What are your concerns going forward for the India growth story? Where are the question marks arising from?  What developments can make us optimistic?   

 The critical concern is on how the government reacts to this slowdown.  Short term growth is important, but long term economic and financial stability is much more important.  Despite the fact that I have been one of the most vocal critics of the government, I think that on the whole the economic management has not been too bad, at least initially.  But the last few months have been quite bad.

Many macro-economists are calling for greater and greater government expenditures.  And that is making me very uncomfortable.  There is an ongoing growth story at the very minimum at the 5% level and likely to be at the 6% level.  Things are not, in the aggregate, as bad as the corporate sector is making it out to be.  Of course, many sectors in the organized sector have been very badly hit.  But it is not the government’s job to save the organized sector at the cost of the economy’s long term growth.  And long term stability and growth will be impacted if public sector investments are ramped up, and the government liberally spends the money it does not have.  You cannot costlessly keep on increasing the deficit – and you don’t need to be a PhD in macroeconomics to know that.  Something somewhere will give if the deficit figure reaches (say) 15%.  It already is at the 10% level.  So if the government goes on an unconstrained spending spree, something will go wrong somewhere - inflation, exchange rate, crowding out of private investment - we cannot tell where the problem will show up, but some gadbad will happen.

 I am still optimistic on India though many seem to be pessimistic (and I was pessimistic when everyone was optimistic on our capital market boom.)  On the whole our institutions are functioning well, and there is significant divergence of opinion on issues related to the macro-economy – that is good, as this debate forces our government and institutions to think through in detail the various ramifications of their actions.

Last 5 posts by Laveesh Bhandari

• Irrelevance of the State and Naxalites - September 25th, 2009
• Handling Naxalites - August 8th, 2009
• Trust and economic foundations of peaceful progress - August 8th, 2009
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• Need for introspection - August 7th, 2009

Tags: india's growth story

This entry was posted on Tuesday, March 3rd, 2009 at 3:02 pm and is filed under Consumer Markets, Indian Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.