Is the economy overheating?
Try as it might, the Finance Ministry cannot ignore the most evident signs of overheating inflation.
For most governments presiding over the fastest national economic growth in decades the temptation to tip toe around systemic problems is far too great to resist. Policymakers like stock markets to operate on sentiments and if the nation's mood is buoyant why spoil the party? That is the underlying perspective of the Finance Ministry, in its Mid-Year Review of the Economy, while traversing the all too familiar ground of India's record GDP growth since reforms began in 1991. This sentiment is evident in the Review's take on a suspicion being aired by the Reserve Bank of India that the economy may be "overheated". Taking the high ground, the Finance Minister cites historical instances of consistent high growth to pooh-pooh the idea. So long as investments continue to pour in and productivity levels rise, overheating, the Review notes sternly, may be more "imaginary" than real.
At first glance this sounds reasonable enough given the level of investment flows into the economy, and the "industrial resurgence" that has earned India plaudits from all over. But try as hard as it might, the Finance Ministry cannot ignore the most evident signs of overheating inflation. At 5 per cent and rising, inflation demands attention; the Review acknowledges it but skips its real causes. By doing that the Review refuses to admit to the systemic crisis in the most backward sector. Thus when the Review notes that inflation is a result of supply constraints of some essential commodities, it is telling the nation that the problem is simply one of filling in the deficit through imports if necessary. But shortages in essential food items in a nation that had become self-sufficient in food, is the result of a decline in agriculture productivity, not to mention a drop in acreage under foodgrains over the last decade and more. The Review admits to the falling share of agriculture in GDP; it also avers that more than half the population is dependent on it. But that is the crux of the problem because the economy is paying the price of neglect through the sharp rise in inflation rates.
The United Progressive Alliance Government has been voicing its concerns about the rural sector; time and again, the Prime Minister has aired his anxieties about rural backwardness, while the Eleventh Plan has all the right ingredients for change in its Approach Paper. But the problem is not new and yet actions to tackle failing productive capacities in the farm sector are very thin on the ground. The real danger in delay of course is that the speeding economy will run aground in the hinterland. When that happens, the stalled growth process will not be overheated so much as comatose.
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