Bob Dylan famously said that you don’t really need the weatherman to tell you which way the wind is blowing.
Likewise, we didn’t really need Pranab Mukherjee to inform us – as he did yesterday – that India’s GDP growth has slowed down and will likely fall short of 8 percent for this year. It’s been palpably evident to any halfways-decent economy watcher that the engine was ticking down. And with the driver asleep at the wheel and with inflation running at close to double digits, there wasn’t any chance of meeting the always ambitious growth target set earlier this year.
In that sense, Mukherjee’s admission yesterday merely represents the capitulation by economic policymakers to the reality that’s been staring them in the face.
What this means is that all the elaborate calculations that go into drawing up the macroeconomic framework for the year have gone for a toss. In his speech yesterday, Mukherjee piled up a litany of excuses to account for why the numbers won’t add up as he’d prophesied in his budget. International crude oil prices were proving stubbornly higher than he’d budgeted for, he said.
“Dark clouds have gathered in the global skies… and these are casting a shadow on us,” he lamented. (Again, you don’t need the weatherman to tell you that dark clouds have gathered; to stretch the meteorological metaphor, it’s been raining fairly steadily for some months now, and we’re all soaking wet.)
As a consequence, Mukherjee conceded, “it will be a great challenge to maintain the fiscal deficit numbers at 4.6 percent this year.”
All this is seriously problematic at several levels. The state of India’s public finances has historically been the weakest link in the macroeconomic outlook. To be fair, some of this has its roots in our economic legacy: since 25 percent of revenues goes towards interest payments, India’s deficit numbers cannot be fixed in the short term, even in the event of the government finding religion and getting earnest about fixing its fiscal failings.
In recent years, for all the suggestion that the government’s finances were progressing in the direction of fiscal consolidation, it’s actually been bailed out by high GDP growth rate. There has been no earnestness of purpose about cutting back on expenditure: on the contrary, the government has been piling yet more unfunded welfare schemes on top of those that have been proven to be inefficient. Funds are leaking like a sieve to the point where, as Jairam Ramesh acknowledged recently, NREGA funds have been used to purchase SUVs.
Now, the debt-to-GDP ratio is facing a double whammy from both the numerator and the denominator: debt is piling up, and GDP growth is slipping. With ratings agencies on a heightened alert for fiscal slippages in the light of the sovereign debt crises in developed economies, there is little tolerance for any worsening of India’s public finance, particularly given its record of falling short of the targets it has set for itself.
At a time when capital costs in India are already running high, any worsening of India’s sovereign rating will only make it more prohibitive for Indian companies to borrow abroad.
In his speech yesterday, Mukherjee was at pains to dispel the notion that the government, and in particular his ministry, was seized of a “policy paralysis”. Yet, in a larger sense, Mukherjee’s style of economic policymaking – particularly in the macroeconomic assumptions he makes for the year – reflects another great failing. It reflects the personality of the character Wilkins Micawber, immortalised by the writer Charles Dickens in David Copperfield.
Micawber is a cheerfully optimistic man who lives in eternal indebtedness but who gets by on the strength of his faith that “something will turn up” to bail him out of his troubles. Likewise, Pranab ‘Micawber’ Mukherjee appears to budget only for best-case macroeconomic scenarios, perhaps in the hope that “something will turn up” to validate his assumptions and his rosy numbers.
Thus far, Mukherjee has proved enormously lucky, with even the monsoons – which were at risk of being deficient this year – working out all right in the end.
But as has been borne out by recent global developments, that “something” that “turns up” may not always be the providential life-saver. Those same “dark clouds” that delivered a normal monsoon and bailed him out may end up raining on ‘Micawber’ Mukherjee’s plans – and on the India growth story.