Small gains

IIP data shows an upturn, but for UPA, there is no alternative to pushing envelope on policy reform

The gloom on the economy has declined somewhat, thanks to slightly better IIP data. The year-on-year growth in March was 2.5 per cent. This was not unexpected, as the month-on-month growth of seasonally adjusted IIP had shown a better performance from October 2012 onwards. At the same time, there are two reasons for reining in the optimism. While this is positive growth, 2.5 per cent is nothing to boast about. Sustained growth in India requires a substantial investment boom. While there is some improvement in the most recent CMIE investment data about new projects initiated, there is no sign of an investment boom.

Macroeconomic policy levers can do little about the slump in growth, owing to the policy mismanagement of recent years. Fiscal policy has no headroom to stimulate the economy by spending more or taxing less. If anything, the need of the hour is deficit reduction, which (in the short term) hampers GDP growth. The situation on inflation is dire: from February 2006 onwards, in every single month, the year-on-year CPI inflation has been above the target range of 4-5 per cent. In recent months, the inflation performance has been terrible, with double-digit values for all four months from December to March. There is little scope for lifting the economy through monetary easing.

The UPA inherited 10 per cent GDP growth and 4 per cent inflation, and has converted it into 4 per cent GDP growth and 10 per cent inflation. The UPA now faces two choices. The first consists of lumbering on to elections in May 2014, with a perpetuation of the existing environment of 4 per cent growth and 10 per cent inflation. The second consists of trying to get away from this awful state. There is no ammunition in terms of either fiscal or monetary policy, owing to bad institutional frameworks and past policy mistakes. The only option left is to push the envelope on policy reform. If the UPA is able to deliver on policy reform, this will reassure the private sector, domestic and global, that India has a bright future. Is India a developing country with bad advisers and worse politicians? Or does it have the ability to make policy for a mature market economy? The UPA needs to demonstrate its ability to deliver a good policy framework. At present, considering bills like the proposed food security bill, the signs are not good.

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