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Updated: March 14, 2012 00:20 IST

Looking beyond the global slowdown

Pulapre Balakrishnan
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The Hindu

The forthcoming Union budget must focus on generating internal demand, and the way to do this is to use public investment and capital expenditure to help India complete its agricultural transformation.

Since 2008-09, the rate of growth of the Indian economy has slowed. As this has followed quite closely the evolution of the global financial crisis, and coincides with the slowing of the world economy, it has encouraged the belief that India's woes are explained away by reference to the global trend. This is unfounded. First, following quite a sharp decline in 2008-09, the economy made a smart recovery and in the two succeeding years has grown at rates over 8 per cent per annum. This suggests the slowing of the world economy had only a temporary impact on the domestic one.

Moreover, according to the IMF's World Economic Outlook released in January, the world economy grew by 5 per cent in 2010. This is one of the highest rates of growth registered in recent years, and compares favourably with the levels registered in the period immediately before the crisis. We may also note that over the period April-January in the current financial year, the growth of exports exceeded 23 per cent compared to 10 per cent for the same period in the previous financial year. Thus it would be difficult to attribute the slowing of the Indian economy over the past two years, in particular in the year drawing to a close, to factors external to it.

It is not difficult to track down the principal causes of the current slowing of India's economy. Actually, we need look no further than the performance of agriculture and the record of public investment in recent years. Following rapid growth in 2007-08, agricultural production declined for two years consecutively since. It may have recovered in 2011-12, but the impact of a supply shock is likely to be spread out over time. Also, its influence is felt in ways other than via the easily understood supply and demand linkages that the agricultural sector has with the rest of the economy.

Declining public investment

Next, let us look at the role of public investment. Gross fixed capital formation as a share of economy-wide GDP has remained more or less constant since 2007-08. This is in sharp contrast to the record of public investment in the five years of very high growth over 2003-08. During this period, public capital formation grew faster than in any five-year interval since the 1950s. This suggests a relatively unsung role for the public sector during the high-growth phase that was the tenure of UPA I. Studying more closely the history of this phase suggests that declining public investment has something to do with the subsequent slowing.

Capital formation

The role of public capital formation in the future of the economy deserves far greater attention than it has received. Since 1991, the whole approach to the question has got mired in the zeal that has accompanied the argument for reforms, construing it as merely liberalisation of the economy. However, it can hardly be anyone's case that we have enough of roads and sidewalks or electricity generating capacity or even pucca school buildings. There is reason to believe that for the foreseeable future these will largely have to be provided by the public sector. However, there is the crucial question of how this is to be financed when the government is debt-strapped. I shall turn to this after considering the indirect impact on growth of the two years of stagnant agriculture alluded to.

The direct impact of agricultural growth feeds through to the rest of the economy via supply and demand linkages. Then there are the roundabout effects that can be as powerful. When food production grows at a slower rate than the demand for food, the relative price of food increases and inflation results. We have experienced such inflation for close to two years now. Such inflation gets generalised across the economy via rising wages in the rest of the economy. In due course, it can lead to a depreciation of the exchange rate, which raises the cost of imported goods, including that of oil. This raises the cost of transportation, contributing to a further rise in the price of food. With this, the cycle of price rise is renewed. Now growth in the non-agricultural sector slows. This follows directly from the fact that the necessarily rising expenditure on food in fixed-income households crowds out expenditure on other goods and services. The slowing of non-agricultural growth can ameliorate inflation as it chokes off the demand for food. This is the precise sequence of events that we have witnessed over the past two years, with manufacturing output growth almost grinding to a halt in the last quarter.

Our diagnosis of the causes underlying the slowing of the Indian economy brings along with it the obvious solutions. As I have emphasised agriculture and public investment, I shall stick with these. This does not mean that other factors are irrelevant, only that I am being faithful to the parsimony of my explanation of recent growth. When dealing with an agricultural shortfall, we need to first acknowledge that there are no short cuts, and that the project of making a dent is a long-term one. Public policy towards agriculture would have to address two issues. First, at 7.7 per cent of the total, gross capital formation appears far too low for a sector already groaning under inadequate infrastructure. And though we would be right to expect private investment to increase, public capital formation often acts as a catalyst to the former. This is so as the public sector alone provides the public goods essential for sustained growth.

However, even as we consider the bearing on growth of increasing public capital formation, it is important to face up to the finding of a rising incremental capital-output ratio in agriculture. Apparently waste thrives despite the rhetoric of the reforms. Evidently, it is one thing to build rural roads and irrigation networks but it is an altogether different matter to get them to work efficiently. The inescapable inference is that governance is central to growth. In fact, the future of economic growth in India is going to be determined by the quality of public intervention. For all the sound and the fury that it may be expected to generate, the forthcoming Union budget can do very little in this regard.

There is nevertheless a sense in which future budgets will continue to matter. We have already referred to the importance of sustained capital formation. It has been flagged for some time now that public capital formation by the Central government is being crowded out by producer and consumer subsidies. Among the former are the fertiliser subsidy and among the latter is food and fuel. Even before curbing the deficit, fiscal correction ought to take the form of maintaining or even increasing the food subsidy where it is merited while gradually eliminating all others. The funds thus freed up may be directed towards capital expenditure. The fact is that India has not yet completed its agricultural transformation, the hallmark of which is that food is made cheaper and expands the market for other goods. Note that producer subsidies in agriculture have not made any difference here. Actually, they may have held up the necessary transformation.

Continuing opportunities

The slowing of the world economy does not imply that India should give up on leveraging global demand to move its economy forward. Opportunities continue to exist, as seen from the reported growth by 33 per cent so far in 2011-12 of a relative newcomer among India's IT firms. But at the same time, the writing on the wall is that India can no longer afford to ignore domestic demand. To respond smartly to this imperative would require a change in the mindset of its polisariat. So far, its approach appears to have been to focus on a limited aspect of the supply-side, namely, the incentives faced by producers. But by now it is emerging that if we want to grow at rates that we have got used to, we must broadbase and grow the internal market.

(Pulapre Balakrishnan may be reached at

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Global Slowdown affects us in many ways! First, Export is largely affected by global slowdown. If our importers don’t have enough to buy then how can we expect growth from our producers? If producers are not able to sell their products in the west, how can we expect increase in the wage, and hence increase in the demand in local. Reasoning the same there will be cut in the supply as well as in the employment. Second, our import is affected by global slowdown. Due to global slowdown, affected countries are not able to produce much to fill our demand. Hence we look for other sources to buy, which in turn results in costlier goods. Those increases in the cost affect the final price of other goods, which results in increased inflation.
To tackle all these we should create a huge consumer base in our own country. For that we have to make our people sufficient enough to buy, which can only be possible by capital investment, infrastructure building, and through inclusive growth.

from:  Kaushlendra Choudhery
Posted on: Mar 14, 2012 at 18:08 IST

Key issue to get back India's economy is funding more on agriculture and R&D.ultimate growth of a nation depends on production.India made a smart recovery in 2007-2008 crisis is because we had a balanced economy.Agriculture plays a major role in economic slowdown,so in this budgetary session farmers core problems should be fulfilled.Another major issue is electricity,depending on the future development in industrial sectors and population sufficient amount of electricity is to be produced.investing in solar energy is this budgetary session should provide importance to core problems in India.

from:  ratheesh
Posted on: Mar 14, 2012 at 09:13 IST

India seems to have no consistency in its policies. Rules and regulations are changed overnight and then back again. This has created a very bad image about India overseas. Yesterday I had the experience of a foreign technical consultancy firm instantly refusing to do any projects in India with a curt " We are not interested in India ". The visa regime with 2 month gap between visits have also put off many companies. The problem in Indian governance is that there is a weak leadership and that has flourished too many Indian chiefs all over the place making a mess of steady stable governance. India is a sure loser. It is paying a very high price for its shoddy image abroad.

from:  Anand
Posted on: Mar 14, 2012 at 07:54 IST

The Indian middle class should come up and express their willingness
to buy a litre of petrol for their Car or buy an LPG cylinder at
market prices. The subsidy bill should be properly reviewed and
dysfunctional subsidies should be stopped. The middle class should
come out of their self created cocoon of short sighted interests which
has been exploited by the politicians.
The Anna Hazare Movement tried to make a dent on this cocoon. A truly emerged and matured middle class needs to set the tempo for the right socio-economic policy making to be truly growth oriented and to be in the best interests of the nation at large.

from:  Hiranya Madhab Saikia
Posted on: Mar 14, 2012 at 01:15 IST

Govt should pay attention to Agriculture sector.Instead of providing Subsidy as a whole on Fertilizers,Govt should give it only to people needed. So as a result,money can be generated from Big Farmers.Govt should promote use of ATM cards in rural parts of India at least Tier 3-4-5 towns which can generate significant revenue from VAT per transaction.Then Govt should try to cut down Middlemen and setup infrastructure so that they can directly sell to Stores,which will result decline in Inflation.

from:  Swapnil
Posted on: Mar 13, 2012 at 19:40 IST

A good living for our farmers depends on Power. Also a rise in organic
farming will improve yields, protecting farmer's health and helping to
keep the earth alive. It is the little life forms, earthworms, etc
which work the soil and allow nutrient absorption into plants. Whether
a farmer uses pesticides or not, 10% always go to these little life
forms and in case of poisoning with pesticides both farmer and the
earth he works on, DIES. Pesticides not only drive up costs but leave
the farmer with debts (loan, sickness) he can't repay and an easy way
out, consuming the pesticide! With the Energy Technology Revolution
occurring worldwide, providing today more jobs than IT and engineering
COMBINED, giving the developed countries an added advantage of free
fuels with no expensive and dangerous wastes, it is paramount we set
up CSPs (concentrated solar panels)which do not require costly
infrastructure or give autonomous power to farmers to generate their
electricity with rooftop solar panels

from:  angela alvares
Posted on: Mar 13, 2012 at 16:38 IST

This is in reference to Mahesh J's post. Sir, your plan will lead to
economic disaster. Have you ever read why the soviet union(and/or
Zimbabwean Dollar) collapsed. Your plan will result in Hyper-inflation
of the Zimbabwean levels. The most effected people will be poor people
who won't be able to afford food more. The Quantity of Monetary Easing required for implementing your plan may result in a worthless rupee
and a default on the debt by the union government(like Greece). We as
a country should shed the idea that wealth can be created out of
Printing Press. The law of economics works everywhere in this world
just like law of gravity, why go the Zimbabwean style. A stronger
rupee will result in increasing purchasing power of poor people of
whatever rupee they make and a rise in living standard for them.
Counterfeiting even if done by the government is a
crime. It is stealing the hard work of people in a deceptive way by
depreciating the purchasing power of the money they hold.

from:  Satish
Posted on: Mar 13, 2012 at 13:22 IST

Agriculture is the most neglected field. People are already coming out of this sector. Why should they do farming??? They don't get market. Loss of revenue and interest in this field and they have to put lot of hard work.
Modernization??? Possible when you educate the farmers. Still the farmers are uneducated. 70% of the poor people who have no voice are only involved in this field. Govt doesn't give any support to this sector.How to improve up on this field??? .Supply of electricity to the needy farmers . Lift irrigation by govt itself. Construction of check dams for irrigation purpose in the water starved areas. .Shifting agriculture pattern from food based to commercial based agri so that people will develope interest. .Supply of tractors and other equipments to farmers..Treat agri as Industry to grow.

from:  A.Natarajan
Posted on: Mar 13, 2012 at 11:57 IST

The agriculture sector is the core of Indian economy but recently it
has been getting the peripheral attention. Liberalization bogey has
shifted the attention from Indigenous agriculture to foreign
copycating. I don't know why there is such an urgency in the government
to subsidies propellants while lifting the subsidies on fertilizers and
oil that concerns the "aam aadami"? There is also wrong prioritization
when one examines the bills to be tabled in current session. Rather
than making all out efforts to get NFSB passed in parliament GOI should
have tried more rational ways. Introduction of this bill per se is
government's admission that production of grains in proportion to the
demand has gone out of the hands of the government. It'd have been far
better if GOI could have tabled "FARMER'S SECURITY BILL" ensuring no more farmers are forced to suicide and they could get a rational and
assured minimum prices for what they produce. Creating fixed assets as
pointed will be a great help.

from:  Ajeet Tiwari
Posted on: Mar 13, 2012 at 08:46 IST

Monetary easing will result in further depreciation of purchasing
power of rupee. Counterfeiting even if done by the government is a
crime. It is stealing the hard work of people in a deceptive way by depreciating the purchasing power of the money they hold. We as a
country should shed the idea that wealth can be created from a
Printing Press. A bigger budget will increase the burden on the
taxpayer and the poor people. Why are we always trying to solve the
problems in economy without analyzing how they came about. The problem
of too much debt and too much mal-investment cannot be solved by more
debt and more mal-investment. Why should the farmer work 12 Hours a
day in hot sun room and not getting good price for his produce. Let
the free markets be truly free.

from:  Satish
Posted on: Mar 13, 2012 at 06:42 IST

The investments in agriculture must come from private sector. The
prices of agricultural products must be allowed to rise, so that the
farmers(and villages) will can become rich and it will also attract
investments because of profit. It will also result in their increasing
standard of living. The Politburo in New Delhi is not as smart as the
Politburo was in Soviet Union in 1988. The politicians and Bureaucrats
are not smart enough for Public investments in agriculture. The
government involvement in it from last 60 years has resulted in
Malnutrition in 50% of children in India, Because they cannot get
enough food. The further depreciation in Rupee(by more Monetary
easing) will hurt the poor people the most. A stronger rupee will make
them able to buy more goods and will result in a rise in their
standard of leaving. Every rupee that government spends is non-
productive.private sector spending is productive. We should let the
Free Markets take care of this problems just like Telecom sect

from:  Satish
Posted on: Mar 13, 2012 at 06:28 IST

I am no economy expert but one thing I want to share. Imagine if government could provide affoerdable housing to marginal & middle class section, then -
1. These 300 million people will have a lot more money to spend on consumer & luxury goods generating internal demand. 2. Affordable housing by government implies public investment in real estate. This will have cascading effects benefiting all other sectors. So more internal demand.Considering 60% of GDP comes from cities & rate of urbanisation, real estate is big sector.
What is happening today is real estate is overvalued & main concern before large section of population is to own small home. And anyways the money in real estate is not returning back to the market as it is dominated by Mafias.

from:  Mahesh J
Posted on: Mar 13, 2012 at 02:23 IST
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