Falling GDP: Who’s to blame?
The drop in GDP growth to 5.3 per cent for the January-March quarter (6.5 per cent for the year, down from 6.9 per cent projected earlier) to levels not seen in nine years should not come as a shocker. The GDP has been falling quarter by quarter for some time, and there has been constant concern for the past one year that the private sector is not investing, but nothing was done to tackle the root causes despite the fact that private investment forms the bulk of our GDP.
Finance minister Pranab Mukherjee has blamed the Reserve Bank for high interest rates, and while it is true the RBI has raised interest rates 13 times since October 2010, each time it has been compelled to do so with the government failing to take fiscal steps needed to meet supply side constraints. These constraints fuelled food inflation, which then spilled over to manufacturing. High interest rates of 10-13 per cent for creditworthy corporates has certainly stifled growth: margins are not large enough to absorb such high rates. Demand has also slowed, and many companies can’t utilise even 70 per cent of their capacity. The RBI needs to cut interest rates immediately by at least one per cent, if not more, for growth is as important as inflation concerns. And the RBI must remember it is not the sole guardian of inflation.
Where do we go from here? Many alarm bells have been sounded in the recent past, so what will it take for the government to get into serious action mode? The government itself admits the oil companies are losing around `507 crores every day due to subsidies on diesel, LPG and kerosene. But it dithers, and delays taking decisions at moments when a small increase would not stoke inflation too much. So matters are allowed to escalate till a crisis reaches unmanageable proportions, and then the government is caught in a trap, largely of its own making. The finance minister assures us the government will take the “necessary steps” to stimulate growth. This does not enthuse the country, India Inc or investors, or inspire confidence. The recently announced austerity measures are also vague, if not hollow.
And while India Inc offers its agenda for growth, it’s imperative that it spells out what it will offer in return. While interest rates are high, there is research showing other costs like raw material are significantly higher, and that margins can be protected if prudent cost-cutting measures are adopted. There are so many opportunities to be exploited given the rupee’s steep depreciation, but one does not hear India Inc collectively enthused to take advantage and use domestic capacity, cut expensive imports and spur growth.
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