Appropriating Growth's Dividends

The recently released estimates of gross domestic product (GDP) at factor cost for the first quarter (April-June) of the current financial year coupled with those of the last q uarter (January-March) of 2010-11 suggest an early, premature deceleration of the economy after an impressive recovery in 2009-10 from the adverse effects of the global financial crisis. Viewed in the aggregate, the first quarter real GDP growth rate of 7.7%, even when compared to last year’s corresponding figure of 8.8%, is high enough. But the slowdown in manufacturing is worrying, so too in mining and quarrying and in construction. Interestingly, just 10 days before the release of these figures, the prime minister told a select group of journalists after an extended meeting of the full Planning Commission that “second generation reforms” were essential if the intended GDP growth rate of 9% for the TwelfƚŚ Five-Year Plan was to be achieved. For big business, the more recent “evidence” of deceleration of the economy is all the more reason to push its policy wish list.

In June-July, when the completion of two decades of the initiation of “economic reforms” was being celebrated, India’s high growth since 2003-04 was being attributed to these reforms. This was an implicit acknowledgement that in the decade after the i ntroduction of reforms – up to 2002-03 – there was no significant growth acceleration over the 1980s. It was only with the very significant step-up of net capital flows as a proportion of GDP from 2003-04 onwards, and with it the creation of the wealth effect, the expansion of consumer credit and the fresh release of animal s pirits that elite consumption and private investment-led growth took off. But, again, such growth had its inevitable limits, and when the financial crisis struck, it was the public sector banks that saved many a real estate and airline business from the brink of bankruptcy, and the Keynesian revival package that the government put in place together with the Sixth Pay Commission awards rescued the economy from recession. Then, with the revival of net capital inflows in 2009-10 and a return of sorts to the elite c onsumption-cum-private investment-led growth model, industry recovered, and with the demand for capital goods gaining m omentum in the second half of the year, all seemed well again.