FROM BUSINESS WORLD OF 5 DECEMBER 2006
Dreaming of 10 per cent
The finance minister smiles in the midst of darkest times,
but the smile seemed broader when he announced the quarterly GDP growth
estimates last week. When asked about his expectations for the current
financial year, he said they knew no limits. Such cheer, such optimism, such
vaulting ambition, are not native to managers of economies, who tend to be
rather portentous, brooding, beetle-browed worthies. Although the kudos belongs
to economy, some of its shine rubs off on the messenger of its good fortune,
which none can grudge him. The sunshine is as much for him as for us to enjoy.
Quarterly growth figures are
about as significant as the outcome of a one-day international. Just as there
will be another day and another ODI, there will be another quarter and another
set of figures. It would be better if members of Parliament exhibited
transports of ecstasy or bursts of rage over GDP figures than over cricket
matches. But they do what they are good at; whether they are good at cricket or
not, they are no good at managing the economy. So it is just as well they are
clueless about growth; the economy is probably better off for their neglect.
The growth rate in
April-September is the highest semi-annual growth in recorded history. The
recorded history reaches back only eight years; before 1998, growth figures
were more likely to disappoint than exhilarate, so the government did not come
out with them more frequently than once a year. Even now, the data on which
quarterly figures are based are skimpy; the only reliable figures are the final
annual ones, and the Central Statistical Office takes over a year to publish
them.
Whilst this scorching growth
may be a flash in the pan, a look at the past three years suggests that it is
not. The 2006Q3 growth of 9.1 per cent comes on top of 8.9 per cent in the same
quarter last year, which makes 9 per cent over a two-year period. This growth
is not based on accidental factors or base effect; there is greater likelihood
that it will stay.
The realization that it will
is reflected in financial analysts’ forecasts for this year. Those made last
year hovered around 7 per cent. The habitually cautious analysts were tempted
by the figure but could not quite bring themselves to touch it; their forecasts
clustered in the 6.5-6.9 per cent range. Then, as one dazzling quarterly figure
followed another, they one by one started pushing their forecasts gingerly
forward. Even now, none of them is prepared to stake his head on 9 per cent for
this year; after the next quarterly figures come out at the end of December,
they will – just a quarter before the end of the year of forecast. Growth
forecasts are more often the product of constipated imagination than of solid
technique.
Whilst 9 per cent is within
reach of analysts’ imagination, 10 per cent is still only in the realm of the
finance minister’s dreams. One dark cloud that figured in his dream was
inflation, hovering just above 5 per cent in the past few weeks. He banked on
good harvests. To leave it to the weather gods befits a good Hindu. He also
placed some confidence in supply management, by which he no doubt meant release
of foodgrains and sugar. No wonder the government does not believe in freeing
agricultural markets.
But the finance minister has
no doubt read Milton Friedman, who had another view on inflation. In his view,
inflation was an entirely monetary phenomenon. Applying it at home, inflation
is entirely due to the fact that the Reserve Bank ensures money supply growth
of 15-16 per cent – indeed, forces it to growth at that rate. Given that the
economy is growing at 9 per cent and given some monetization of the economy, it
thereby mandates inflation of 5-6 per cent. If Mr Chidambaram asked RBI to
bring down money supply growth to 10 per cent, inflation would stop in its
tracks.
But he will not do it because
the government needs that extra money. Money issued by RBI is a perpetual
interest-free loan by citizens to the government; which finance minister would
give up loans that he never has to repay? And the government’s banks live on
infusions of money; the greater it is, the more they can lend. So unless the
government cures itself of addiction for fresh money, inflation cannot be
brought down. Let us be thankful that the government limits money supply growth
to 16 per cent and inflation to 5 per cent; that is our good luck.
