Two stories of the economy

When I read what politicians are saying and reportedly thinking, I am afraid that, as in 2009-10, they will become complacent and ignore the need for continuing reforms over the next three years, and permanently lose the opportunity of restoring growth to its medium-long term potential of 8 per cent to 8.5 per cent. When I talk to people from the world of business and private equity (the long term investors), I often find deep despair about government actions, and inaction, that have stymied the growth of output and investment in the recent past. I fear that their pessimism will slow the pace of recovery even if the political system produces genuine reforms of the "permit-inspector raj". Both the over-optimism among politicians and the excessive pessimism among business and industry can be bad for economic recovery. We need a realistic balance between the two if we are to get a reasonably quick as well as a sustained recovery.

Two projections for 2012-13 from the economic survey encapsulate the negative story. One is the current account deficit, at 4.8 per cent of the GDP, and the other is the growth rate of gross domestic product at constant market prices (GDPmp), at 3.3 per cent. These are both unprecedented and unsustainable numbers. The growth projection of 5 per cent for GDP at factor cost (GDPfc), which shocked many observers, is about 1.8 per cent point higher than the number for GDPmp. We last had such a low growth rate for GDPmp during the balance of payments crises of 1991-92, when it plummeted to 1 per cent. The CAD of 4.8 per cent has no historical precedent; the worst historical CAD was 3 per cent of the GDP in 1990-91, when the BoP crises started. The high inflation rate, best captured by a five-year 9 per cent average rise in the implicit GDP deflator for private consumption, is another symptom of macro-economic imbalance. However, it is still lower than the nine-year average of 9.9 per cent from 1990-91 to 1998-99, following the BoP crisis.

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