India’s growth story gone sour
by K P Prabhakaran Nair on 13 Feb 2014 4 Comments
Last week, in an important interview with the media, Raghuram Rajan, Governor of the Reserve Bank of India, said that if vegetable prices are controlled, the nation’s economy would be on the right track. What has the Reserve Bank to do with vegetable prices? The UPA government is about to close shop and winds of change and political turmoil are visibly seen. Those who govern, starting from the Prime Minister downwards, push the blame on international economic situation for the country’s poor economic performance, especially of the last three to four years. I think Raghuram Rajan is closer to the mark when he mentions vegetable prices contributing to a slide in Indian economy.


In fact, if we critically look at the Indian economic scenario, it is the downside of agricultural growth that is contributing greatly to our economic despair. If we go back into the history of development of any country in the world, and critically examine their economic path, we would realise that the country that progressed well first laid a strong foundation in agriculture. Agriculture is the primary sector, and without putting it on a firm ground, a nation cannot progress.


The course of development should be, first the primary sector which is agriculture, followed by the secondary sector that is manufacturing, and last, the tertiary sector services like information technology where there is a boom all over. Everywhere people only talk of the “IT” sector. True, it generates a lot of revenue, both internally and through export. But, when the economy is flooded with too much of paper money, chasing too little consumable goods, coming from agriculture, inflation is the result. Let us examine the situation critically.   


In three months, India will face the Lok Sabha election. Each party is coming out with promises, ranging from free water, the most basic human necessity, to bullet trains such as Japan has had for more than three decades. But, the most worrying aspect is the current Congress-dominated UPA which, without promising anything spectacular, is hanging on to the assumption that it has given India a decade of the best economic growth the country has enjoyed in the post-independence phase. The ground reality is far too different. Let me explain.


The much hyped India growth story was actually put in place by the predecessor to the current UPA government, the Vajpayee-led NDA government. It was during the NDA regime that annual growth, measured by the Gross Domestic Product (GDP), was running almost to double digits 10-11 per cent per annum. It has now come down to less than 5 per cent, and the future projections for the financial year 2014-15 are bleak. So, instead of blaming the international economic scenario for the Indian economic crisis, let us examine what is happening on the ground, here in India, to assess where we, or more precisely, the economic planners in New Delhi and State Governments have gone wrong. 


The balance of payments (BOP) and current account deficit (CAD), as of today, is cause of much worry. Food inflation is raging, the Food Security Act which will require mobilization of more than 62 million tons of food grains, will not only dent the economy badly, but India will simply not have enough grain to be procured from farmers. This is almost three times more than the minimum “Buffer Stock” requirement in the Food Corporation of India (FCI) godowns. If growth and inflation are the macro-economic indicators by which we are to judge an economy’s medium-term performance, what India is currently witnessing is a total reverse step, in fact a somersault, with double-digit growth during the NDA regime being replaced by double digit inflation by UPA II. Raghuram Rajan certainly has a point when he spoke about vegetable prices and the state of Indian economy. It does not need top class economic knowledge to understand the implications of what he has said. Please go to the market and make a survey of the vegetable prices and you will understand what I am saying here.


In fact, what we now are witnessing in the country is a kind of “implosion”. The real reason for the spiralling food inflation lies elsewhere. In fact, the current UPA government and whichever government is in place after May, is literally walking on a field laid with dynamite. The just concluded (in December) WTO meet in Bali (Indonesia) saw how the developed countries, in particular USA and European Union (EU), arm-twisted India on food subsidies, starting from the minimum support price (MSP) paid to farmers. The mindless mopping up of foodgrain, mainly rice and wheat, to fill the FCI godowns to meet the FSA (Food Security Act) requirement will trigger a huge cereal inflation, wheat 7 per cent and rice 15 per cent, more than double of wheat. Any action that will propel this higher cereals inflation should not be entertained. In November, Raghuram Rajan promised that wholesale price index (WPI) would fall to 6.5 per cent and retail inflation to 9.2 per cent. This simply has not happened, because of speculative grain trade.


The new buffer norm of 53 million tons, assuming an annual off take of 61.2 million tons for the FSA, a stock requirement of about 40-45 million tons is more than sufficient. The figure 61.2 million tons is based on a monthly requirement of 5.1 million tons. If one moves from the point that the buffer norm should include 3 months of supply requirement, which will be 15.3 million tons, and an equal amount as reserve, plus a strategic reserve of 7.5 million tons, the total requirement comes to only about 40 million tons. Hence, where is the need to assume that that buffer norm should be 53 million tons?


Clearly, there is something very fishy here. And the assurance of the central food minister that the excess procured grain can be stored in “pucca” and”katcha” godowns is simply foolish. We know how grains rot in the open FCI godowns and rodents make a feast of it. An excess inventory of about 13-15 million tons than what is precisely required will translate into an economic cost of close to Rs 38000 crores. What will happen to the food economy of the country? Food inflation will simply be uncontrollable.


As per the international weather report that this author has received, the next south-west monsoon is going to be “El Nino” - that means deficient monsoon. So, what will happen to our rice crop? And the following one of wheat in the cold rabi season, for which the mainstay especially in rainfed areas is the excess stored water received from kharif southwest monsoon? Clearly, the country is inching towards uncontrollable food inflation, and I wonder whether the agricultural ministry, both at the Centre and States is prepared for it at all.


Many factors are contributing to our growth story going sour. In 2008-09, there was only zero growth in agriculture. The actions of the government aggravated an already bad situation. The gradual spread and fraudulently managed MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) also contributed to the current mess on the economy. Rural wage growth increased sharply, adding pressure on food prices. We must remember that “food” constitutes a “basket”, not only of rice and wheat, the main staples, but others like vegetables, fish, eggs, meat, poultry and so on. And the prices are determined by the Government. The combination of poor farm growth coupled by Sixth Pay Commission hikes and the MGNREGS created a permanent excess demand for food. Vegetables come under this food loop. And the perennial low output escalated the inflation. Food production has simply not matched demand, hence the unstoppable food inflation.


The Finance Ministry is now turning to Mumbai. The RBI contributed its own havoc. Midway through UPA II, RBI raised the interest rate 11 times in succession. This while not controlling inflation had a very negative impact on manufacturing, which came to a halt. Instead of a growing economy what we see is a “cooling economy”. The UPA Government is spending enormous amount of money on infrastructure, while NDA had a steady growth in the sector.


On the whole, if one critically examines the picture of the Indian economy today, what we see is that the current situation is due mainly to its own wrong economic policies, and not due to the international economic situation. 

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