Never has the doom and gloom bandwagon been so full. Speeches at annual general meetings are variations on the "things fall apart" theme. Magazine covers scream of a "meltdown" in the economy. Moody's has downgraded the country's rating. And now research outfits have added their imprimatur to the anecdotal evidence. The Centre for Monitoring Indian Economy as well as the National Council for Applied Economic Research have revised their estimates for GDP growth downwards. The NCAER has forecast GDP growth of 5.5 per cent this fiscal while the CMIE puts it at 4.5 to 5 per cent.You don't need a doctorate in economics to predict that with a slowdown in industrial growth, a weak government, and economic sanctions, GDP growth is going to be low. We've had the first two of these conditions for over two years now. What, then, is new about the forecasts? The NCAER study has lowered its sights because its last estimate was made before the budget, and the push to investment provided for in the budget has not been upto expectations. The sanctions will lead to lower private investment as well.
Hence the need to revise the forecasts. The CMIE projection hinges on lower foodgrains output and agricultural growth of only 0.7 per cent, on account of a weak monsoon. This would reduce consumption demand, affecting industrial production adversely.
The predictions for the monsoons have been made very early in the season, after studying data for just one month's rainfall. Predicting the full impact of the monsoons so early is a risky proposition, and falls in that grey area between economic forecasting and soothsaying. Agricultural growth was negative last year, but the growth in tractors and motorcycles sold, and fertiliser consumption, all proxies for agricultural demand, continued to be healthy. Forecasting a fall in agricultural demand could, at this stage, be more a function of prevailing pessimism than based on hard facts.
That said, there are, of course, plenty of reasons for worry. There is clearly a lack of effectivedemand. Plagued with excess capacity and a squeeze in profitability, corporates have been understandably hesitant to commit resources to new investments. The weak government has resulted in a policy gridlock, the effects of which are clearly brought out by the startling statistic that only 0.5 per cent of the total investments proposed in the power sector have been converted into completed projects. The long-term remedy, repeated ad nauseam, is structural change. The short-run solution to increase effective demand, also repeated time and again, is for the government to rapidly step up investment spending.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
