As a country we are kidding ourselves and not believing in reality. The government of India has just announced that our economic growth rate for the year 2013-14 is meagre 4.7 % (provisional) and the GDP per capita income has moved from Rs. 38500 to Rs. 39500, a mere 2.7 percent. Also this is the second time our growth rate has stayed below 5% per annum. Carefully scanning the data we find that even this growth is achieved because of robust food production, while the manufacturing has faltered badly to settle with a negative growth and with practically no chance of recovering in a big way. In the near term part of the problem is the poor capital formation in the country along with reduced gross domestic savings rate. Combining this with the current economic slowdown in the US, Euro zone, Japan we have nowhere to turn to except admitting reality that higher growth rate cannot happen during global deflation.
For a while put yourself in our finance minister shoes. How is he going to find funds of such large quantity of money to kick start the economy? Tax on consumption replacing income tax is on the agenda for many years but no follow up action is possible because of political imbroglio. Selling the assets of the country namely the PSU is a sign of despair and it has not yielded the desired results in the last 2 years and may not provide the additional capital required in the near term. The scarcity is accentuated further since we may need to recapitalize the PSU banks due to NPA. Even if it is done, Mr. Finance Minister sir the starting point of the new government is to present to its citizens the correct score card on the economy, failures and misdeeds of the past, money lost through scams, current availability of resources and the damage done to the economy because of building of debts. Putting the house in order is the immediate priority and it will call for sacrifices from people by way of additional consumption taxes etc. Once the economy is brought back to the even keel, which may take 2 years, a road map to prosperity must be prepared and presented to the people and debated until clarity is reached about the future course of action required to implement the road map.
The global economy is slowly but steadily moving into deflation. Euro zone just announced a growth of less than 1 %. US which appeared pulling out of slowdown has announced that its first quarter growth will be 0.1 percent. The abenomics of Japan is only adding to the debt of the country which is in excess of 200 percent of GDP. The world is looking to the emerging economies to pull us out of the deflation. Chinese economy has started decelerating. Russian economy is in recession. With Indian economy growing marginally who will drive the global growth?
Looking carefully we know the answer. We have had many decades of global growth sponsored by massive credit expansion through lower interest rates and quantitative easing. We have now reached the end of credit expansion and so the contraction is setting in. The central bankers are doing their best. Boated real estate prices have to come down. Commodity prices which are now at historic lows will have to move up and the funds must flow to where it achieves the maximum return. Will it be achieved in the short-run is a moot question? For our part we must accept that our finance minister hands are tied. If he increases money supply to achieve higher growth, he is damned because of high inflation and if he didn’t he is damned because of low growth for want of capital.