It's that time of year again – the time when everyone gets busy advising the Finance Minister on what he should do in the coming Budget and in macroeconomic strategy in the coming fiscal year. But this year, for a change, it may be more important to highlight what Mr Chidambaram should NOT do, particularly because he already seems to be doing – or threatening to do - those very things!
In terms of both the economy and the government's accounts, this is not a particularly good year.
GDP growth has very clearly decelerated quite sharply. It is likely to be only 5 per cent for the year from April 2012 to March 2013 if the CSO's (Central Statistical Office) latest projections are to be believed - perhaps just slightly more if the Finance Ministry is correct in assuming some revival in the last quarter.
Industrial production has been flat over the financial year so far, growing at only 0.1 per cent at an annual rate. Mining (-1.5 per cent) and capital goods production (-11 per cent) have both fallen absolutely over April-November 2012 compared to the same period in the previous year.
Agriculture is also likely to perform poorly: on current projections food grain output (estimated to be 118 million tonnes) will fall by around 6 million tonnes in 2012-13 compared to the previous year, and the poor winter rains suggest that the final harvest may be even worse.
All this provides good reason for the CSO to point to significant growth deceleration in the current fiscal year.
The slowdown in the denominator is in turn bound to affect ratios like that of fiscal deficit to GDP (Gross Domestic Product), which are so carefully watched by domestic and international investors. This would have been likely even without a further slowdown in revenue collection, which also appears to be likely on current projections.
Already by November 2012, the fiscal deficit was 80.4 per cent of the target for the entire year and the revenue deficit was at 91.2 per cent of the target. This was even though the total expenditure was only around 60 per cent of the budgeted amount, because tax collections have been thus far much lower than expected.
The other bugbear is inflation, which has decelerated somewhat from its recent high rates, but still remains unacceptably high, with the WPI (Wholesale Price Index) increasing at more than 7 per cent per annum and the consumer price index still at double digit levels, hitting 11 per cent for the month of December 2012 over December 2011.
Food inflation has recently accelerated again and is more than 9 per cent.
Meanwhile, the headwinds from the global economy continue to make our external position look even worse.
Exports, in US dollar terms during November 2012, decreased by 4.2 per cent while imports increased by 6.3 per cent vis-a-vis November 2011, pointing to a further deterioration in the already large trade deficit. This too is likely to exercise a dampening effect on both growth and its future prospects.
As a result, when the Finance Minister presents Budget 2013-14, he is likely to have to declare fiscal and revenue deficits that (in terms of proportion of GDP) that are definitely higher than what he had planned for, even with all the flourishes of creative accounting that he has been known for in earlier tenures.
But the real problem is not that this will happen, because this is usually inevitable in a downswing. Rather, the problem is that he will see it as a problem, and use this as the reason for insisting on further cutbacks on public spending in the coming year.
There is already evidence that the Finance Ministry is attempting to prevent the fiscal deficit from going much beyond his projections by clamping down on expenditure in the remainder of the current fiscal year, reducing the release of financial flows to Ministries and state governments through a variety of methods.
It's not yet official, but fiscal austerity is already being introduced in practice.
This is likely to be counterproductive, especially if – as seems likely – the fiscal cutbacks are directed towards areas with high multiplier effects, such as public service provision and “welfare” schemes.
Cutting down on these is not just bad from the perspective of ensuring better conditions for the mass of people – it is also macroeconomically stupid, because it adds further downward pressure on an economy that is already slowing down.
In any case, in the presence of unutilised capacity and unemployment, more spending does not have to generate higher deficits as the increased incomes will also cause government revenues to rise.
In the case of sectors with apparent supply constraints, such as agriculture, spending designed to reduce these bottlenecks can have positive results from both supply and demand sides.
The idea that it is necessary to cut the fiscal deficit because of the need to control inflation is also wrong in the current situation, because much of the inflation - particularly in food items - is of the cost-push variety. But many of the government's moves have been such as to increase these cost-push factors.
The diesel price hike is an important case in point that exposes he contradictory nature of this strategy. The government says that it wants to meet fiscal targets in order to fight high inflation that is eating into the real incomes of workers and salaried persons. Yet it attempts to do this by cutting subsidies on energy and food, which lead directly to higher prices and also indirectly contribute to more inflation because fuel enters into all other prices.
This policy obviously cannot succeed and will only intensify the inflationary pressure. In the worst-case scenario, we can end up with stagflation – decelerating growth and relatively high inflation. So already the government has done one of the important things it should not do in the current situation.
This has been a decade of squandered opportunities in India.
The growth dividend, which should have released much larger resources to tackle the most significant problems of the Indian population - food security, employment, health and education - has instead been frittered away on concessions to a private corporate sector that has grown to expect a context of continuously rising incentives from the government. That failure has rebounded on the growth process itself, exposing its lack of sustainability in the current slowdown.
What the Finance Minister and the government really should do is to change course away from treating private corporate investment as the only impetus for growth, to be incentivised at all costs. Unfortunately, current trends provide little hope that this is actually what will happen.
Run-up to the Union Budget 2013-14
Renowned economist Dr Jayati Ghosh is the Professor of Economics at the Jawaharlal Nehru University in New Delhi. She is also a member of the National Knowledge Commission set up by the Indian Prime Minister.
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Other columns by Dr Jayati Ghosh:
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Why India won't feel like celebrating this Independence Day
Global turmoil and the threats it holds for the Indian economy
The scariest thing about the world economy
Is Europe rushing headlong into economic destruction?
The finance minister has failed the common man