 "Green shoots are a pre-elections mirage; reality is we are still stagnating")
One can smell that it is elections time when one picks up a newspaper or listens to the radio or tunes into television. We have all state governments extolling the great levels of development brought about in their geographies and the number of roads constructed, health centres opened, electricity lines in operation, women empowerment programs, education to children etc. - this is a common line of virtue in this propaganda material. The distribution of cloth, sarees, TV sets, computers, iPads, bicycles etc. are manifestation of what all governments have done to uplift the masses. It has become more of a competitive propaganda with even states like Chhattisgarh, UP and TN advertising heavily in Mumbai newspapers. The Union Budget went a step ahead and was filled more with a time series of achievements (there must have been an economist working on it) where the success was placed before the House. What is one to make of it?
The first is that all parties do see that they have a chance at the elections and that it is necessary to drive home their own success repeatedly to the masses. Not to do so would mean that they would get left out.
Second, they are out to show that their governments in their regions have done very well by performing the role of a welfare state. Add to this the fact that RBI data on state finances shows that states have worked within the FRBM guidelines, and it appears that this is an achievement.
Third, all parties have realized that talking of just growth does not work with the electorate. Or for that matter blaming the central government for inflation is not tenable considering that prices have increased everywhere and clearly UPA is not responsible for high prices of onions. This factor worked in the recently held state elections and cannot be brought up again as inflation has started coming down now. Therefore, the track has shifted to the good things that have happened.
Fourth, all state governments have snatched the same virtues of the central government by reiterating the elaborate success of the state sponsored schemes such as food security, employment under NREGA and so on. Thus the centre cannot take credit for the same as they have been projected as state initiatives.
Going by this propaganda, it looks like if all this were true, then everyone should be happy that all the governments have combined through the help of the invisible hand to create a Pareto optimal situation where no one is worse off and someone is better of (the economics principle) which implies that we are all better off. So logically we should all be very happy.
But the reality at the ground level is different which makes this narration sound like a fairy tale with not-so-good an ending. All government programmes continue to be afflicted with leakages and the focus has been on numbers and not delivery. The quality of public service remains abysmal and schemes relating to health, women and education have shown no improvement over the years. The poor remain poor and still have limited access to these services. Therefore, while allocations have been made at rapid speed, the same has not been witnessed in the overall quality of life as most of this largesse is a one-time affair with little focus on self-sustaining income generation or asset creation for the beneficiaries.
Is there something wrong in this story? We all know that the economy continues to slump and for the third successive year we will have low growth. GDP growth came down from the 8 plus levels to 6.7 percent in FY12, 4.5 percent in FY13 and will be between 4.5-4.7 percent in FY14. These numbers are more of a statistician’s delight if one juxtaposes the same with the ground reality where nothing is happening. Few new projects have been undertaken and the quantum of stalled projects has increased. The corporate sector has turned into a loss situation and the government has stopped spending on projects. Therefore, while fiscal targets have been achieved and the welfare role has been played out, the government has actually stopped contributing to capital formation. And once the government cuts back on a project, there is a cascading effect on the private sector industries thus leading to recessionary conditions. Manufacturing is in a negative growth zone, which is unfortunate and is a result of sheer neglect of the sector.
The obsession has been with controlling fiscal deficit and current account deficit. The latter was evidently necessary as our forex reserves got depleted and the rupee took a beating. There was little choice here. But the fiscal scene was debatable because while we have stuck to the book and drawn red lines the cost has been high. Running a higher deficit like we did just after the financial crisis would have helped, but with pressure from the global rating agencies as well as critics and the RBI to control the deficit, we have gotten into this tangle of demand shortfall.
Inflation has been our nemesis and while everyone is taking credit for declining inflation- the government says it has brought it down while the RBI maintains that its hawkish stance has controlled inflation, the fact is that supply corrections and seasonal factors have brought it down. Just like how it would not be right to blame the authorities for rising food prices when vegetable prices went up, credit cannot be provided to anyone except chance when they came down.
Do we have a plan for a revival? Not really, and in case we had it would have been stated. We only have wide scale media publicity that things have bottomed out and that green shoots are visible. The value of investments cleared by the government has increased now to over Rs 6 lakh crore. Yet, little has turned into implementation. That sounds odd as conditions look as arid as ever. The latest core sector data shows growth of 1.6 percent which means that nothing much can be expected from industry again this month. In fact, the GDP growth rate for Q3 was at 4.7 percent which can be attributed more to chance as it emanated from agriculture, finance and government. While agriculture performance is real, the same cannot be said about finance as normally growth should be related with other segments of the economy which should show commensurate growth - which is not the case. The sudden inflow of dollars through the FCNR route due to the swap facility extended by the RBI enabled this flow and growth. And the government cannot spend more now that its fiscal deficit has crossed 100 percent of target in the first 10 months. Clearly, the focus now will be more on getting in revenue to fill the gap and this could mean at the cost of expenditure.
So what lies ahead? The picture is fairly opaque right now. The combination of the rabi harvest with festival/marriage season will help boost consumer demand. Add to this the election spending which will unearth a good deal of money from underground, and there will be high demand for automobiles (SUVs and two wheelers in particular), fuel, paper, printing, cloth, chemicals, etc from both the parties as well as the Election Commission in bringing the pieces together. This will be good news for the economy, though most expenditure will be of ‘current nature’. However, for anything positive to happen, it is more likely to be after the new government is in power with a progressive budget. Therefore, the third quarter of FY15 could raise a ray of hope provided inflation does not spoil the party and enables both the government and RBI to take appropriate measures.
The author is chief economist, CARE Ratings.