By mid-May, the country will know the likely shape and strength of the new government that would emerge out of the five-phase poll to the 15th Lok Sabha in the world’s largest exercise of political choice. India is clearly headed for another coalition of sorts – the two leading national parties having no illusions about getting an absolute majority on their own. The world would watch intently on how a coalition forged after perhaps the messiest election on record, would address the daunting challenges that await it, mainly on economic and security fronts.

Limits to CMP...
Competitive populism to win votes indulged in by all parties – national, regional and state – could set limits even to a common minimum programme that can be worked out. The leading party might be held more accountable to its alliance partners to a greater extent than had been the experience of UPA in 2004-08. The most urgent problems are on the economic side, to minimise as much as possible the destabilising impact of the global economic and financial crisis on India during 2009-10 and to keep growth and jobs from further disruptions.
IMF says 2009 would be an ‘awful year’ for the world economy already on a free fall. The new government in India will start with the advantage of low inflation, low interest rates, solid reserves – food and foreign exchange – and a favourable monsoon outlook. But it should not be frittered away in public expenditure of dubious value.The budget for 2009-10 will determine whether we are on a forward march or would stagnate for some more time.

More challenging...
Macro-economic management would be more challenging in 2009 given the need to steer the economy through the global contraction and in the absence of ‘conducive’ external environment. There is a new wave for countries to look inwards for domestic demand.

Slowdown of 2008-09
India entered fiscal 2008-09 with a slowdown in its high-growth record until March 2008. GDP declined to less than 7 per cent in 2008-09 and is projected at 4 to 5.5 per cent in the current year. There is, however, some expectation in government circles for the economy to begin a rebound in the latter half of 2009-10 when the stimulus package and additional public expenditure to generate demand in 2008-09 would have their impact.

Revival only from 2010-11
By and large, the expectation of a reversal of the domestic downtrend is on the assumption of a global recovery taking shape before the end of 2009, a view not shared by the recession-hit advanced economies or by IMF. The preliminary forecast of a normal monsoon in 2009 should, however, offer some encouragement but outside agriculture – where India has not achieved sustained improvement and productivity – the hitherto better performing manufacturing and services sectors have been severely affected by external shocks.
Industrial slowdown became more pronounced in 2008-09 which ended with manufacturing registering a mere 2.8 per cent growth in April-February 2009 as against 8.8 per cent in the previous year. Infrastructure was down to 3 per cent (5.8 per cent) in this period. Labour-intensive export sectors like textiles and the unorganised enterprises have suffered substantial job losses of more than a million.
Weakening export demand sharply lowered trade growth; despite some fall in oil and other prices, import demand did not correspondingly decline thus raising steeply, the trade and current account deficits in 2008-09.Coupled with portfolio capital ouflows, the drop in net capital inflows and reduced inflow of long and short-term debt led to significant drawdown of reserves of the order of 56 billion dollars during 2008-09, after several years of reserve accumulation. Still, the current fiscal year has opened with reserves of $243 billion.
The economy successfully navigated through the tough times: combated with steady monetary tightening and some fiscal measures, the annual rate of inflation (WPI) had fallen steeply from doulbe digits to 0.18 per cent in the week ended 4 April. RBI steadily moved down the repo rates by four percentage points to 5 per cent. But banks have not passed the benefit in equal measure to businesses and other borrowers. Understandably there is caution not to increase non-performing assets; but banks have scope to reduce costs.
Bank credit growth has not kept pace with demand and deposit accretion has fallen behind. Slowing economic activity has also resulted in lower savings and investment in 2008-09. Corporate performance and profitability were subdued especially from the third quarter of the year. Business expectations survey of the RBI also pointed to a sharp decline, by 20 per cent, over the previous assessment for the first two quarters of fiscal 2010. Decline in domestic demand led to cutbacks in factory output. Some recovery in the automobile, steel and cement sectors was reported in recent months.

Effect of stimulus packages
In 2008, government announced three stimulus packages between December and February 2009 reportedly equivalent to 2.9 per cent of GDP. But the steep revision of the deficit estimates, cannot entirely be attributed to the stimulus; post-budget expenditure had also exceeded well above the original estimates, both plan and non-plan categories due to larger subsidies, farm debt waiver, sixth paycommission pay scales, etc.

Mounting deficits...
The revised estimates for the revenue deficit would be 4.4 per cent and fiscal deficit 6 per cent of GDP in 2008-09 while the Interim Budget for 2009-10 projects these at 4 and 5.5 per cent of GDP respectively. The combined deficits of the Central and state governments are expected to be above 10 per cent of GDP in 2008-09 and by a similar order in the current year, given the need for more stimulus to slackening domestic demand.
With such deficits,the Centre ran up huge debts doubling its market borrowings to some Rs.339,000 crore in the year ended and the provisional estimate for the current year is Rs.343,680 crore to finance the deficits. The level of public debt in India is 80 per cent of GDP which, is considered one of the highest in the world. Such levels of debt cause rising interest payments and budgetary deficits to be financed by further borrowings and leave little room for private investment.

Revert to fiscal consolidation...
The Union interim budget for 2009-10 has indicated the relaxation in the FRBM targets for 2008-09 and 2009-10, to ensure expansion in aggregate demand through fiscal stimulus measures. However, as a medium-term objective, it has recognised the need to revert to fiscal consolidation process at the earliest. The 13th Finance Commission (Kelkar Commission) has been tasked to suggest a revised fiscal deficit reduction framework for 2010-05 along with the recommendations for devolution of finances to states in October.
India’s economy depends more on domestic consumption and investment – roughly 60 and 30 per cent respectively in terms of GDP. But our growth slowdown by not less than three percentage points is attributed to the global crisis. The prognosis (including that made by IMF) is that this recession would be lasting longer and remain severe to thwart any quick recovery. Not perhaps until 2011 one could see a degree of economic stabilisation at the global level and resumption of trade supportive of growth.
It is now well-established that the cycle of booms and busts experienced by the US economy is no sure foundation for sustainable growth. India has moved cautiously in some critical areas like capital account; her nationalised banking system has proved a defensive mechanism in the present crisis - but the commitment to reforms to further open up market and adopt the now discredited ‘international best practices,’ still holds. This is time for greater wariness on the part of developing countries than being swept away by the tide of market forces, now that the worst global crisis since the Depression of the l930s is clearly linked to bubbles fed on speculators’ greed and debt-fuelled consumption.
India is committed to ‘inclusive growth’ and has several flagship programmes but there is no way of judging how much impact these programmes are having on poverty and backwardness. There is enormous potential for boosting domestic consumption by greater focus on agriculture and rural infrastructure. Indeed the time has come to rebalance demand as much in India as in China and other export-dependent countries.

Rebalancing growth...
Even global institutions have changed the tune from opening up to strongly advancing the case for rebalancing growth. This should be a serious medium-term and long-term objective even as governments grapple with their short-term responses to the global economic crisis, it is argued. Such rebalancing would help enhance social welfare and contribute to poverty reduction; and one source of strong and sustainable demand would be the emergence of a large and rapidly growing middle class with demand for goods, including automobiles and household appliances,as the Asian Development Bank points out.
This way the structure of output would get more closely aligned with domestic demand and policy distortions would need to be removed to promote both manufactures and services. India would need to consolidate its domestic strengths and employ fiscal policy and exchange rate to serve as tools to promote better the objective of rebalanced growth.