The congress meltdown at Delhi, Rajasthan, Madhya Pradesh, Chhattisgarh etc. etc…….maybe the list will end with general elections of 2014, which may mark the end of congress dynasty rule in India. Rahul Gandhi has made stump speeches but failed to win sufficient backing. Even the aggressive campaigning ahead of the vote by all party members didn’t secure them votes. There’s an anti-Congress tsunami!
Corruption, scams, Delhi gang rape, ignorant attitude of the party members and not to forget our mute prime minister, maybe regarded by many as the reasons for UPA’s defeat. But I personally believe most of them are long forgotten and now the major threat to congress that may have occupied their mind is the high persistent inflation touching a new high of 11%, declining growth rate (expected to be less than 5%) and the excessive volatility of the rupee.
But here’s the turning point…it’s not all gloomy and despondent in the UPA camp. They have a saviour too…their hero and saving grace; the renowned economist DR.C. Rangarajan, former Chief Economic Advisor of India. So what did he do…let’s find out his magic formula of how to grow at 8.5%.
The fact is that over the eight year period beginning 2005-06, the average annual growth rate has been 8%. But the major question that needs to be addressed is that whether India has the potential to grow at a sustained rate of 8-9% or it was just a one-off case of robust growth that India experienced (maybe lady luck was wooed by India for a while!)? In order to get the answer to this question, we need to see what have been the trends in recent past i.e. in order to determine the potential rate of growth of the economy, one can take the maximum growth rate achieved in the recent past as the lowest estimate of the potential, if there is a reason to believe that the growth rate achieved was robust.
India achieved its maximum growth rate of 9.5% in 2005-06 followed by 9.6% and 9.3% in subsequent years, which is quite obvious that the rates achieved were robust. The domestic saving rate, gross capital formation rate averaged around 30%. The current account deficit remained low. In the wake of housing bubble burst in US, growth rate began to decline, slowed to 6.2% in 2011-12 and now it may even be below 5% among the growing uncertainty.
This clearly shows how the Indian economy has been too dependent on skittish foreign investment and foreign demand to finance their growth ambitions. Indian economy is greatly linked to the international market, hence any changes in foreign demand and inflows will surely impact the Indian markets. However, this trend gives an indication that India cannot sustain its own growth and also represents instability in the Indian economy, and represents its excessive volatility.
Now various academicians and economists attribute the slump in growth to a decline in investment. However, according to C Rangarajan, the gross fixed capital formation rate was around 30.6% in 2011-12 against 32.9% of GDP in 2007-08 and the decline for the private corporate sector was 4.6%. Now the question is, if there was not much difference between the two, then in normal circumstances it should warranty a growth rate of at least 7%, but the actual rate was only somewhat around 6%, which is surely less than expected. He believes that the delay in completion of projects, non availability of raw materials may be the primary reasons. He has provided relief to the UPA by pointing out the fact that, saving and investment rates are at high levels, so if we are able to find ways to combat the 2 issues mentioned above then the growth will follow even in short run, which can be a great move for Congress ahead of 2014 elections[long term fundamentals are intact but there is a need to address the prospects and issues governing the economy in short run, which the government is trying to through formation of various commissions(congress is paying special emphasis on this trying to gather and secure the bits and pieces of its rule)
However we also need to examine some macroeconomic fundamentals that are important parameters indicating the economy’s health
Gross domestic savings rate – which fell by 6 percentage points between 2007-08 and 2011-12(most of it was contributed by decline in public sector savings)
Investment rate– which fell around 3 percentage points between the 2 periods
Current account deficit – which increased from 2% of the GDP in 2007-08 to 4.2% in 2011-12.
Fiscal deficit– a sharp increase in fiscal deficit from 3.5% in 2007-08 to 5.9% in 2011-12
As the 4 parameters above that indicate there was a deterioration of the macroeconomic fundamentals of the economy, which has been seen as the major cause for the exaggerated impact the withdrawal of QE3 (the final round of quantitative easing) had on the economy.
So here’s the Rangarajan recipe for higher growth rate- increased domestic savings, fiscal consolidation, modest current account deficit and productivity of capital need to be increased, which is not even that tough, India just needs focussed efforts on these 4 fronts, along with that there’s a need to foster an atmosphere of stability and trustworthiness for rapid and robust growth – a suggestion that has possibly been the least implemented. Well, the magician can only give you his trick, the performance lies in the hands of the protagonist only!