Shankar Acharya: India - before and after global crisis

The country's recent macroeconomic performance remains well below pre-financial crisis levels
Shankar Acharya* Aug !!" #$!!

Nearly three years ago I had noted that the period 2003-08 was the best sequential five years of macroeconomic performance that India had ever achieved, according to the usual criteria of growth, inflation, e ternal balance, fiscal deficit and aggregate investment !"#he halcyon years, 2003-08$, Business Standard, %ctober &, 2008'( )y the spring of that year the international commodity price shoc* had hit our country and in +eptember the global financial crisis came to a spectacular clima ( I ended my column on a nostalgic note, "-ven as the economic indicators turn ine orably negative, let us not forget those halcyon years( .ho *nows when !or if' they will return($ Now, after three years, it may be instructive to ta*e stoc*( /s readers may recall, after almost ignoring the distant thunder of the gathering financial storm right through the summer of 2008, contemporary commentators 0 including the .orld )an*, 1oldman +achs and 2itiban* 0 quic*ly went to the other e treme after the financial meltdown in /merica in +eptember and predicted a sharp slowdown in India3s growth to below si per cent in 200&-40( /s it happens, the Indian economy surprised most people by its resilience, than*s, in part, to the good old-fashioned, fiscal populism of spring5summer 2008 !well before the post-6ehman rationalisation of "fiscal stimulus$' and the 7eserve )an* of India3s !7)I3s' adroit monetary and e change rate management( #rue, growth slowed to 8(8 per cent in 2008-0&( )ut it recovered quic*ly to eight per cent in 200&-40, confounding the tribe of pessimistic forecasters( It would, however, be a serious error to thin* that we have emerged unscathed and are bac* to repeating those "halcyon years$( / glance at the accompanying table shows the clear worsening of our macroeconomic performance according to each and every significant indicator( 2omparing the three pre-crisis years !column 4' to the three most recent years !column 2', it is evident that growth has slowed significantly, inflation has been substantially higher, the e ternal current account deficit has more than doubled, and the combined !2entre plus states' fiscal deficit is 80 per cent higher( #he rate of domestic investment has also fallen a little( 9urists may ob:ect that it is not fair to include 2008-0&, the pea* year of global financial turmoil, in the "after$ period( /ccordingly, the table includes column 3, which restricts the "after$ period to 200&-40 and 2040-44( ;oing so improves growth a bit but worsens inflation and the e ternal deficit, with no change in the fiscal deficit and aggregate investment outcomes( )asically, the economy3s recent macro performance continues to remain well below pre-crisis levels on all counts( %ne dimension of macroeconomic performance has been omitted from the discussion above, namely, aggregate employment( India3s employment data are woefully wea* and incomplete( #he overwhelming ma:ority of the country3s labour force wor*s in the unorganised or informal sector, with low earnings and high insecurity( #hat central fact has not changed over many decades( / few wee*s ago the government released the National +ample +urvey 88th 7ound large sample survey data on employment for 200&-40( /lthough total employment increased very little over the five years since 200<-0=, some government spo*esmen and analysts drew comfort from the decline in the unemployment rate !on a "current daily basis$' to 8(8 per cent from 8(2 per cent in the previous large sample survey of 200<-0=( >owever, this may simply reflect a mar*ed and surprising drop in the labour force participation rate !especially amongst females' over the same period( )esides, with only 4= per cent of wor*ers being in "regular wage5salaried$ employment, the unemployment rate is a poor indicator of trends in employment conditions(

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-conomic growth !? per year' Inflation !1;9 deflator, ? per year' 2urrent account deficit !? of 1;9' 2ombined fiscal deficit !? of 1;9' 1ross domestic investment !? of 38(4 1;9' 1ross fi ed investment !? of 1;9' 34(=
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Source: Central Statistical Organisation and Reserve Bank of India

.hat about the future, including the current year, 2044-42A #he information available till early /ugust is hardly reassuring( In /merica, 1;9 growth slowed to a measly 0(8 per cent annualised rate in the first half of 2044, including a surprising wea*ness in consumption( - cept for 1ermany, most of -urope is mired in mounting problems of debt and financial stress( /fter the horrendous damage of the tsunami and the debacle in Bu*ushima, Capan is e pected to show negative growth in 2044( /mongst the world3s large economies only 2hina continues to power ahead at nine per cent-plus( ;espite the prevailing economic gloom and uncertainty in the developed world, India3s e ports did remar*ably well in /pril-Cune, 2044( )ut the commerce ministry has clearly warned that such dynamism may not continue in the present global conte t( - ports aside, the rest of the Indian economic data are not reassuring( /ccording to the new inde , industrial production growth slumped to =(@ per cent year-on-year !DoD' in /pril-Eay, 2044 from 8(2 per cent in 2040-44, not to mention the high double-digit rates of 200=-08( >eadline inflation !.9I' continued at nine per cent-plus in Cune and is pro:ected to stay high through the ne t few months by both the 7)I and the 9rime Einister3s -conomic /dvisory 2ouncil !9E-/2', before declining to a 8(=-@(0 per cent range by Earch 2042( 7)I estimates that the central government3s budgeted fiscal deficit will be overshot by a massive one per cent of 1;9 because of oil sector subsidies and related revenue cuts( #hese factors point to continuation of high short- and long-term interest rates( >igh and rising interest rates are only one of several factors damping investment( 9E-/23s recent report highlights others, including, "the spate of corruption related controversies over the past one year$, bottlenec*s in *ey infrastructure sectors of power, roads and ports, various restrictions on mining coal and other ores, delays in forest and environment clearances, shortages of s*illed labour, and political uncertainties( #he lac* of meaningful economic reforms over the past few years is surely also relevant( #he impact on investment is showing in the data( 2apital goods production, which had surged at 30 per cent a year in 200=-08, grew by only 8(8 per cent DoD in /pril-Eay 2044( In the stoc* mar*et, the pace of new issues has slumped( #he >+)2 purchasing managers3 inde hit a 20-month low in Culy( 7eports of delayed, postponed and cancelled pro:ects abound( It is more than li*ely that the rate of aggregate investment in the economy will drop in 2044-42, with unfortunate consequences for growth in subsequent years( /s for pro:ections of overall economic growth in 2044-42, while official agencies are still optimistic !7)I pro:ected eight per cent in late Culy and 9E-/2 forecast 8(2 per cent more recently', investment ban*s have dropped their pro:ections significantly over the past month !Eorgan +tanley to @(2 per cent and 2itiban* to @(8 per cent'( #a*ing all this into account, my own guesstimates for 2044-42 of *ey macroeconomic performance indicators are summarised in column < of the table( /s for the years beyond, it depends mostly on the government3s ability to sha*e off the prevailing stasis and seriously implement its long-awaited reform agenda( #he "halcyon years$ show no signs of return as the global economy faces renewed stresses(

*The author is honorar professor at Indian Council for Research on International !cono"ic Relations and for"er chief econo"ic adviser to the #overn"ent of India