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july 12, 2014 vol xlix no 28 EPW Economic & Political Weekly
he sharp deceleration of the rate of growth of real gross
domestic product (GDP) at factor cost (at 2004-05 prices)
from an average of 8.3% during 2004-05 to 2011-12 to
4.6% in 2012-13 and 2013-14, and particularly of the manufactur-
ing sector to an annual average 0.2% in the latter two years, this
with an average annual food ination (wholesale prices) of
12.2%, has raised fears of the possibility of stagation. Yet, the
Economic Survey 2013-14 (ES), presented in Parliament on 8 July, is
quite sanguine on the whole. It sees a way out in the amelioration of
[domestic] structural constraints of the supply-side variety.
The corrections in (the) scal and current account decits
have already been made by the previous government, and these
rectications augur well for macroeconomic stabilisation.
But what are these structural constraints, in the view of the
government? After all, in the governments reasoning, it is some of
these constraints that have led to the sharp decline of gross xed
capital formation as a proportion of GDP from an average of 30.8%
during 2004-05 to 2007-08, to 28.3% in 2013-14. The ES is, of
course, more concerned about the growth in investment by the
private corporate sector. This was 48.1% on an annual basis at
current prices during 2004-05 2007-08 but plummeted to 3.4%
during 2008-09 2012-13. As a proportion of GDP, private corpo-
rate investment declined quite sharply from an average of 13.9%
during 2004-05 2007-08 to 9.2% in 2012-13. Difculties in land
acquisition, delays in environmental clearances, infrastructural
bottlenecks, bans on mining in certain areas, problems with the
supply of coal, etc, are mentioned. Moreover, the prot margins
of non-governmental, non-nancial companies have deteriorated.
As regards priorities for reviving growth, the ES pitches for
further scal consolidation. India, it seems, needs a sharp scal
correction, a new Fiscal Responsibility and Budget Management
Act with teeth [our emphasis]. But elsewhere, thankfully, the ES at
least concedes that this should be done without compromising
on capital expenditure. The World Banks Doing Business Report
2014 is considered the last word in deliberating upon aspects of
the interface between rms and the state. That India ranks
134th out of 189 countries in ease of doing business, 179th in
the ease with which a business can be started, 182nd as in terms
of dealing with construction permits, 158th under the head of
paying taxes, and 186th as regards enforcing contracts are
sources of great concern. If only factor markets for land, labour
and capital are reformed, India can become a global hub in
labour-intensive manufacturing and Mumbai an international
nancial centre matching London, New York and Singapore!
Capital controls under the Foreign Exchange Management Act
do not support a rapidly globalising economy. And, the ES also
makes a case for liberalising the market for agricultural com-
modities, especially food, mainly by the centre overriding the
Agricultural Produce Market Committee laws.
Overall, the ES, as would also be evident from the above, is
suffused with the logic of supply-side economics. On its macro-
economics, even if scal consolidation meets the standards of
the monetarist central bank, and the Reserve Bank of India
brings down short-term interest rates, given the problems of the
commercial banks as regards their stressed assets, their lending
standards, if anything, will be tightened. Private investment
will depend anyway more on expectations regarding the long-
term prot rate rather than on the cost of capital. If in the
present context of industrial stagnation, rms are not going to
make large investments in new plant and equipment, then a
large scal stimulus is required to spur aggregate spending,
production and employment.
But going by the ES, the government instead thinks that a
credible programme of scal consolidation that promises to
continuously lower scal decits over the medium term will
itself lead to lower long-term real interest rates today, which, in
Overcoming Sub-5% Growth
Believing that contractionary scal policy is expansionary risks the well-being of the Indian people.
Economic & Political Weekly EPW july 12, 2014 vol xlix no 28
turn, will stimulate private investment-led economic growth.
To be fair, this is only a theoretical possibility based on rational
expectations, not a logical necessity, nor is it backed by empiri-
cal research results of what may have happened in the past. The
belief that contractionary scal policy is, in fact, expansionary
is the reigning dogma of a brand of macroeconomics that has
gained hegemony in North American academia since the 1980s.
That we should blindly accept it as gospel truth and, in turn, the
government should apply it to gamble with the livelihoods of
hundreds of millions of our people is a matter of grave concern.