The current structural imbalance in the economy is as dire as it was in the 70s, says economist and former banker Haseeb Drabu.
In an interview with CNBC-TV18, he says the economy is likely to witness a sustained period of slow growth.
India's GDP growth hit a decade-low of 5 percent in fiscal 2012-13, and is estimated to grow anywhere between 5-6 percent this year. To add to the macro woes, the rupee is quoting close to its all-time low of 59 to the dollar, and there are fears that slowing foreign capital flows would make it harder to bridge the current account deficit.
Drabu says gold imports is not a major concern as it is being made out to be.
"The gold thing is a peripheral concern, the core of the problem is emerging from a macro economic imbalance," Drabu told CNBC-TV18.
"I think the way the trade flows, the investment flows are behaving, I see this as a long term external imbalance which given the global situation, given the fragile nature of the economic recovery there and given the policy framework, given the political situation doesn’t look like this is going to peter off in the next quarter or next two quarters," Drabu said.
He said the industry and the government was ignoring the problem of declining public investments in key sectors, which had contributed to the 8-9 percent growth seen till a couple of years back.
The second problem was raw material constraints, he said.
"The second binding constraint which even if investment is there and which is not been adequately understood is the raw material deficit in the country. This has of course come to a crisis for a reason which is specific on policy but beyond policy also. The kind of raw material supplies that we have in this country are not adequate to fund 8-9 percent growth," he said.
Below is the edited excerpt of the interview with CNBC-TV18:
What's your sense from the current account or the trade deficit numbers yesterday? Do you think June will alleviate those concerns or we are going still remain in a bumpy but negative patch on that key metric for rest of the year?
I think we will stay negative in that patch, there is no doubt about. These are not seasonal or cyclical factors. We have got into a structural imbalance which actually reminds me of the 1970s.
You have a savings-investment gap which is becoming larger, rate of savings has still not come down as much as the investment has but the levels have come down and that has caused real core macro economic concern which is getting reflected in other factors and current account deficit (CAD) being another indicator.
So in a way, we are looking at plus/minus the gold thing which I think is a peripheral concern. The core of it is emerging from a macro economic imbalance. I think the way the trade flows, the investment flows are behaving, I see this as a long term external imbalance which given the global situation, given the fragile nature of the economic recovery there and given the policy framework, given the political situation doesn’t look like this is going to peter off in the next quarter or next two quarters.
So I am seeing this now in terms of a post election situation where the economic fundamentals will start looking up depending on the nature of the government that we have. So, we are in a phase now of deeper uncertainty driven by structural macro economic factors and also the emerging political scenario.
On this gold import issue, has something gone fundamentally wrong in the way it was dealt with? Could there be another way to deal with this gold import issue because it has almost had a ricochet effect at least for the last couple of months?
Those kinds of demands are driven by domestic thing but I don't think it would have dealt with differently. In some ways coming in with such control is the only option you have given the fact of your own consumption behaviour of gold which is historical and in some ways very social and cultural.
But you would tend to if you go more on that side of control, you will probably create a parallel market which again goes back to 1970's. I somehow get reminded of 1970's in whatever I am looking at currently. So I would not think there is any other way on that in terms of the kind of hikes on duties and certain stuff so that you would really be looking at a situation where you would create a parallel market for gold.
The other fundamental problem is that of growth and a lot of economists have gone on to say that perhaps FY14 will also be as poor in terms of growth parameters as FY13 was. Do you think that is the real risk that we have extended this growth drudgery to much longer and many more quarters?
I think somewhere on the way we have lost the whole understanding of how growth has worked in this country, consequent upon public investment declining. The rate of capital formation in agriculture is coming down to abysmal levels, the rate of private investment not picking up, the overall rate of investment coming down.
I don’t see a possibility of growth, the one we saw somewhere around 8-9 percent for an interim period. It is a situation where there is a serious lack of investment demand and the phase that we saw was driven by a certain nature of consumption demand plus increasing capacity at that point of time.
Today, there is very little investment demand and we are going back to a whole situation of the rate of investment is falling and there is very little that’s being done to revive that both by the government as well as at the private sector level.
Private sector one is talked about quite a lot in terms of the policy paralysis, the kind of policy initiatives, the project clearances but one hasn’t really talked about the rate of decline in public investment particularly public investment in sectors which were crucial, which had driven up or made growth possible in this country, that is one.
The second binding constraint which even if investment is there and which is not been adequately understood and is a big constraint on growth is the raw material deficit in the country which has of course come to a crisis for a reason which is specific on policy but beyond policy also.
The kind of raw material supplies that we have in this country are not adequate to fund 8-9 percent growth. So we have both these constraints now emerging. Unless of course something dramatic happens and one looks at getting the assets abroad, one would see a sustained period of slow growth and I am not surprised by it. It stems from the fact that the rate on investment in the country is much lower than what it was a decade back or five years back.