It’s not just a twin deficit problem

“Chicken flight’ or voo de galinha is the latest term used to describe the experience of certain emerging economies — a brief, unsustainable growth spurt, followed by a rapid return to earth.

It has been used in the context of Brazil, whose growth fell to 0.9 per cent in 2012, compared with the 7.5 per cent growth achieved in 2010.

Where does India with its floundering growth story fit in? Is it a case of chicken flight too? To prevent India from being reduced to a status of a ‘has-been’ emerging economy, India should come to terms with its ‘triple deficits’ — not just current account and fiscal deficit but a governance deficit as well.

INDIA’S GROWTH STORY

The current India growth story can be analysed in terms of three distinct time periods, 1991-92 to 2002-03, 2003-04 to 2007-08 (pre-crisis) and 2008-09-2012-13 (post-crisis) ( seetable ).

The pre-crisis period (2003-08) characterised by strong macro-fundamentals — lower fiscal and revenue deficits as well as a lower CAD — resulted in high growth rates. This continued even after the crisis, thanks to the fiscal stimulus. But over the last couple of years, growth has been hit, thanks to the triple deficits. These acted as a drag on growth, through their various inter-linkages.

Worsening CAD

India’s CAD in the first quarter of 2013-14 was at an alarmingly high 4.9 per cent of GDP, much higher than the annual averages for the earlier three time periods.

Can increasing exports, spurred by rupee depreciation, and declining gold imports lower CAD on a sustainable basis? Low CAD, it turns out, may just prove to be a chimera.

That Indian oil imports are relatively price inelastic is well-known; however, its high levels of import in a scenario of declining growth indicates inefficiencies in usage. This leads to the prospect of pass through in fertiliser and fuel prices, with fiscal deficit implications.

The availability of a cushion of net invisibles to finance CAD is also debatable. (Net invisibles refers to the net balance arising out of exchange of intangible items such as services, intellectual property, and so on.)

In Q1 2013-14, it is the decline in service imports, as also lower outflows of primary income, rather than a revival of service exports, which is responsible for an improvement in the net invisibles component.

The US government shutdown and the threat of an increase in demurrage (and hence costs) for exporters means export receipts and hence CAD may not recover in Q2 2013-14 as expected.

Thus, the current account side remains vulnerable as ever. Nor is its financing -- with its overemphasis on portfolio flows and short-term debt flows -- without dangers.

Fiscal mismanagement

India’s fiscal, and more importantly, revenue deficits pose serious concerns for the India growth story, with their ‘crowding out’ effects on private investment.

Crowding out occurs when higher expenditure by the government pushes up interest rates and elbows out private spending.

With the fiscal deficit and revenue deficit attaining 63 per cent and 73 per cent as a proportion of the Budget estimate for 2013-14 in Q1 itself, there are concerns over the over-shooting of the fiscal deficit.

Any adherence to budgetary estimates in such a scenario can only be construed as a creative accounting exercise undertaken by the government in a pre-election year.

Poor governance and institutional environment (including law and order) have a bearing on both the current and the capital account side of the balance of payments. They affect the receipts from tourist flows as also the quantum of foreign direct investment flows, respectively.

Poor governanace

FDI is attracted by the growth opportunities offered by good governance.

It is estimated that a one point increase in the Government Effectiveness (Kauffman) Index increases the FDI to GDP ratio by 4 percentage points.

The ‘Doing Business’ Report 2013 indicates India’s poor governance track record in terms of ‘Enforcing contracts’ (second last rank ,184/185) and the overall ‘Ease of Doing Business’ (132 rank).

India also suffers from a low rank in the ‘Order and Security’ (96/97) and ‘Corruption’ (83/97) dimensions of the Rule of Law Index (World Justice Project).

This has affected its Global Competitiveness ranking in 2013, where it has slipped a notch to 60th place behind most of its other BRICS competitors.

Is the India growth story also a case of ‘chicken flight’?

To prevent that, it has to address its triple deficits.

(The author is a Professor of Economics at the SP Jain Institute of Management & Research, Mumbai. The views are personal.)