The pot-holed road

Thoughts about India, the United States, and occasionally, the world at large.

India’s deteriorating economic prospects

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Some time back (in January of 2011) when I had predicted that the India Growth Story was on its last legs, that India would be facing an economic crisis within the next 2-3 years, I had also said that we could expect a consequential fall in property prices. As a matter of fact, when you consider that the economy-wide inflation rates in India are at 12%, it means that a rise in property price of 10% is actually a fall in real terms of 2%. But now, even beyond such quibbling, comes news of a crippling  blow to India’s home loan borrowers. A 75 bps hike in home loan rates from SBI, coming on top of the vastly increased outlays on food and other essential commodities in the average family budget.

However, this is just the beginning. India is now firmly in the grip of a “bad news cycle”, the outcome of seven years of a “do-nothing” government. It means that in the days ahead, there will be more and more of such bad news coming, simply because when you don’t press ahead with reforms in time, it leaves you vulnerable to multiple downside surprises (or shocks). The recent strike by Air India pilots is a case in point.  Soon after coming to power, Sonia Gandhi  declared publicly “Profit making public sector enterprises should not be privatized”. Well, Air India was indeed profit making once, but look at the sorry mess it is in right now. And, come to think of it, would the pilots have held the government to ransom if they knew they were dealing with serious people capable of pushing through with privatization, if things came to a pass?

Already, the Finance Minister has lowered the GDP growth projections to 8%.from his wildly optimistic 9% budget estimate, but he he is yet to rework his revenue assumptions. Not that it will help because having become an “entitlement economy” (in the words of the economist Deepak Lal), there is very little the government can do on the expenditure side barring a cutback in investments which will further dim our future prospects.

There is worse to come. As elections draw near, Sonia Gandhi will step up pressure for the food security bill to be made into law. I predict that this would be a killer blow to the economy not just because of all the extra waste, pilferage and expense involved, but because a scheme that would have 75 percent of Indians eligible for rice and wheat at two and three rupees a kilo would be hugely distortionary as far as the food economy is concerned. Further, with three out of four Indians having to queue up in front our ration shops for a good part of their day, the efficiency loss to the wider economy will be staggering. Recall that in the former Soviet Union, all the essential commodities were priced very low, but people had to stand in line for hours to be able to get their hands on it. And then there were other distortions like the fact that bread was priced very low with the result that farmers who were allowed to tend to pigs at home ended up feeding bread to the pigs. 

Now, India is not the Soviet Union, not as yet, and this is thanks largely to the dynamism of its private sector. But as we have relentlessly expanded the government in recent years, all sorts of problems to do with a “governance deficit” have cropped up. The concern is justified but a little misplaced. The fact is, India’s governance deficit did not spring up from nowhere; it is the natural outcome of the far more relevant “intelligence deficit” of its ruling classes.

I’ve always believed  the mistake India’s professional economists make is that they look at the numbers and then try to predict the future. I differ because I also like to look at the people behind the numbers and then make predictions about the future.  It’s not a bad idea. At school, there were many kids whose math scores could be safely predicted all the while. And talking of the people behind the numbers, I often see the pursed lips of an unsmiling face  in elegant, crisply starched cotton sarees. Not suprisingly, I am very glum about India’s economic prospects. 

“Against stupidity, even the gods are helpless”, I’ve invoked this popular quote before about George Bush. And I would say the same thing about Sonia Gandhi now. 


Written by Ranjan Sreedharan

May 11, 2011 at 10:21 am

Posted in Uncategorized

One Response

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  1. Very good info. Lucky me I recently found your site by chance (stumbleupon).

    I’ve bookmarked it for later!

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