Thursday, February 7, 2013

Root Cause of Poor Growth Is corruption

Root of poor growth is corruption which weakens institutional cohesion
From Economic Times 

That the advance estimate of output for the current year puts the growth rate at 5%, the lowest growth rate since 2002-03, is disappointing but hardly a mind-numbing shock. It might well be the case that the actual number turns out to be better, as the fourth quarter promises better than the trend. But it hardly serves any purpose to quibble over a few decimal points. 

The point is to understand the political economy of stalled growth and change it. Gross fixed capital formation, at current prices, is less than 30% of GDP. Mining is slated to grow 0.4% in the current fiscal after declining 0.6% last year, meaning the current year's value added in mining is lower than what had been achieved in 2010-11. The trade deficit is nearly 10% of GDP, with oil and gold imports rampaging ahead. Together, these numbers tell a story of deficient investment, excess demand, inflation and growth aborted by fiat in mining. 

The courts have banned mining, in an attempt to clean up the sector, killing off jobs, incomes and exports, and inducing needless steel imports. The courts had to step in because of the tremendous venality in the sector. Venality again lies behind stalled investment. Senior former civil servants have been put behind bars for their putative roles in corrupt acts and incumbent civil servants have learned to sit tight and take no decisions, reducing the flow of official clearances to a trickle. 

The government's spending priority is subsidy and consumption, with little money left for investment. So capital formation has fallen. Inflation is led by farm produce, whose supply lags demand, thanks to venal arrangements that favour middlemen over farmers. Inflation pushes up the demand for gold as a hedge. Oil subsidies induce profligate consumption and add to the import bill. 

To revive growth, beat inflation and restore the balance between different branches of the state, politics needs to shed venality and turn responsible. The problem is systemic, not any one party's monopoly. And fixing it has to be a collective effort, not only by political parties but also by those from whom politicians collect, by force or in exchange for favours. The time is past to talk of ships and shoes and sealing wax.

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