OFFICIAL statistics have begun to reflect the slowing of economic growth in India. The CSO has revised its optimistic advanced estimates of GDP growth during 2000-01, with the provisional figures now pointing to a 5.2 per cent rate of growth as compared with 6.0 per cent expected earlier. This 5.2 per cent compares with the 6.4 per cent rate of growth achieved in 1999-2000, pointing to a significant deceleration. There is no area of economic activity in which GDP growth has not decelerated. Agriculture continues to stagnate, manufacturing growth has fallen from 6.8 to 5.6 per cent, and the services sector, which was responsible for raising aggregate growth even when the commodity-producing sectors were languishing, has finally begun to experience a degree of slackness.

This slowing of growth is significant because the government had all along held that, despite the fiscal compression resulting from its effort to contain the fiscal deficit in a period when the tax-GDP ratio was falling, the economy had been placed on a new, "higher" growth path after liberalisation. In its view, the stimulus to private "animal spirits" that the liberalisation offered, had spurred private investment to an extent where it more than adequately compensated for the sharp deceleration in public capital formation during the 1990s.

Clearly, the government itself is not convinced by this argument any more. In his effort at reversing the slowdown in growth, the finance minister Yashwant Sinha has directed financial advisors in all ministries to step up capital expenditures. In addition, PSUs are to be tapped to obtain (in advance?) dividends and interest due from them, so that the non-tax revenues of the government can be beefed-up and overall expenditures expanded. This becomes necessary because the government has already borrowed substantial sums in the very first month of this financial year, possibly to meet payments that were postponed at the end of the last financial year in order to keep the deficit during the last fiscal under control.

These perceptions are in complete divergence with the views advanced by the advocates of reform who have held that there is a direct link between "reform" and growth inasmuch as the former spurs private investment, that public investment tends to "crowd out" private investment and should be curbed, and that sustaining growth requires sustained liberalisation. With trade having been almost wholly liberalised, with domestic regulation having been virtually wiped clean, with privatisation being pushed through even at rock-bottom prices for public assets and with the fiscal deficit being controlled to a far greater degree than earlier, there is little more that the government can do on the liberalisation front. If growth still tends to slacken, the problem must lie with the neo-liberal reform process itself, as Sinha is implicitly accepting, though he would never admit the same.

In assessing this turn around in the pace of growth and change in perception regarding the determinants of growth, there is a larger question that is at issue. Does and did "reform" spur growth at all? Advocates of reform have often argued that, whatever else may be said about the effects of the reform process, it cannot be denied that it has helped India move up from the earlier "Hindu rate of growth" of 3-3.5 per cent to a new rate of more than 6 per cent per annum. If liberalisation is persisted with, they hold, India can move up to the 9 per cent rate of growth that the prime minister dreams of.

What this argument conveniently ignores is the fact that the "transition" to the new rate of growth occurred well before the reforms of the 1990s. In fact the 1980s were also a period when the rate of growth of GDP was close to 6 per cent. The acceleration in rate of growth during the 1980s occurred essentially because the investment rate which stood at around 19 per cent at the beginning of the 1980s rose to around 26 per cent by the end of that decade. As compared to this we find that during the 1990s, barring three years around the middle of that decade 1990s, the investment rate ruled well below its end-1980s level and is currently around 22 per cent. Clearly there is a link between the investment rate and growth, as is to be expected, and the current slowdown is the result of slack investment demand in the economy. Not surprisingly, the capital goods sector is the worst affected by the recession being faced by industry.

Thus what seems to matter for growth is the rate of investment in the economy, and the acceleration in growth starting from the 1980s was essentially the result of India’s ability to sustain a higher rate of investment without triggering an inflationary spiral. In the 1980s the rate of investment was raised in part by large deficit financed spending by the government, which not only propped up capital expenditures but also spurred private investment. This, however, did not result in inflation because of the access to international liquidity provided by changes in the world of international, which allowed the government to borrow abroad to finance its expenditures and to import the commodities needed to meet domestic demand and dampen price increases. The transition to a "higher" rate of growth was not the result of changes within the country, but changes in the world economy, that permitted a strategy that raised growth at the expense of increased external vulnerability as the 1991 balance of payments crisis forcefully demonstrated.

To an extent a similar process operated during the early and mid-1990s. Despite the government’s claim of having substantially reduced the fiscal deficit, it is known that after making adjustments for changes in definition and upward revisions of GDP figures, the deficit has ruled high over much of the decade. It is only in recent years that the deficit has been reduced, with the hope that private investment would help spur growth. In practice the reduction in expenditures that deficit control entailed has adversely affected investment and growth.

The reduction in the deficit has been all the more damaging from the point of view of the dampening of the fiscal stimulus, because of the fall in the tax-GDP ratio. That fall was because of the sharp liberalisation-induced reduction in customs duty collections, in the wake of substantial cuts in import tariff rates. It was also due to the massive reduction in direct and indirect tax revenues as a result of tax concessions provided to the private sector, as part of an effort to spur private investment. With private investment and growth slipping now, revenue collections have dipped even further, as evident from the figures for 2000-2001 and the first month of fiscal 2001-2002.

It is in response to this evidence that the government is attempting to shore up expenditures in general and capital expenditures in particular. But even here, the pressure to prove to international financial capital that the deficit is being reined in, is forcing the government to rely on current revenues and surpluses grabbed from PSUs to achieve its goal. It is unlikely that this would have much effect, since there is a limit to such "expansionism". What the government needs to do is to give up its obsession with the fiscal deficit and use the opportunity offered by the large food stocks and foreign exchange available with it, to launch a massive food-for-work programme geared to building rural infrastructure, as well as undertake larger infrastructural investments that would improve utilisation in the demand-starved public sector. This would raise demand and output, increase employment and have salutary effects on poverty and productivity.

Though success is guaranteed if such an effort is initiated soon, it is unlikely that the government would opt for this strategy. To do so would be to disturb the tenuous equilibrium it has built vis-à-vis foreign finance capital, the IMF and the World Bank, as well as to openly declare that "reform" has failed to deliver because it is inherently flawed. That would prove the correctness of those who have held that reform of a different kind, involving structural changes that redress the deep inequities characteristic of the only capitalist path open to developing countries in the current international conjuncture, is the need of the hour. India’s elite, which the present State represents, can hardly back that position even implicitly.