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Return of Keynesianism

The Indian economy is growing when most of the world's is shrinking, but by our own standards, we are not doing well

On February 9, the Central Statistical Organization estimated that the Indian economy will grow by just over 7 per cent during the current financial year than ends on March 31, against an average of around 9 per cent in the four previous years. In other words, India will be better off than most countries in the world. That's the good news. Here's the bad news. The worst is not yet over.

On January 28, the International Monetary Fund claimed that during 2009 the world economy would grow by just 0.5 per cent, the US economy would shrink by 1.6 per cent, the economies of Germany, France, Italy and Spain would become smaller by 2 per cent while Japan's economy would contract by 2.6 per cent. By way of contrast, in the current calendar year, the gross domestic product of China would grow by 6.7 per cent while that of India would increase by 5.1 per cent.

In other words, what the IMF is saying is that the world economy is growing simply because of China and India, the world's two most populous countries accounting for 40 per cent of the planet's population. Should we be grateful for small mercies, for the fact that our economy is growing when most of the world is shrinking? Yes and no. Yes, because the situation could have been far worse. No, because by our own standards we not doing well.

One worrying factor is the CSO projection of 2.6 per cent rate of growth in agriculture against an average growth rate of 4 per cent in the three previous years. Since agriculture accounts for roughly 18 per cent of India's GDP even if it supports the livelihood of more than half the country's population, one bad monsoon in 2009 and the overall rate of growth of the economy could slip further to 4 per cent.

An estimated one crore workers have already lost their jobs, especially in labour-intensive, export-oriented industries such as textiles and garments, gems and jewellery, leather, handicrafts, processed foods and sports goods. Another half a crore workers are likely to lose their jobs in the coming months as markets in the developed West continue to decline. Even the relatively better-off IT industry will witness a slowdown in the face of protectionism, not-withstanding the new Obama Administration.

The Reserve Bank of India has pumped in an estimated Rs 300,000 crore into banks since September and the government has announced two stimulus packages including an across-the-board sharp cut in excise duty. Petrol and diesel prices have been brought down twice and inflation is on the decline. Why then do we not see any discernible impact on the economy? One reason is that more needs to be done. There is consensus today that the government needs to postpone adherence to the targets specified in the Fiscal Responsibility and Budget Management Act.

The fiscal deficit has already overshot the budget estimate is already 166 per cent above what was specified by the then Finance Minister on the last day of February 2008. The government really has no choice - the only way forward is to borrow more, including the printing of more currency notes. The money has to be spent on the social infrastructure (education and health-care) and on the physical infrastructure (roads, electricity and drinking water). Not only will such a Keynesian strategy make good economic sense, it would make good political sense as well since elections are barely a couple of months away.