corporate names crumble into dust, the new-found fascination in the advanced world for antediluvian ideas of how government knows best and markets are never to be trusted and Nobellaureate economists predicting the end of the market economy as we knew it, should surely have sowed the seed of corrosive self-doubt , even amongst the hardiest of entrepreneurs.

Perhaps it did a wee bit, but the fear does not seem to have survived into 2010. This speaks volumes for how well-founded the economic transformation of the Indian economy has been. For, it is when change manifests in the realm of ideas, or as some would call it the superstructure or others the governing paradigm, that such change is indeed a lasting one.

The challenge before public policy is how to leverage on this happy endowment of robust economic dynamism. In order to consolidate the return of the Indian economy to the growth trajectory of 9%, we must be able to do certain things and do them well.

First, the deficits in physical infrastructure — power, road, rail, ports, airports, urban mass transit and municipal economic infrastructure — remain. We have to push hard on these investments, a large part of which will be either in the private sector or in public-private partnerships. We must be able to gain traction on the issue of better use of water resources, particularly in agriculture and encourage recycling in urban and industrial use.

Second , in order to leverage the momentum of growth, the government has to facilitate not only investments in infrastructure but also the large investments that will be needed in manufacturing and other businesses to support sustained growth of the Indian economy at 9% and higher.

This needs clarity in policy, in the interpretation of these policies and coordinated and cooperative action by the wings of the government.

Further, this agenda of public action must include the reform of the market for infrastructure services, particularly that of the power sector. This is not only a doable proposition, but one on which a lot of ground has indeed already been covered.

Now it is a matter of completing the journey , albeit with some obstacles that are yet to be overcome. Third, the farm sector needs the benefits of technology, especially in water use and improvement of soil quality, which must be combined with a dramatic improvement in the supply chain that connects the farm to the kitchen table.

This is the only way to reduce wastage and inefficiency , improve the net price that the farmer receives and lower the price that the consumer has to bear.

This will not only help us to rein in food price inflation, which in our country has consistently underpinned overall inflation , but it will also improve farm incomes and help bring rural economic transformation into the fast lane. The effort and investment in health and education has to be accelerated, in the full realisation that the lead time to get results are longer, and to sustain the growth process in India, very significant improvements in these fronts are vital.

Trade and investment relations with the rest of Asia, as well as Africa and Latin America, hold the potential of fruitfully deepening the mutually-beneficial engagement with these emerging economies that are today the focus of global growth.

Finally, in a world rudely awakened by the nightmare of a shadow on the solvency of advanced economies, it is ever more imperative that we pursue the course of fiscal consolidation that we have set ourselves with determination and clearly perceptible resolve.

The present decade holds the potential of taking India into the league of the four largest national economies measured at market exchange rates.

We owe it to ourselves, to those who preceded us and on whose shoulders we have the benefit of standing, as well as to tomorrow’s generation, that we successfully realise this potential.

(The author is member of Planning Commission)