Fighting graft key

Since, the Narendra Modi government has taken over the reign of power in the country, hopes are blooming, both domestically and globally, indicated by reports by national and international agencies and stock markets. 

This, despite the fact that there has not been any significant improvement in manufacturing, agriculture or any other sector. It is notable that between 2010-11 and 2013-14, average growth rate of GDP has been nearly 5 per cent in comparison to nearly 8 per cent GDP growth in the decade preceding 2010-11. Growth in manufacturing, which had reached 15.6 per cent in 2007-08, declined to -0.7 per cent in 2013-14. First six month of 2014-15 have also not brought good news.

After Modi's takeover, international economic agencies have mended their earlier forecasts about future growth prospects of India. While presenting his budget 2014-15, Finance Minister Arun Jaitely raised hopes for growth between 5.4 and 5.9 per cent. This forecast was important in comparison with 4.5 per cent and 4.7 per cent growth recorded in 2011-12 and 2012-13 respectively.

Recently, the IMF has raised forecasts about India’s GDP to 5.6 from its earlier estimate of 5.4 per cent. It is notable that as per purchasing power parity, India's contribution to world GDP is 6.5 per cent. Before IMF’s revision, NOMURA, a Japanese agency had given GDP forecasts for 2015-16 and 2016-17, as 6.3 per percent and 7.1 per cent respectively.

Morgan Stanly, yet another agency has revised its earlier forecast for 2016 from 6.2 per cent to 6.5 percent.

There was an absolute despair among one and all, including international agencies, about growth prospects in India due to gross economic mismanagement, corruption, inflation, depreciation of rupee and unemployment. It is notable that continuously high inflation, especially food inflation, has been sending negative signals about the economy, due to RBI’s tight money policy, raising interest rates continuously. Despite
former Finance Minister P Chidambaram’s repeated expectation, RBI has not heeded to any such wish.

A big change with the new regime is with respect to corruption. People’s money was getting galloped by corrupt politician, bureaucrats and businessmen by way of scams like coal, 2G, Commonwealth Games and host of others; exchequer was drying, leading to fast rising fiscal deficit from merely 3.1 pr cent of GDP in 2007-08 to 5.7 in 2011-12. The country had lost capacity to bear such huge deficits, both fiscal as well as balance of payment deficit.

Huge fiscal deficit was forcing the government to borrow from RBI, which in turn was printing more currency notes. RBI is not a profit making organisation, but it has currency note printing press. The Central government can fill the fiscal deficit by either borrowing from the public, including banks and other financial institutions or from RBI.

When RBI lends to the government, it does so by printing more currency notes. It is notable that currency held with the public increased at the rate of 16 per cent in the last 5 years from Rs 6.66 crore in 2008-09 to Rs 12.48 crore in 2013-14, as a compulsion to fill the deficit in the budget.

Prior to 2010-11, increase in money supply was majorly matched by increase in availability of goods and services, due to sufficiently high growth rate, and inflation was keeping within bearable limits. However, later on, due to deceleration in growth, hyper inflation, especially in food products was causing havoc on two counts. First, cost of living started increasing, making life difficult for commoners and second, forced RBI to raise interest rates.

It is notable that repo-rate and reverse repo-rate increased from 5.0 per cent and 4.0 per cent in 2010 to 8.5 per cent and 7.5 per cent in 2013. However, later on RBI did partially reduce these policy rates to 8.0 per cent and 7.0 per cent, respectively.

Due to high rate of interest, not only our industrial costs have increased, housing, cars and other consumer durables have also got a setback due to high monthly installments. Consumer purchases, housing and infrastructure development have been the worst victim of high interest rates.

Trade deficit worsens
It is not mere a coincidence that when nation was neck deep into corruption at higher levels, country's trade deficit was reaching unmanageable limits. Scam money was getting diverted to gold and gold imports, which was only $14.5 billion in 2006-07, reached $56.5 billion in 2011-12.

Worsening of trade and balance of payment deficit was making rupee sink at lowest levels and it dipped to Rs 68.84 per dollar at one point of time before improving to Rs 61-62 per dollar later. Devaluation of rupee worsened inflation further spoiling the growth scenario in the economy.

Controlling inflation is the litmus test of Modi who was elected with the hope that he will stop corruption in the country. If Narendra Modi's efforts fructify in preventing corruption at higher places, the country has great potential to achieve high growth. Control on corruption and inflation are essential conditions for improving growth. People feel that Modi will stop corruption, so it will be possible to halt inflation, reduce trade deficit, and stem further devaluation of rupee and country will ride high on growth.

Thus, whether the nation will be able to come out from corruption, inflation and the problem of twin deficit of balance of payment on current account and fiscal deficit, will depend upon how the Modi government is able to pass this litmus test of fighting corruption, in which he is seemingly on right track.

(The writer is Associate Professor, PGDAV College, University of Delhi)