There is simply no way to get away from the fact that the clouds over the economy continue to darken — not just because of events already unfolding but equally because of the quality of government response. Moody’s decision to put out a warning on its India rating may be nothing more than recognising the changes in economic prospects that have already occurred, since rating agencies typically react slowly and tend to be behind the curve. What should worry forecasters (and everyone else) is the risk that the minor upswing in economic growth that most of them expect in the quarters following July-September, even if only helped by progressive changes in the base period comparator, may in fact not come about because of a downswing that feeds on itself for a variety of reasons.
There is a fiscal crisis building up, which might become apparent when the Finance Commission presents its report — especially if it seeks to claw back the tax share of the states by putting out the data on the central government’s vast unpaid bills, hidden expenditures, revenue shortfalls, and much else. The government is spending on citizen-friendly programmes to win votes, and who is to complain, but where are the steps to bring in the money to pay for the goodies?
At the same time, capital is being used badly or destroyed. The financial sector is one sink. The public sector swallows up ever more cash — the latest pile going to two bankrupt phone companies which are unable to pay salaries. The Railways has taken in huge cash, but has little to show so far by way of growth in traffic and revenue. The bankruptcy process is taking its own toll. Irresponsible chief ministers cancelling energy contracts destroy capital, too. Regulators who mismanage sectors, as in telecom, have destroyed capital wholesale — and the Supreme Court has not helped. What underpins the economy’s growth potential are the still high savings and investment rates, but these have little meaning if the money that is invested disappears without trace down various sinkholes — among which one is real estate.
The big worry is continuing denial by those in charge, perhaps even a lack of comprehension. The decision to opt out of the big regional trade agreement may eventually have been out of lack of choice, but it is silly to pretend that it is a sign of bold leadership. When every country east of Dhaka is willing to sign up and India is not, it says something is wrong with India. This reflects a failure of leadership over the past five years, and a failure to reform and get ready for opening up to and integrating with the largest, fastest-growing region in the world.
The argument that past free trade agreements have not worked in India’s favour is false; they made little difference. The fear of Chinese products swamping the market may or may not be real, but the trade deficit with China is only half the regional story; India has a big trade deficit with virtually every country in the region. The bilateral deals talked about as an alternative are non-starters. Opening up to Australia means opening up to agriculture; with New Zealand, dairying; and with Asean countries, other agricultural items. As for switching from “Acting East” to looking West, trade deals with the US will be no easier, even as the country loses trade disputes at the World Trade Organization.
It is claimed that we can join later, but when the domestic lobbies that have won are the protectionists, why should they give up their hold on government policymakers? Where are the action plans and timelines to get ready for slashing tariffs, doubling agricultural productivity, and ending cross-subsidies in power pricing so that industry is not penalised? Or to get into regional supply chains when organised retailers are discouraged? The government has raised tariffs and become an anti-dumping champion, so the country is becoming more inward-looking. How then can the system open up, or become more competitive? Those that are competitive are being locked out of markets by those that are not. The losers are winning. This is no way to get to $5 trillion.