Economic policy can’t be populist
The government must focus on reviving investment growth
The government is shortly expected to announce a package for the economy. There’s need for one: the rate at which the economy grows has been falling for six quarters now. It is understandable that the government, which came to power at least partly because of its predecessor’s mismanagement of the economy, is concerned.
It is important, however, to understand the nature of the problem. Growth has slowed in part because of the impact of one-off shocks such as demonetisation and the implementation of the goods and services tax (GST), but in other part, because of fundamental structural factors. It is entirely possible, as the effect of these one-off events wears off, that there will be at least one GDP number before the end of the year that will surprise everyone pleasantly.
Fortunately for the government, neither inflation, nor the rising current account deficit is as yet a structural problem. The rise in inflation was expected, and the current account deficit is backed by healthy capital flows (although it makes sense to keep an eye on the import of electronics and gold). Nor should the government respond to the growing clamour surrounding fuel prices – the decision to not pass on the benefit of lower international crude prices to consumers helped the government shore up its finances – or demands for an even looser monetary regime. Smart management of the fiscal deficit, and a tight monetary policy by the Reserve Bank of India have resulted in significant macro-economic stability. This has been hard-won and shouldn’t be sacrificed at the altar of populism – at least not entirely so.
The government should focus on reviving investment growth through public investment while resisting the temptation to announce populist sops that temporarily boost consumption. Incentives for exporters would work, though, and provide a quick-fix, although their benefits are likely to be limited. An aggressive disinvestment policy and the anticipated extra revenue from GST could give the government enough room to spend more. It is the only long-term solution to slowing growth.