GDP slowdown – Is India’s growth story over

Real Time News, Asia, June 05, 2012
India, under the Congress-led UPA goverment has faced scams, corruption, controversies, mass movements, a doubling of petrol prices and relentless inflation.

But through everything, there was one thing that held it all together — economic growth. Even as the rest of the world was mired in recessions and slow downs, India congtinued to grow at 7% every year.

Even as industry association after industry association warned of an impending slow down caused by high inflation and high interest rates, growth seemed to hold up miraculously.

Now, with GDP growth slipping to 5.2% in the first quarter, UPA may finally have run out of sympathisers — as revealed by a public discussion among the nation’s top intellectuals on arguably India’s most high-profile idea-exchange forum.

While any discussion on topical issues at the “Functional Competition Policy” forum — organized by Jaipur-based Consumer Unity & Trust Society (CUTS) — tends to see both anti and pro government opinions, the mood was extremely sombre when discussing India’s latest economic quagmire.

The invite-only forum, on which discussions are held by email between 2,300 of India’s most influential intellectuals and public figures, saw statements such as ‘worst government ever’ go unchallenged after news of the dip in GDP growth.

“It’s the worst form of functioning, even worse than the pre 1991 era,” wrote one participant, drawing virtually no criticism from others. “The most ineffective, the most corrupt, the most indifferent and the most inefficient Central Government since independence,” another said.

Economists, lawyers and intellectuals are not given to such sweeping generalizations or sudden outbursts of passion, but the slow-down in economic growth seems to have created a distinct sense of fear that India is going back to the days of Indira Gandhi’s socialism and a limping economy.

Professor Sebastian Morris of IIM Ahmedabad pointed out on the forum, “Today the situation is absurd. We have killed growth – it requires innovation to bring down growth in India to these low levels of under 5%. Investment growth is less than 4%.”

The Congress-led UPA government has, over the past five years, overseen a policy of what many economists have called imprudent fiscal profligacy to support a rapid increase in spending on ‘subsidy’ and ‘welfare’ schemes.

Food subsidy has more than tripled in the five years to Rs 75,000 crore, rural employment scheme expenditure has gone from Rs 0 six years ago to nearly Rs 50,000 crore.

The budget allocation for fertilizer subsidies has gone from Rs 17,253 crore five years ago to Rs 60,974 crore this year. Going by the track-record, the actual spending this year is likely to be in the range of Rs 80,000 crore.

The spending on so-called fuel subsidies can be exempted as it is a case of false subsidy, with the government earning about 3.5 times as much in tax from the sale of petroleum products.

The rapid rise in spending on such subsidy and welfare schemes — all of which are noted for their extreme ‘leakiness’ and corruption — has come at the cost of investment in core infrastructure such as roads and ports that would have helped India keep its growth up.

At the same time, such huge expenditure, and associated corruption, has pumped more money into the economy, raising prices and creating a double whammy of falling growth and rising prices — or stagflation.”Schemes are designed in a way that large-scale leakages and theft are easy,” says SL Rao, economist and former president of All India Management Association, on the forum.

“There is no accountability of administrators to ensuring that schemes benefit those they are intended for.Ministers (helped by the more idealist NAC) think up schemes that will reduce deprivation and provide the deprived with opportunities for betterment.

“Bureaucrats work out the details. There is no attempt to test the schemes out on a small scale to iron out the bugs. There is great hurry to roll them out nationally. Charitably, this is to win quick populist brownie points. Uncharitably, it is to enable as much theft as possible..,” he says.”Not surprisingly much of the money is not spent on reaching the target beneficiaries. A substantial sum goes to politicians and bureaucrats. The havala route abroad, the Mauritius route for laundering the money in Indian markets, and legally back to Mauritius, and they have white money held legally abroad. The same thing is done with participatory notes,” he adds.

Rajeev Chandrasekhar, business man and member of the Rajya Sabha, objects to calling the government’s policies ‘socialist’. He argues that the policies are the result of a misguided perception that allocating more and more budgets to welfare programs will help the current ruling parties come back to power.

“This government’s economic strategy is as far removed from socialism or for that matter free market capitalism – as one can get,” he says on the public forum.” On one hand there’s a group within this govt. whose core economic ideology (if you want to call it that) is a determination to spend every rupee that the govt. can earn and borrow – in a profligate public spending spree towards attracting and consolidating through a misguided ‘populism will win votes’ political strategy. And they also don’t believe in any economic rationale of fiscal prudence or the common sense ‘spend what you can afford’ truism.

“Further it doesn’t even seem to matter if the spending is leaky or outcome less and no one seems to even have a decent clue of the impact of these spending programmes.” On the other hand, he says, there seems to be another group in the government that seem to subscribe to the ‘crony capitalism’ theory.

Crony capitalism is defined as a state where capitalists (companies) beat other companies using their connections to those in power.

“So what we see from Govt. is neither socialism or capitalism. Its some tortured morphed version of both with a lot of its worst features. There is plenty of evidence all around to reinforce the perception that the government’s approach to economic policy making has become incoherent, sloppy, lazy and lacking creativity or guts,” he says.

Chandrasekhar also notes that many have started predicting that India’s economic growth story has ended — like it did in Japan in the late 80s and in South East Asia in the 90s.

“There are many visible examples of economies in freefall after decades of negligent economic governance. We should not go down that road,” Chandrasekhar, who has been closer to the opposition BJP than the Congress, adds.

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