People's Democracy

Editorial

Growth Optimism � Reality Check  

THIS Tuesday (September 1) the prime minister chaired a full meeting of the Planning Commission to discuss an agenda paper on the economic situation and the progress of the eleventh plan targets. The agenda paper painted a rather rosy picture by indicating that India's GDP grew at 6.1 per cent in the first quarter of the 2009-10 fiscal year. This is considered a significant improvement from the 5.3 and 5.8 per cent in the previous two quarters. From this it is being projected that the worst is over and India has been able to overcome the impact of global recession. By 2012, India is expected to reach a trajectory of a 9 per cent GDP growth rate.

The Planning Commission deputy chairman has announced that the GDP growth would average just 7.8 per cent over the 11th plan period (2007-08 to 2011-12) as against the targetted 9 per cent. However, this would mean lower revenues and hence lower availability of resources to meet the planned targets and ambitious expenditure programmes. The Planning Commission has projected a massive shortfall of Rs 1,60,000 crores over the next two years. This in itself dampens the optimism that the prime minister and the Planning Commission seek to generate.

Further, much of the resilience that the Indian economy has shown against the global recession has been due to greater governmental spending as well as healthy private consumer expenditures. The government's share of expenditure increased from 9.6 per cent of GDP to nearly 10 per cent this year. This is mainly due to the fact that the 15th General Elections were held during this period. The expenditure's connected were larger than any stimulus package could have generated and importantly they directly reach the people without any middlemen or losses suffered due to faulty delivery mechanisms.  This however is only a one time expenditure and hence to be optimistic that such levels of spending will continue for the rest of the planned period would be highly erroneous.

As regards private consumer expenditures this fell from 58 per cent to around only 56 per cent in April-June this year. Even these levels were attained primarily due to the consequences of the sixth pay commission and extra monies put in the hands of the people. Even this is a one off expenditure. Thus, a surge in consumer expenditure obviously cannot be sustained.

In the light of this, to project an optimistic picture would be misleading. This is reinforced by the fact that the ongoing drought situation is estimated to lead to a decline in nearly 30 million tonnes of foodgrain production. This would mean that agricultural GDP may contract by as much as 6 per cent from the 2.4 per cent growth registered this March. From a plus 2.4 per cent we could move to a minus 6 per cent situation. The shortage of foodgrains coupled with spiralling prices of all essential commodities will leave very little income, in the hands of the people to be spent on other commodities. This is bound to effect manufacturing sector which in turn will impact upon the services sector. The services sector which accounts for nearly 60 per cent of the total GDP grew at 7.8 per cent compared to 10.2 per cent in the same period last year. Industrial sector, in the first quarter of this fiscal has performed below the six per cent growth witnessed during the first quarter of the last fiscal.

The import-export situation also does not appear very encouraging. India's imports fell by 37 per cent in July outpacing a 28 per cent fall in exports compared to last year. This may well improve the trade deficit of the country but does not augur well for the economy's future. Decline in imports reflects a decline in domestic production activity. The non-oil imports declined by nearly 25 per cent which means that industry and manufacturing sectors are in a state of stagnation at best. Exports of commodities fell for the 10th straight month in July giving a clear signal that the optimism on the economic growth front does not reflect in the foreign trade front.

The RBI in its annual report for 2008-09 forwards a lower estimate of a 6 per cent GDP growth rate for this year. The RBI however has warned of serious consequences of the expansionary fiscal positions taken by the government, in the name of `stimulus packages' and the consequent monetary policy of very low interest rates will lead to future inflationary pressures adversely affecting the economy.

It is therefore clear that while the economic optimism may create a `feel good factor' it is far removed from a real assessment of our economic fundamentals. In order to overcome the huge shortfall of resources for the plan targets the prime minister and the Planning Commission have once again emphasised the importance of public private partnership (PPP). In a situation of global recession where private capital is mainly relying on bailout packages advanced by the governments, to expect them to come in a big way to invest in infrastructural development is unrealistic, to put it charitably. It also has the danger of allowing the private sector to recover and consolidate its profit generating capacities at the expense of the public sector and people's resources. This would only mean that India will also follow a policy that puts profits before people, as discussed in these columns last week.

What we need is an approach that puts people before profits. This can only happen when the government directly hikes public investment substantially. This would generate employment at a time when unemployment is on the rise due to the global recession. Such employment generation would generate higher levels of aggregate domestic demand. This in turn would lead to a sustainable stimulus for the growth of industrial and manufacturing sectors. This is the only way in which relief could be provided to people who are under a multiple onslaught through rising prices, rising unemployment and food insecurity due to drought conditions.

The initiative taken by the CPI(M) in convening a national convention on these three issues recently in the capital has now led to a joint decision by the Left parties to conduct a countrywide movement on specific demands to alleviate the people's sufferings on these three counts. It is the strength of such popular struggles that must force the government to implement such policies which put people before profits.