Source: Economic Times

 

On most economic fronts, though, over the last three years, the story has changed - from talking of sustainable double-digit growth, we appear to be barely staying afloat. Just a few years ago, we did three consecutive years of 9%+ growth; from the peak of 9.6% growth in 2006-07, when India was the "Darling of Davos", we are now in the second consecutive year of below 5% growth and the year ahead does not promise to be significantly better.

 

The collapse has come through three sectors: mining, manufacturing and construction, and this has had a direct spill-over effect on the services that feed off these activities - trade, transport, storage and communication. In fact, the latest data also goes to confirm that the predominant narrative of the boom years, of services-led growth for India, has been proved to be a non-starter. A flagging industrial sector has brought the services sector down.

 

 

Then there is the inflation battle that households have been fighting for a long time. Apart from sustained pressures in basic cereals like rice and wheat, there have been some very volatile spikes in basic vegetables like onions and potatoes. Expenses on education and health have been rising at a very fast clip as well, making a dent in the disposable incomes, especially in urban areas. Here again the earlier narrative of a large domestic market holding up growth during the boom years has taken a hit.

 

 

When it comes to the fisc, if we look back over the decade, two trends stand out: a) this is the sixth year in which subsidies as a percentage of GDP would have exceeded 2%, this is unprecedented in the history and, b) at the same time, capital expenditure as a percentage of GDP has dropped below 2.5% since 2005-06. Juxtapose just these two facts together and the cumulative effect on growth and inflation can be seen clearly. Now India is hard pressed to keeping to the deficit target of 4.7% in this year's budget, there is the risk that breaching this can earn the wrath of the rating agencies.

 

Yet, while on the main growth, inflation, fiscal indicators India has not been showing a good performance, there have been some positive highlights. The external crises have been weathered fairly well. Not just the global meltdown in 2008, we managed to stave off a crisis last year when the exchange rate plunged. Though the recent vigorous fire-fighting by the government and the RBI brought the economy back from the brink, critics did say that such a situation would not have arisen if the macro-fundamentals, especially on the fiscal front, had been better managed.

 

Another heartening development over the last decade is that rural India has come into its own. There have been many push factors here - the MNREGA programme, the higher MSPs, development of roads into the hinterland etc.; yet, there has been a trade-off in higher wage inflation. While rural wages have so far risen higher then rural inflation, recent data shows a narrowing of the gap in the two and disposal incomes are being cut into here as well over the past few months. Clearly the rural economy needs much more substantial improvement in infrastructure and non-agricultural employment opportunities to keep that story sustained over the next decade.

 

We are now looking at getting back to at least a 6-7% growth track, rather than setting our sights on double-digits. Of course, the uncertainty surrounding the political situation will hopefully get cleared in a few months and what happens after that will shape the macro-trajectory. However, it is not just a question of getting the growth-inflation equation right, what will matter in the long run is getting the basics of primary education and skills, sanitation and health in place, these have been long overdue. While access to education has been fixed to a large extent now, the focus has to shift to the quality of schooling, in ensuring that skill sets match employment needs.

 

There is a lot to fix for this economy and the latest Census has shown new trends - India is becoming increasingly urban, increasingly literate, increasingly linked through the mobile phone and the internet. With the country more connected than it was ever before, there has to be a different policy narrative for the next ten years, one that adapts to the needs of this new economy.

 

Sumita Kale works with Indicus Analytics and can be reached at sumita@indicus.net