We have highlighted in some of our earlier writings (E.g., see I
and II)
that to achieve higher growth during
2004-2010 India has let structure of its
real economy severely tempered, though still not irretrievably.
The rush to accumulate cheap credit and unreasonably benefit from
often ill conceived policy relaxations, has lead to excessive debt both at
government as well as corporate level and dissipation of resources. This has
brought a lot of unmanageable demand forward in time. The consequences are
gross and extravagant misallocation of capital and unmanageable changes in
consumption patterns.
The following chart shows cyclically adjusted growth (5yr CAGR)
since first plan period. After growing 2-4% during 1951-1975, a steady progress
was made to 4-6% orbit in next 30years. However, a sudden spurt in growth
during FY05 to FY11 has led to serious distortion in macro framework of the
country, suggesting that (a) this high growth is unsustainable and unmanageable
and (b) the correction or descend back 4-6% orbit is going to be sharp and
excruciating.
Some structural deficiencies created by higher growth during
FY05 to FY11
·
Consumer inflation rose to 7-10% from 3-5%
·
External debt rose to US$306bn from US$134bn
·
Trade deficit rose to US$131bn from US$34bn
·
CAD grew to over 3% of GDP from under 0.5%.
·
Subsidies rose to over 2% from 1% of GDP.
·
Debt service ratio fell from over 16 to under 5.
·
Gross fiscal deficit remained around 7%,
suggesting effective tax incidence increased.
Corrections as said earlier, will be sharp and painful.
Also read:
Thought for the day
“The worst form of inequality is to try to make unequal things equal.”
-Aristotle (384-322BC)
Word of the day
Matador (n):
The principal bullfighter in a bullfight; a torero.
(Source: Dictionary.com)
Shri Nārada Uvāca
Q. How many ministers are there in India’s Union Council of Ministers?
Ans. P. Chidambram; and Umhh…ahh….hmm, that one what’s his name!
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