Seems like India’s growth forecast is being revised downward. The Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, who is one of the key economic policymakers in the government, reviewed various econometric models and concluded that growth will come down by 1.5 to 2.5 percentage points. Starting from 9 percent, that implies growth of 6.5 to 7.5%, or a mid-range of 7 %. That’s lower than the RBI’s most recent forecast, and lower than projections made in July, before the financial meltdown. The 7% figure was basically what was directly stated by Suresh Tendulkar, Chairman of the Prime Minister’s Economic Advisory Council. The talk is of counter-cyclical measures, including a fiscal stimulus.
The above figures are for fiscal year 2008-09. The IMF has forecasts for calendar years, and they look even gloomier. The latest IMF projections are 7.8% for 2008 and 6.3% for 2009. That latter figure is way below potential growth, which is conservatively estimated at about 8%, average, in the medium term. A fiscal stimulus is a classic remedy in the case of a recession, and the US is likely to pursue that in the new administration. But I’d argue that India has two superior policy options.
First, India’s nominal interest rates still have room to come down. Current month-to-month inflation is basically zero, so real rates by that reckoning (after all, it’s the future that matters, not inflation over the last year) are quite high. Further loosening of monetary policy is certainly more of an option than in the US, where nominal rates are already very low.
Second, India has enormous room to reduce the transaction costs of doing business, and to stimulate new areas of business. Reducing existing controls and prohibitions in a variety of areas might be very helpful, and be more efficient than increased government spending. Hiroko Oura ends her survey of India’s growth potential with this statement: “given the potentially large rooms for productivity catch up, medium-term potential growth could be higher. However, reaping these gains, and more generally the economic potential of demographic shifts that would support saving, would require policies to foster improvements in labor market conditions for better job creation and in the financial sector for sustaining investment efficiency.” If the key issue is business confidence, such measures might be more beneficial than classic Keynesian pump priming.
This does not rule out a fiscal stimulus, but it just seems to me that the above two options are superior in terms of delivering an immediate boost to investment and confidence.