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09 Jan 2020 : The Hindu Editorial Analysis

1) On govt projecting slower GDP growth: Reality check

  • The government’s advance estimates for economic output and growth for the fiscal year ending in March may raise eyebrows, but only for the wrong reasons. 
  • The National Statistical Office (NSO) has estimated that Gross Domestic Product (GDP) will expand by 5% in the 12-month period, in line with the Reserve Bank of India’s sharp downward revision last month in its full-year growth forecast - from 6.1% projected earlier, to 5%. 
  • The NSO’s estimate is a full 2 percentage points lower than the 7% figure that the Economic Survey had projected on the eve of the newly elected government’s annual Budget in July, reflecting the continued sharp slide in momentum. 
  • However, disconcertingly, even the latest growth assumption appears grounded more on optimism than on real hard data. Misplaced optimism needs to cede ground to tangible policy interventions.
  • Given that the pace of growth slumped to a six-and-a-half year low of 4.5% in the second quarter, thus dragging the first half’s expansion to 4.8%, the statistics office’s projection for the full year assumes that the economy will expand by a healthier 5.2% pace in the October-March six-month period. 

  • It is this premise that is hard to square with all the macro-economic data available so far, as well as the assumed estimates for the key expenditure components that together total up to the overall GDP. 
  • Take for instance the very cornerstone of demand in the economy, private consumption expenditure, the NSO’s projection assumes that consumers would go out and spend an additional ₹4.77 lakh crore, or almost 12% more, in the second half, than what they had spent in the preceding six months. 
  • Not only do most high-frequency indicators, including automobile sales, belie this assumption, even the RBI’s consumer confidence survey points to a decline in non-essential consumption compared to a year ago.
  • The NSO’s estimates also paint a picture of a distinct uptick in the final six months of the current fiscal in a key sector. Manufacturing, which contracted 0.2% in gross value added terms in the first half, is now posited to turn around and post a 2% expansion for the full 12 months. 
  • This projected revival in the crucial job generating sector again appears premised more on wishful thinking given that industrial output data from October showed the sector having shrunk by 2.1% from a year earlier. 
  • With private investment activity still becalmed - full-year growth in Gross Fixed Capital Formation is estimated at just about 1% compared with 10% in the last fiscal - and a significant shortfall in revenue receipts leaving the government little room to bump up its own spending within the constraints of the budgeted fiscal deficit target, it may be time for radical solutions. 
  • And with the clouds of conflict darkening over the crucial energy supplying West Asian region, India’s economy will be even more vulnerable now to another oil price shock. Clearly, it is time to expedite tangible policy interventions.


2) On U.S.-Iran conflict: From the brink of war

  • The latest spell of conflict between the U.S. and Iran turned full circle on Wednesday when Tehran launched ballistic missile attacks at American troops in two military bases in Iraq in retaliation for the assassination of Maj. Gen. Qassem Soleimani. 
  • In its first direct attack on U.S. forces, Iran targeted Erbil, the capital of the Iraqi Kurdistan in the north, and Al-Asad in the west, which is some 400 km away from the Iranian border. 
  • The attacks were both an act of retaliation and a show of its capability. Foreign Minister Javad Zarif invoked Article 51 of the UN Charter, which allows member-states to take military actions in self defence if they come under attack. 
  • He said Iran has taken and concluded “proportionate measures in self-defence”, which can be interpreted that Iran is now ready for de-escalation. The man who is primarily responsible for the current explosive situation is U.S. President Donald Trump. 
  • His decision to kill Soleimani, a top Iranian military leader who commanded the elite Qods Force for over two decades, in the Iraqi capital, was practically an act of war, forcing the Islamic regime to respond. 
  • However, despite the wide range of rhetoric issued by Iranian military leaders and hard-line politicians, what Tehran actually did was to launch a calculated, limited strike. It is as much an act of revenge as an opportunity for de-escalation.
  • The Pentagon’s assessments suggested there were no American casualties and only minimal damage in the attacks. Mr. Trump, in his response later on Wednesday, has signalled that he was backing away from further conflicts with Iran. 

  • If the U.S. had responded with air strikes or missile attacks inside Iran, it could have triggered further attacks from Iran, setting off a cycle of violence and aggression. A direct shooting match between the U.S. and Iran would have been disastrous for the whole of West Asia. 
  • Iran may be a weaker power compared to America’s conventional military might, but it is a formidable rival. It not only has ballistic missiles and a wide range of rockets but also a host of militias under its command across the region. 
  • It could have made an invasion and air strikes on its territories extremely costly for the U.S. and its allies. It could also have disrupted global oil supply by attacking the Gulf waterways. 
  • By any assessment, a direct war would have been catastrophic. Mr. Trump did well to step back and not push the Gulf region into a disastrous cycle of violence and destruction. 
  • The international community should now push for a diplomatic settlement of the crisis and find ways to revive the nuclear deal which could bring long-term peace to the Gulf. And Iran should seize this opportunity for de-escalation.