The Gold Standard | What? Me? Worry? I have IPL

GDP growth in India has crawled to a 5.3% rate (real GDP; 2004 prices; seasonally adjusted) in 2011-12Q4 (Jan. – Mar. 2012). It is the lowest one has seen in several years. But, in the final quarter of 2010-11, India recorded a growth rate of 5.6%. So, actually, the base effect was in India’s favour for 2011-12Q4. But, in spite of that, the growth rate was only 5.3%. That shows how weak the underlying momentum in the economy is. There is no momentum. In the first quarter of 2009-10 (April – June), the economy recorded a growth rate of 5.47% and in the two preceding quarters, a growth rate of 3.5% and 2.7% respectively. In 2004-05Q3 (Oct. – Dec.), the growth rate was 5.15%.

So, if we exclude the crisis-induced swoon in GDP growth in 2009, this is the lowest growth rate in eight years. In his weekly Op.-Ed., Mr. Ninan tries to spread some cheer. He is right about the falling price of crude oil and the competitiveness gains induced by the weak rupee. But, they are only partial. As he himself notes, the domestic price impact of falling crude oil price has been nullified by the weak rupee. In the latest petrol price hike saga, most governments have rolled back taxes, to offset the price hike made by the government. We do not know what the fiscal consequence is.

On the rupee competitiveness, if there is no demand growth in the importing countries, cheap currency (i.e., lower export prices) matters very little. Further, he omits to mention one negative consequence of a depreciating rupee. Inward investments would be postponed in the hope of further weakness. As with inflation, there will be a case of reality reinforcing expectations and vice-versa, in a mutually reinforcing vicious cycle, unless some decisive policy signal breaks it. Business Line put out a story on how importers are asking for invoices in Indian rupees.

He is also statistically correct that the growth rate of real Gross Fixed Capital Formation (GFCF – investment spending) has ticked up. The growth rate (y/y) in 2011-12Q4 is 3.26%. The growth rate in the previous quarter was -0.39%. There are two caveats to this so-called ‘silver lining’:

(i) In 2010-11Q4, the growth rate was -3.7%. Hence, the base effect has been clearly helpful here.

(ii) In terms of levels, the fall in Gross Fixed Capital formation has not stopped. It has been declining from 4739.4 billions of rupees in 2010-11Q1 to 4517.2 (2011-12Q2) to 4364.08 (Q3) to 4326.88 (Q4). These are seasonally adjusted data. There is no silver lining here. The decline in GFCF has not stopped.

So, how did the government address this issue? It has liberalised norms for foreign individual investors to buy into Indian stocks, Indian stock mutual funds and now Indian corporate debt too. On occasions, something is better than nothing and, on other occasions, nothing is better than non-sense. Only time will tell whether this move falls into the first or second category.

The government has been unable to liberalise investment rules for foreign direct investors to invest into insurance, retail and aviation sectors. Instead, it goes out and liberalises the norms for ‘hot-money’ to flow into India.

In 2006 and 2007 and again in 2009 and in 2010, the government did not have to ‘woo’ foreign portfolio investors. They came because they believed (wrongly, as it has turned out since) in the Indian growth story. That story has run aground, for now. The answer is in reviving that story and not in making desperate gestures to fickle foreign portfolio investors in desperate times.

Ninan’s conclusion is as forthright as the conclusion in the edit of MINT.

We are paying the price for keeping a dysfunctional and seemingly clueless government in office.


The Sonia Gandhi-Manmohan Singh combination has made a mess of things. A billion Indians deserve better.

MINT got it right. They did not say that 1.21 billion Indians deserve better. The number of one billion is about right. The other 210 million is busy watching IPL. I doubt they deserve better.

If you really are looking for a silver-lining,  I will give you two. Here is one and here is the other.

One-off or scattered initiatives (second link above) cannot solve the problems of a country with 1.21 (and rising) billion people. Governments have to let communities deal with their problems. They need resources – financial and human – and they should be allowed to mobilise and acquire them. India cannot be governed from Delhi. It is impossible.

Among many of the ‘achievements’ of this government, concentration of power in its hands is another. It is using it to settle political scores. That it is shooting itself on its own political foot is another matter. Such is the power of blind, impotent (and hence, stupid) rage.

Mani Shankar Aiyar has written a well-researched piece on how the Panchayat Raj Institutions are yet to be empowered:

The critical systemic fault lies in the present practice of implementation. Over a hundred social sector and poverty alleviation Centrally Sponsored Schemes (CSS)10 are implemented by separate agencies for each scheme operating through parallel bodies set up by the Central and State government bureaucracy in collaboration with civil society organisations to perform tasks that the Eleventh Schedule of the Constitution specifies might best be entrusted to the PRIs.

In consequence, the beneficiaries remain hapless recipients of Government/NGO largesse instead of actively participating in designing the schemes, adapting them to local community priorities and being effectively in charge of supervision, guidance and disciplinary action.

This link takes you to a summary of a book that has tried to systematically track how various States have performed on the index of devolution to local governments. Only a handful of States have been sincere, despite so-called administrative incentives. Well, they are hardly a match for the personal incentives that come with centralisation and concentration of power.

No wonder some of us are left wringing our hands and tearing our hair out on how to model morality into our elegant discourses on what India lacks and the rest of us are off to watch IPL. Cricket in India is now well and truly escapist as most Indian cinema is.

Yes, that is what Indians need: escape.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.