Even as the UPA government has been patting itself on the back, off and on, for handling the aftermath of the global meltdown exceedingly well as shown by high growth rates achieved, the Economic Survey 2012-13 has questioned the rationale of such stimulus packages and pointed to that phase as the root cause of the current macro-economic situation.
In a foreword to ‘State of the Economy and Prospects’ (Chapter 1), the Survey, primarily authored by Chief Economic Adviser Raghuram G. Rajan, has argued that while India’s recent slowdown is partly rooted in external causes, domestic causes are also important. “The strong post-financial-crisis stimulus led to stronger growth in 2009-10 and 2010-11. However, the boost to consumption, coupled with supply-side constraints, led to higher inflation. Monetary policy was tightened, even as external headwinds to growth increased. The consequent slowdown, especially in 2012-13, has been across the board, with no sector of the economy unaffected,” it said.
In a cogent introduction to the Survey, Dr. Rajan analysed the causes of the recent slowdown while highlighting three objectives that need to be implemented. Pointing to the causes for the slowdown, Dr. Rajan said: “A number of factors are responsible. First, the boost to demand given by monetary and fiscal stimulus following the global financial crisis was large, even though the economy was already reaching the limits to its potential growth before the crisis.”
While the resulting recovery from the crisis was strong and final, consumption grew at an average of over eight per cent annually between 2009-10 and 2011-12, Dr. Rajan noted that one consequence was strong inflation and the powerful monetary response slowed down consumption demand. Besides, starting 2011-12, corporate and infrastructure investment began slowing both as a result of policy bottlenecks and a tighter monetary policy.
“Unfortunately, even as the economy slowed, it was hit by two additional shocks: a slowing global economy, weighed down by the crisis in the Euro area and uncertainties about fiscal policy in the U.S., and a weak monsoon, at least in the initial phase,” he said.
While not holding the RBI directly responsible for its actions to control inflation, the Survey pointed out that falling savings without a commensurate fall in aggregate investment has led to a widening current account deficit (CAD). “As growth slowed and government revenues did not keep pace with spending, the fiscal deficit threatened to breach the target. With government savings falling, and private savings also shrinking, the current account deficit — which is the investment that cannot be financed by domestic savings and has to be financed from abroad — also widened,” Dr. Rajan said.
To get out of the current situation, India has to revive growth, and that growth has to provide more decent jobs for the many millions who will join the labour force, he says. Second, India needs to shift from consumption to investment by way of increased government and household financial savings. And third, there is need for macro-economic stabilisation — to bring down inflation, the fiscal deficit and the CAD.