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The art of managing expectations
A K Bhattacharya
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July 04, 2007

Kamal Nath's reaction to India's exports growth of 18 per cent in May 2007 was almost like that of a panic-stricken commerce minister. In an ominous tone, Mr Nath said worse was to follow as Indian exporters continued to face the adverse impact of a rising rupee against the dollar.

Why should a commerce minister appear alarmed if his country's exports in a month grew by 18 per cent? True, the May exports growth rate was lower than the 23 per cent achieved in April 2007 and the even higher 30 per cent recorded in May 2006. But an 18 per cent growth rate is still very healthy.

Lest one forget, exports notched up single-digit growth for three successive months in the last financial year - from December 2006 to February 2007. So, any growth rate that is more than 15 per cent should be a cause for happiness, if not celebration. But the problem with India's macro-economic performance of late is that its political leadership is so used to healthy numbers that even when the economy performs reasonably well, there are statements to the effect that doomsday has arrived.

For five consecutive years, starting from 2002-03, exports have been growing by well over 20 per cent every year. In 2004-05, they grew by 31 per cent, notching up the highest-ever growth rate in the post-reforms era.

But public memory is short. In 2001-02, exports fell by about 2 per cent. In 1998-99, they fell by over 5 per cent. Exports fell again in 1991-92 - by 1.6 per cent. If you leave out the five years between 2002-03 and 2006-07, only in five years did exports record double-digit growth.

In three years, they fell. And in three years, there was single-digit growth. So, just because exports did not grow by more than 20 per cent in May 2007, should the commerce minister start worrying?

What is also conveniently ignored is the fact that non-oil imports in May grew by over 40 per cent, in spite of the beneficial impact of a stronger rupee on the country's dollar import bill. Thus, while oil imports fell, imports of industrial raw materials and other commodities rose sharply, indicating strong industrial growth prospects in the months to come.

But the problem is that even in respect of industrial growth, the expectations of our political leadership clearly need to be managed. Double-digit industrial growth in 2006-07 was the cause of the rise in such expectations. What has fuelled them further was the 13 per cent growth in industrial production in April 2007. The last time industrial growth crossed the 10 per cent mark was in 1995-96.

The April 2007 performance was also a 12-year high. So, when the industrial growth figures for May are released and if these happen to be slightly lower than 13 per cent, you can rest assured that fears of how industrial growth has slowed down will be expressed by our political leaders.

And the culprit for this slowdown will be identified as the Reserve Bank of India [Get Quote] and its policy to tighten money supply by nudging up interest rates. If exports growth slows down to less than 20 per cent, the rising rupee is to be blamed. And if industrial growth is around 10 per cent, the central bank's monetary policy takes the flak.

The political leadership's sensitivity to inflation also needs to be noted in this context. Since 2001-02, the annual inflation rate, based on the movements in the wholesale price index, has stayed below 5 per cent, with the only exception of 2004-05, when it rose by 6.5 per cent.

But during the first three years after economic reforms in 1991, the annual inflation rate ruled at over 10 per cent. Inflation was tamed somewhat only in 1996-97, when it declined to 4.6 per cent. Since then, any rise in the inflation rate beyond 5 per cent causes alarm in political circles.

The point is that the country's political system has now got accustomed to high growth and low inflation rates. The last five years of economic prosperity has spawned a feeling among our political leaders that the high growth of exports and industrial production, on the one hand, and relatively low inflation rates, on the other, are here to stay. But the reality is somewhat different.

Growth rates can vary and unless there are major structural problems, which need to be corrected, there should be no need for spreading panic even when there is some deceleration in the growth rates of either exports or industrial production. The difference between an ordinary politician and a mature one is that while the former would press panic buttons at the slightest variation in the economy's fortunes, the latter will quickly draw the right lessons from these changes in the growth rates, take necessary steps and learn the technique of managing expectations.

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