The Hindu Business Line : Read the right numbers

Judging by monthly data for various economic indicators the UPA government could be forgiven for assuming the economy is getting back on a growth track; industrial output data for August provide continuing evidence of an uptrend with expansion up 8.5 per cent during June-August, from around 1 per cent the previous quarter and a fall in output before that. Capital flows have been flooding in, fuelling the strong surge in the Sensex, the IPOs are lining up and the Government is readying for a round of divestment.

The shortfall in the monsoon created a scare among policymakers, who woke up late to the prospect of drought in many regions. Inflation is a worry that New Delhi has, however, left to the Reserve Bank of India. For its part, the monetary authority is confident it is ever ready to lift interest rates should inflation get out of hand. For now, the RBI will tolerate the rise in the rupee against the dollar because capital flows suggest a return of global confidence and that is just what the economy and the policymaker would like in plenty — a sense of assuredness that the organised economy is recovering lost ground.

But the pace of industrial output at this stage may not be the best indicator of sustained recovery to the levels of 2007 for it merely suggests that firms are picking up some of the slack prompted by the pick-up in demand following the stimulus packages and these have a short life; countercyclical government expenditure may have shored up demand and output but can it do so indefinitely?

Every government that has undertaken an active role in stimulating demand in its respective economies prays and hopes that private investment sentiments will revive enough to mitigate a mounting fiscal deficit. In the developed world, there are few signs of that revival; the same goes for India.

Reading it right

To get a sense of movement in the economy do not look at output data alone; look for signs of an uptick in private investments on the ground. Check out trends in gross capital formation to sense just how deep and sustainable the recovery can be. And, to get some perspective, look at the record so far of what the RBI calls demand components of gross domestic product (GDP).

Till 2008-09, both private final consumption expenditure and gross fixed capital formation contributed in a big way to the success story with exports adding a considerable bit and government expenditure trailing behind. Then contribution of government expenditure quadrupled to 32 per cent even as the share of private components of consumption and investments halved.

After September, exports too began a secular decline and slipped into the negative territory. The government stimulus packages and largesse in the form of the Sixth Pay Commission award pumped some life into consumption expenditure; perhaps investments too may spurt.

But policymakers shouldn’t bet on it because the field for investments suffers from major structural defects that the government has so far tip-toed around. That is where the crisis of growth manifests itself in social, political and economic terms.

Getting it wrong

Most policymakers would agree that the next phase of growth rests upon a new round of industrial capacity expansion. That means the extension of the core sector — both physical and social infrastructure. Most should also agree that, barring telecommunication, almost every other sector lags in its planned targets. That failure explains the limits of the next growth phase; those limits also lay the ground rules for UPA-II’s policy strategy.

In theory, New Delhi not only recognises those rules, it also articulates the game clearly: infrastructure has to grow and the inclusive agenda needs universal education and employment. Targets for roads and highways are set anew, ministries hit the road for global investments; a significant bilateral treaty with the US offers the hope of billions of dollars for infrastructure. Yet the UPA skirts the roadblocks to new investments in the core sector.

The most important of these is land availability. Soon after the Special Economic Zone Act came into existence, four years ago, New Delhi and State governments, despite growing evidence to the contrary, refused to consider the acquisition of lands as one of the most critical areas for urgent policy reform.

The problem is not simply the lethargy in pushing the amendments to the Land Acquisition Act through Parliament. Nor is it a problem of what constitutes the right compensation. The biggest flaw lies in the state abandoning its duty to mediate the transfer of lands from a host of uneducated and un-empowered peasants to capital-rich investors.

Land acquisition woes

The space vacated by governments as perceived impartial arbiters of the rights of economically weak land owners was filled by other agencies purporting to showcase and correct the unequal status of the land-owners and villagers in the bargaining process. From Singur in West Bengal to Raigad in Maharashtra and, most critically, in the States of Jharkhand, Chhattisgarh and Orissa, the story has been repeatedly told of rising agrarian and tribal opposition to what is perceived as rapacious capitalism, abetted by the state apparatus.

The state’s abdication of responsibility to mediate transfers of lands from individual peasants to impersonal and powerful corporations has already affected ambitious projects; Arcelor Mittal recently held delays in land transfers as the prime cause for a rethink on its proposed projects in Orissa and Jharkhand.

POSCO, Vedanta — the list of delayed projects in eastern India seems to be growing with Steel Ministry officials admitting that land acquisition problems are the biggest hurdle to the dozen-odd steel projects that are to more than double the country’s steel capacity by next year.

The traumas over land acquisitions that have erupted in violent resistance reflect a deeper crisis of agriculture, especially in eastern India that has to a large extent also created what the Prime Minster recently termed the biggest “internal threat”. Maoist-Naxal violence is not just an issue of law and order. More perniciously, the self perpetuating cycle of violence entraps the poor by cutting them off from any hope of deliverance from their abject poverty.

That cycle of violence may engulf the entire eastern region, with resistance to land transfers at some point intersecting mindless Naxal extremism. While New Delhi and the State governments’ resources are now channelled to combating a “law and order” problem, policymakers would do well to ponder just where they missed the right turn.

( blfeedback@thehindu.co.in)

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