The 5% question

When private consumption expenditure stagnates in an economy, the government must step in to compensate. This spurs investment and nudges the economy towards revival. But what happens when the government is not able to step into the breach because it is running an unsustainable fiscal deficit? The problem in crafting a policy response to the dismal GDP numbers for 2012-13, recording a 10-year low, lies here. Both private and public consumption expenditures have halved from last year — the former because households and the private sector do not have the money and the confidence to raise spending. Some of the decline is a response to the high interest rate and inflation scenario that has prevailed through most of this fiscal year. With the government pledged to cut back borrowings to keep the fiscal deficit under control in 2013-14, the economy may well be headed further downhill.

Depending on the domestic drivers of growth at this juncture may arguably cure the economy of its ills, but the GDP figures point to the constraints on that possibility. At this stage, therefore, the only way to fight out of the downward cycle is to bring investments, domestic and foreign, centrestage. The leadership of the UPA government would appear to have realised this, but the message must percolate down. The numbers show that India has grown at less than 5 per cent — closer to 4.9 per cent — this fiscal. Returning from here to even a 6 per cent rate of growth in the next fiscal will need the economy to suddenly pick up speed from April onwards, and without the support of a rebound in exports.

While an election year would appear to offer comfort in terms of loosening government expenditures, those are only short-term stimuli, evaporating by the time a new government is in power. More fundamental changes can only take place if the environment for strong policy action at the Centre is also carried forward to the states over a sustained period. The panoply of objections that have built up to complicate, delay and stall projects must be addressed. This will need time, as the Cabinet Committee on Investment is finding out. In the circumstances, quibbles over whether the money used to finance investment is domestic or foreign are unrewarding. Finally, continuity of policy is essential. The economy is still paying the price for the policy inertia and confusion of the last few years.

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