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Subir Roy: A repeat of the nervous 90s?

Last Updated: Tue, Jan 03, 2012 19:52 hrs
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A horrible year is over, and an uncertain one is ahead. A combination of political uncertainty and monetary tightening is lethal for growth, as a memory of the 90s would suggest. An inflationary bout in 1994-95 brought in its wake monetary tightening. Then the defeat of the Narasimha Rao government in 1996 introduced a period of political instability, which only ended with the 1989 elections that renewed the mandate of the Vajpayee government. The next few years saw monetary easing in response to falling inflation. Then growth picked up from 2003 onwards. So one scenario ahead of us is political uncertainty, early national elections and continued poor economic performance until a degree of political stability returns and pushes up growth.

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There is another, more positive scenario. The monetary contraction cycle is almost over and inflation is slowly abating. Add to that the chances of a slight, yes very slight, improvement in the global scenario - continued, even if slow, growth in the US and some stability in Europe – and you get a context for slow recovery in Indian growth. If you add to that a sharply improved performance by the Congress in UP, prompting better cooperation by UPA allies and a decent monsoon, there is a chance that by the time Diwali comes the sparklers will sparkle the national sentiment too.

The future is difficult to predict, but still there is the compulsion to outline a credible scenario as a basis for action. First, the worst during the current downward cycle is unlikely to be as bad as the last one, when growth averaged 5.2 per cent during 1997-2003. Till now there is no projection that growth will go very much below the current 6.9 per cent. So if we take a longer time horizon, say the last two decades, we appear to be in a downward dip within a secular upward trend. That's negative but not terrible.

There are several reasons to expect that things will not get as bad as they did in the late 90s. First, inflation. It appears to be coming under control, but its back is not broken. It is reasonable to see a year of stable global commodity prices - which will be of some help to India's economic managers. Domestically, the current seasonal downward trend in food prices may not go away entirely as the year progresses. Food prices took off over the last two years for two reasons. The first was poor monsoons in 2009. Supply has since eased, and the outlook for this year is wide open. More important, the outlook for demand for food is likely to be much more stable. Remember that a critical factor behind the current inflationary cycle was the rise in rural wages, partially but not entirely fuelled by the rural employment guarantee programme. This phase of transfer is over and no section is likely to make a grab for a larger share of the national cake this year. Thus, if, and that is always a big if, the monsoon does not let us down, a further food prices-led inflationary spell may not happen.

Now let us come to industry. It will benefit from the monetary easing and lower cost of borrowing that is on the horizon. The fall in the rupee will have opposite consequences. Exports should become more competitive, and demand should also benefit from a gradual, albeit very slow, improvement in the global scenario. Simultaneously, the import bill of manufacturers will, or is already, rising. However, over time a realistic exchange rate lends stability and sustainability to economic performance. Greater domestic sourcing and improved local demand courtesy monetary easing is likely to make 2012 no worse or maybe even slightly better than last year for industry. A pick-up in industrial growth from the current negative nadir appears certain.

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The one area in which the signals are unambiguously negative is the fisc. The end of the fiscal year is likely to reveal fully the fiction that Pranab Mukherjee outlined in the last Budget in the shape of a wishful fiscal target. An election year is never good for the fisc, and there is no sign that the government will be willing or able to begin to restore fiscal stability. The only possible positive factor can be better revenue collection with a slight pick-up in industrial growth.

Thus, the economy may begin to plateau from the present trough - that is if politics will let it. Imagine a poor performance by the Congress in the coming round of Assembly elections, clear expectations of a mid-term poll - and sentiment getting outright downbeat. Then economic recovery, that is, getting back to eight per cent-plus growth, will have to await the installation of a stable government.

In looking back and ahead, the major reality that emerges is that it was the year of the Lok Pal who eventually failed to arrive. An enormous amount of public attention and time was expended on an issue universally acknowledged as of utmost importance - taking on pervasive corruption. The political class kept reminding everyone that only Parliament could make laws and create institutions - and at the end of the day it didn't. The government and opposition appear to have engaged in a conspiracy, maybe un-orchestrated, to preserve the status quo. The most depressing thought is that corruption is deeply entrenched across the political spectrum and no established political force is interested in changing things. What this will do to economic progress in the long run does not need elaboration.


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