Pre-poll Goodies in Times of Falling GDP Growth

Prime Minister Manmohan Singh's government was looking forward to a "Jai Ho" moment with the electorate after the series of poll sops that have just been announced. But the GDP growth data released this week has put a dampener on its hopes as recessionary trends are much stronger than had been envisaged till now.

With a 5.3 per cent growth for the economy during the third quarter of the current fiscal, it looks as if the overall growth for 2008-09 will end up more in the region of six percent than seven percent as had been widely expected. The government cannot be blamed for being optimistic on this score since most economists had been expecting that growth would be around seven percent this year. Even this would have been quite a drop from the nine percent growth recorded for the last three financial years. 

But hopes had been pinned on agriculture which had recorded robust 6.9 percent growth in the third quarter last year. The low growth in the first two quarters of 2008-09 had not dimmed the hope that rural demand would be the savior for the rest of the year. In the event, agriculture has actually contracted by 2.2 percent, which is bound to spread gloom in the UPA as it looks forward to the general elections. 

Finance ministry spokespersons, however, are not wrong when they say the fourth quarter generally shows the highest growth and are claiming that the year could still end with seven percent. This is, of course, unlikely unless the fourth quarter records a whopping 7.7 percent growth. The plus point is that the prospects look bright for the rabi harvest in contrast to the previous kharif harvest, which saw coarse grains recording lower output. Agriculture remains the mainstay of the economy and if the rabi output increases as has been projected, rural demand may rise in the coming months, though perhaps not as much as had been hoped. 

In any case, the only conclusion we can reach after the latest GDP data is that India has been hit harder than expected by the global economic meltdown. The reason is clearly that the economy has become much more globalised than ever before after the gradual economic liberalization since the 1990s. Though India may not be as dependent on exports as China, it does have a large skilled workforce that relies on buoyant export growth for its sustenance. These include the large numbers of artisans in the gems and jewellery, handicrafts and textiles industries. Many of those laid off owing to low orders from abroad are going back to the villages. Reverse migration has become a reality and is worsening the financial plight of those in rural areas. The question is: will the economic stimulus packages unveiled by the government do the magic trick of revving up demand and providing the push for higher growth in the manufacturing sector. 

The latest round of measures, described as the third stimulus package by interim Finance Minister Pranab Mukherjee, are clearly in the nature of pre-poll sops for the electorate though they may help in pushing up demand. These include the wooing of central government employees with a six percent increase in dearness allowance. In addition, there have been cuts in excise duty and service tax which should translate into price reductions at the retail level. Also larger allocations have been made for urban housing plans, a scheme for affordable housing has been launched and major investments cleared for road development projects. 

Whether this will provide enough push to demand is still being seen, but the decision to make these two announcements while replying to the parliamentary debate on the interim budget was clearly taken for two reasons. The first was naturally the need to ensure that some popular policy measures are announced in the run up to the elections. The second was the all round disappointment and criticism of the lackluster interim budget which met the needs of constitutional propriety but not the demands of a crisis-hit economy and an electorate faced with growing across-the- board job losses. 

The advantage of cutting indirect taxes is that it puts money more directly into the hands of consumers and could help in pumping priming demand. On the other hand, it puts the government in a very tough situation as far as the fiscal deficit is concerned since the tax cuts will reduce revenue collections even further. At this point, however, there appears to be little option but to go down this road and clearly the rest of the world is also resigning itself to higher deficits while trying to push growth. 

But the latest GDP data has shown clearly that this is not a good time for a government to be operating in an interim mode. The government of the day needs to take bold policy decisions to be able to deal with the economic crisis that is clearly engulfing the country. As soon as the model code of conduct kicks in prior to the elections, the present regime's hands will be virtually tied and it would not be able to make any policy changes. This could be a dangerous situation at a time when the government needs to react quickly to the fall out of the global financial crisis on the domestic economy. For the time being, the pre-poll goodies being handed out may be sufficient but more measures may be required in the coming months and this may not be politically feasible. Thus one can only hope that the economy remains in good fettle till the next government gets into the saddle. 

(Sushma Ramachandran is an economic and corporate analyst. She can be reached at sushma.ramachandran@gmail.com)


More by :  Sushma Ramachandran

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