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- An economic assessment of the year gone by

As I write this, only a few hours of 2010 are left. This time last year, I ended my column for The Telegraph by observing that the finance minister had predicted a growth rate of over 8 per cent for the Indian economy, and that the pronounced improvement in the global environment was likely to ensure that the finance minister’s forecast for 2010 would come to be true.

Everything has not quite worked out according to this script, as far as the international scenario is concerned. In particular, several European economies, such as Greece and Ireland, have been in the throes of a deep financial crisis, and only generous help from the European Central Bank and the International Monetary Fund have enabled these countries to avoid total collapse of their economies. The crises in these countries, as well as the precarious state of some other European economies, have been so severe that there was indeed talk of giving up the euro as a single currency.

Fortunately, despite the somewhat uncertain external environment, Pranab Mukherjee’s forecast has proved to be true. The Indian economy has been thriving, and we have had a year of close to double-digit growth. Moreover, the year has witnessed balanced growth with virtually all sectors contributing to the growth process. Some sectors have reached truly stratospheric rates of growth. For instance, both the capital and consumer goods sectors grew at over 20 per cent. Even the agricultural sector, which has often constrained the overall rate of growth, performed much better than expected.

There is no doubt that India is now an important player in the world economy. In terms of gross domestic product, it is now the 11th largest in the world. Our growth rate during 2010 and future prospects of sustaining this high growth path are sure to consolidate this position. Of course, the absolute size of the economy is somewhat misleading because this ignores the size of our population — we fare far poorer in terms of per capita incomes.

Nevertheless, we do provide a very large market for other countries. It is not surprising that leaders of the five permanent members of the United Nations security council have visited India this year, accompanied by large numbers of officials dealing with economics ministries. “Economics” occupied centre stage in the bilateral talks, with trade and investment agreements capturing newspaper headlines. We have truly travelled a long distance from the days when our finance ministry officials would travel to the World Bank and IMF headquarters with begging bowls in hand, pleading for foreign aid on concessional terms.

But we should not let this newfound respect from international leaders lead us into a false sense of complacency. To what extent is the high aggregate growth rate an illusion of success? On several counts, chief amongst them being the very high rate of inflation throughout the year and the rampant corruption, there is little reason to award the government anything more than a passing grade.

For much of the year, foodgrain prices have been galloping upwards. In the last couple of months, prices of several vegetables have also been increasing very fast. The government has seemed completely clueless about how to control the rise in prices — all that it has offered are assurances from various finance ministry officials that the rate of inflation would fall “in the near future”. Despite holding on to huge stocks of both rice and wheat, it has not been able to evolve a viable mechanism to release the grains into the market so as to augment supply. This failure to release government stocks has actually aggravated the problem because its procurement policy sucks away such a large fraction of the annual production every year, thus leaving a correspondingly smaller amount for the market.

To some extent, the government is less culpable for the rise in vegetable prices. Rising incomes have caused a shift in demand patterns. Indians are now consuming more vegetables and dairy products. There has been no corresponding increase in supply, and so there is very little the government can do about the rise in prices of vegetables which are not traded in international markets.

But consider the recent skyrocketing of onion prices. This has been the result of unseasonal rains which destroyed a part of the onion production. It did not require any rocket science to predict that this would create a strong upward pressure on prices. The government should have acted immediately by banning onion exports and arranging for imports from neighbouring countries, thereby neutralizing the demand-supply imbalance. Unfortunately, these are actions that the government undertook long after the sharp rise in prices. Unfortunately, this sluggishness in government response has not been a one-off event — it has come to symbolize the public decision-making apparatus in recent times.

Consider, for instance, the Central government’s response to tackling corruption in public affairs. The corruption involved in the Commonwealth Games and the awarding of 2G licences is too well-known to require elaboration. There seems to be little doubt that the public exchequer has been deprived of truly gigantic sums of money. And there is no doubt that this was common knowledge within the highest circles of the Central government. And yet, the government refused to take any action until pressure from the media and a determined Opposition left it with no other option. This is certainly a chapter that the United Progressive Alliance ministry will want to erase from the record books.

This leaves us with the obvious follow-up question. What have been the positive achievements of the current government during the current year? It is perhaps fair to give the government some credit for the very commendable performance in so far as the rate of growth is concerned since this is in part due to the package of stimulus measures implemented by it. But the overwhelming bulk of these measures were adopted last year.

During the current year, there has not been any step taken by the government in initiating reforms, big or small. In fact, if one is to judge from the noticeable lack of any discussion in the media, reforms have vanished from the government’s agenda. If anything, we seem to have moved backwards on this score since the deadline for the implementation of the unified goods and services tax has been pushed back. The seeming paralysis affecting the government does not augur well either for the economy or for the electoral prospects of the Congress party, the principal party in the UPA coalition.

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