'India and the global slowing', The Hindu, 4 January, 2001.
These must be trying times for anyone concerned with the fortunes of the Indian economy. In manufacturing, the sector of the economy that receives the most attention,
output is crawling. Over April-September, the recorded growth in the index of industrial production (`Manufacturing’) is 2.5 percent. In the Budget for 2001-2 the finance minister had spoken of a second generation of reforms that may be expected to take the economy to overall rates of growth at least three times higher. In February 2001 such hubris would go unchallenged. Internet mania had ruled and anticipations of an economy-wide spillover from the banquet in cyberspace were de riguer. Now all of this seems like distant thunder. Nor has it taken September 11 to trim the sails of the dotcom brigade and their camp followers. The usual delayed release of statistics for the
The prevalent tendency to link the slowing of the Indian manufacturing sector to the recession in the
The official explanation of the slowing of the Indian economy is that it signals the need for another round of reforms. However, for this to have purchase one needs to be convinced that the first round has succeeded. The bottom line really is an understanding of the drivers of growth. In this context, reforms work when they release the constraints that bind production. It is clear by now that the explanation of the resurgence in the first half of the nineties is that the policy shift of 1991 released supply constraints in place due to the extant policy of restricting capacity. This was eased with the abolition of industrial licensing. A considerable pent-up demand for white goods was then met by increased production of these consumer durables. But what of an underlying demand constraint in this very segment, or, more significantly for manufacturing output, in the wider segment of mass consumption goods? The reforms have proved less succesful in releasing the demand constraint in the economy than they have done in releasing the capacity constraint. An egregious instance is that of that big-ticket consumer durable, the motor car. The automobile industry in
Government have thus far acted, oddly enough, to release supply constraints of a certain kind while at the same time constricting the sphere of demand. Not all supply constraints have been released either. Capacity, after all, is only once aspect of production. Production can be hamstrung by infrastructural shortfall even when capacity is in place. It is not entirely clear that bureaucratic discouragement is a thing of the past either. The author of a study undertaken for the Asian Development Bank reports the statement of a trade association in Kerala that an application to start a business in the State must stop at seventeen staging posts. Thus we see that all that has happened since 1991 is that supply constraints that could be eased by the Centre by a stroke of the pen have been done. In this category we have industrial licensing and, for supply-side economists, the personal income-tax rate. However, it is difficult to spot a single action in the past decade that has expanded demand. Indeed, there is sufficient reason to believe that the government by its actions has actually made things worse on this score. One can think of two factors on the demand side that have actually contributed to the slowing of the economy since 1995. These are the decline in public investment and the increase in the price of foodgrains, both firmly the responsibility of the central government.
In complete contrast to the rhetoric of market-determined outcomes the present government have continued the practice of raising the procurement price of foodgrains beyond the inflation rate. This has two consequences, both adverse. First, it imposes hunger as some households tug at their purse strings. Next, it leads to a constriction of demand elsewhere in the economy where potential household-spending declines. The terror that
The second of the demand-side factors, one that has received far too little attention, is investment both public and private. Private investment never really took off after 1991, indicating a certain failure of the reforms to significantly alter the incentive structure. But much worse, public investment – gross fixed capital formation - has fallen since 1991 and is on average lower than that registered in the 1980s. Public investment has two positive influences. In the first instance, it is a source of demand when purchases are made from domestic firms; but it is also eases a supply constraint when it goes to strengthen the infrastructural base. In both instances, in two distinctive ways and contrary to the conservative predilections of the group of economists recently convened by the government, it shifts positively the incentive for private investment. Empirical research on the
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It is necessary to see the current economic situation in
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