Daily Times

The divergent view by many economists on the question how to lift millions out of poverty reflects the uncertain future of Asia’s third largest economy. An abridged version, that continuing the market reforms started when the Indian economy liberalised in 1991 would help create the growth needed to bring more citizens out of poverty. However, only by focusing on growth alone is not enough and that public expenditure on social programmes, especially healthcare and education, is vital to help the country meet its full potential.

Righting the grim fiscal landscape — and keeping India on an upward trajectory that will continue to improve citizens’ lives — has been a national priority since the country began to fall off its much admired so called high-growth path two years ago. On July 30, the Reserve Bank of India cut its growth forecast for the current fiscal year from 5.7 percent to 5.5 percent. This week, following the rupee’s fall to a record low earlier in the month, Prime Minister Manmohan Singh met with business leaders to discuss how to combat the weak currency and boost investor confidence. “The reason or debate is resonating now is because of what is happening in India — the sense that growth is slow, and that maybe the country is on the verge of a financial crisis,” says Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics in Washington. “Essentially, we have had three decades of reasonable growth, and the question is whether that model has run out of steam.”

The debate’s stark polarisation can also be traced to India’s other central preoccupation: politics. In down the line media scrum, the economists’ opposing philosophies have been shoehorned into the evolving narrative of national elections set for next year. The faction of economic experts support social-welfare programmes, a calling card of the ruling Congress Party; they have also openly criticised Narendra Modi, the recently appointed campaign chief of the opposition Bharatiya Janata Party. These remarks have led many in India to conclude that economists back Singh’s Congress-led government. Another group, for its part, has pointed to Gujarat, the state where Modi is chief minister, as a model of growth and social progress. Modi, a controversial and divisive politician because of the killing of at least 2,000 Muslims during unrest in Gujarat in 2002, is expected to go for the country’s top job next year.

What’s the right way forward for India? Most economists working in India today, says Partha Mukhopadhyay, a senior research fellow at the New Delhi–based Centre for Policy Research, fall somewhere on a “sliding scale” between reform-oriented growth at one end and government-led redistribution of wealth at the other. One instance the latter is the recently signed Food Security Bill, which aims to give some two-thirds of the population five kilogram of subsidised grain a month at a cost of billions to the treasury. But more important, Mukhopadhyay says, “If the Indian growth story is to happen, the state has to learn how to function.” In other words, if government spending on healthcare and education is not yielding higher quality and efficiency — which many argue it is not — then the money is going to waste. On the other hand, simply letting the state off the hook for underperforming in these areas, and counting on private-sector growth to pull them forward, is not practicable either.

While most economic juggernauts have been critical of advocacy of heavy social expenditure, they also doubt the contention by opponents and other free-marketeers that reforms alone will translate into the growth needed to reduce the country’s devastating poverty. “India is now one of the most open countries to foreign direct investment, but foreigners are not going to come in because they have absolutely no faith in the stability of the regulatory regime,” they argue. “The state has to do a lot of basic things that it’s not doing.” Ensuring that rule of law and basic services are functioning will be crucial to creating more growth and stopping the flight from the public sphere of more and more members of India’s growing middle class, who are increasingly seeking private health are, living in gated communities and sending their children to school overseas. Perhaps the question that Indian voters should be asking themselves today is not whose economic theory is correct, but who are the men and women in government who can make things right.

Apart from the discussion above, the economic upheaval has not been also curtailed for India’s love of gold, and the world’s weaker economy has caused a deeper than expected trade deficit on the subcontinent. India’s trade deficit rose sharply to $20.1 billion in May, significantly above the $16.4 billion average of the past year. Exports continued to disappoint, falling 1.1 percent year over year in May. Imports meanwhile rose 7.0 percent with its obsession of precious metals.

The wider trade deficit in India is mostly driven by a jump in gold and silver imports, which increased around 90 percent year over year to $8.4 billion in May. Oil imports remained balanced, totalling $15 billion versus an average of $14.7 billion in 2013 year to date. Only gold, for the moment, is the biggest stickler. Higher gold imports were partly driven by strong retail demand in April, Barclays Capital analysts said in a note to clients. However, with import duties being hiked substantially to 8% on gold and prices stabilizing at a lower level, Bajoria and his colleagues at Barclays say they expect gold demand to be significantly lower in June, and possibly remain low in coming months. “The widening in May might mark a near-term high for the trade deficit, and we think it could narrow significantly in June,” Bajoria wrote.

(To be continued)

The writer is a former Associate Professor, Government Degree College, Gujar Khan. He can be reached at profkschazad@yahoo.com