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Can we at least rescue growth?
Issue Date - 27/10/2011
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A decade down the road, instant historians will perhaps marvel at this paradox: how a bunch of absolutely true blue brilliant people managed to destroy growth prospects for India. Just look and marvel at the names: Manmohan Singh, Pranab Mukherjee, Jairam Ramesh, P. Chidambaram, Montek Singh Ahluwalia, Kaushik Basu, D. Subbarao…. Each name is brilliance personified. And yet collectively, these pilots of the Indian economy are failing to prevent a crash landing of growth.

The automobile industry is a reliable indicator of what exactly is happening with the economy. And the message from this bellwether sector is stark and ominous: growth prospects are tanking. For three months in a row, sales of cars have been lower than last year. The industry clocked a growth rate of about 30% in 2010-11. In the first six months of the current fiscal, the growth rate is just about 1%. Auto companies have slashed growth forecast from 20% and more, to less than 2% this year. Worse, there is now a dramatic slowdown in the sales growth of commercial vehicles, including auto rickshaws. Even a child can tell you that the RBI decision to raise interest rates 12 times in less than two years is responsible for this calamity. Sales of two wheelers – which are not so dependent on auto loans, have maintained a healthy growth rate. It is only the growth in four wheelers that has crashed. Don’t forget, each automobile sold generates many jobs that range from garage mechanics, workers in tyre factories, workers in accessory plants, attendants in petrol pumps to financial sector executives who process auto loans. So such a drastic slowdown in the auto industry is not hitting just the rich and the middle class, it is deeply hurting the lower middle class and the poor who depend on this industry for jobs.

As worrisome as the astonishing decline in growth of the auto industry is the fact that excise duty collections in September this year have been lower than last year. Many economists are suggesting that this could be an aberration. But I don’t think so. There have been clear indications since January this year that economic activity and sentiments are being adversely affected. No one is now talking about a GDP growth rate of 8%; most will be relieved and happy if GDP growth rate in the current year manages to reach even 7.5%. The opportunities lost for India because of this avoidable tragedy are huge. Better managed, the Indian economy, like the Chinese economy, should grow at at least 10% a year. What does this unrealised 2.5% mean. In purely statistical terms, it means the economy is losing about $75 billion each year. In human terms, the tragedy is even more painful because this failure means persistence of poverty, unemployment, malnutrition and worse.

And what have Indian policy makers achieved by behaving like monetarist hawks? Food inflation is still in double digits, hurting the poor where it hurts them even more. And the Rupee has tanked to almost Rs.50 against a weak dollar – a fact that will worsen inflation. Can any one of these brilliant people at the helm of the Indian economy explain this mystery?

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