The Hindu Business Line : Fretting about growth decimal points

For weeks, there has been discussion about estimates of India’s GDP growth this year. The quibbling is if it’s 6 per cent, 6.5 per cent or 7 per cent and above.

Does it make a difference? After all, there’s not much separating the numbers thrown around. One understands that 3 per cent or 4 per cent is much less than 6 per cent or 7 per cent. But is the gap between 7 per cent and 6 per cent even worth talking about? In any case, there’s a spurious accuracy about these numbers, marking the definitive reason why the debate is trivial.

Critical issues

It’s a pity that discussion is not rising to touch the several critical issues that abound.

Among them are exchange rate policy and management. How does an appreciating currency impact key sectors of the economy?

Are capital flows contributing to productive investment or setting off an asset price spiral?

Instead, economic debate is stuck in the narrow groove of financial reforms and rupee convertibility.

It’s not just woolly-headed Left wing economists who oppose free capital flows. Those like Dani Rodrik and Arvind Subramanian, who are part of avowedly mainstream institutions like the John F. Kennedy School of Government at Harvard and the Peterson Institute for International Economics, think capital mobility is economy destabilising. In fact, the original idea that liberalising capital movements is different from trade liberalisation came from Jagdish Bhagwati. He was one of the earliest to strongly advocate the latter for India and other developing countries and also one of the first to warn of the risks of the former.

When India did finally move towards free international trade, it forced industry to become globally competitive (although not without a period of pain after having enjoyed protected domestic markets for years). The Government wisely followed a supportive exchange rate policy.

Rupee swings

Wittingly or otherwise, exporting sectors are now being exposed to the vicissitudes of wide swings in the rupee. Just the past two years have seen the currency rise from Rs 49 to Rs 39, back to Rs 52 and now Rs 46 and thereabouts. Taking the back and forth movements, in a crude sense the volatility is 50 per cent! How much havoc such wild and unpredictable fluctuations can wreak on otherwise sound businesses can well be imagined. Understandably, in this environment, a number of corporates have fallen prey to derivatives products ‘promising’ they would insulate currency losses. A good bit of the blame for the huge damage done by derivatives on India Inc.’s balance-sheets in the last couple of years can be apportioned to the unstable rupee.

There are far more important issues than fretting about the exact growth rate. If we neglect those, we risk severely hurting growth itself.

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