Dark economic clouds hang over India. The rupee is in a free fall, economic growth has faltered, the twin deficits (fiscal and current account) have gone haywire, policy makers seem unable to make up their minds, and experts talk of an Asian crisis that may engulf India. Only a few stray voices still seem to indicate that the worst is possibly over, and the second half of this fiscal (October-March, 2013-14) is likely to be much better than the first one that was terrible.

There are reasons why the doomsayers are in an overwhelming majority, and the optimists can barely make their voices heard over the pessimistic din. The reason: those who think the worst is over include PM Manmohan Singh, FM P Chidambaram and economic affair secretary Arvind Mayaram. Obviously, the government is going to talk positive, even if the world is about to collapse. No one gives any heed to what the policy makers, who have little clue about anything these days, say.

For a different view, read: Where economy went wrong: it's the growth strategy, silly!

However, in this period of gloom and doom, it may be a good idea to listen to the Singhs and Chidambarams. This is because what they have said makes sense. Only if one steps back several steps, and looks at the immediate future without getting carried away by the cries of an impending economic dangers, can one realize the significance of what the government wishes to convey. In fact, there are several silver linings to the dark clouds hovering over our heads these days.

Food security versus fiscal stability
Economists believe that the extra expenditure for the Food Security Act, which promises minimum food grain to poor households, will magnify the fiscal deficit. An additional annual expense of Rs 40,000 crore, over and above the budgeted Rs 1,00,000 crore, on food subsidies is something the government cannot afford. It is fiscal hara-kiri, which will take the fiscal deficit to unimaginable heights, higher than 5.1% of GDP in 2012-13, and definitely higher than 4.8% budgeted for 2013-14.

But is this really true? Even if the Act is passed in the monsoon session, it will be implemented only for six months in 2013-14. Therefore, instead of an additional expenditure of Rs 40,000 crore, the figure may not be more than Rs 20,000 crore. The final amount may be still lower, because many states like Tamil Nadu and Chhattisgarh have their own food security, which is better than the centre’s. Such states will not implement the central scheme. In addition, many of the states ruled by the BJP and other parties may stay away from food security to prevent the Congress from taking credit for it.

Let us now look at figures in the new context. The additional burden on the exchequer because of food security may not be more than Rs 10,000-14,000 crore this fiscal (2013-14). This is not going to add too much to the fiscal deficit, which is budgeted at Rs 5,42,000 crore. In fact, if Chidambaram can force the defence minister to postpone one major purchase of equipment from this year to the next, he can easily accommodate the extra financial burden due to food security.

One has to also remember that because of the good monsoons this year India may witness record production of food grain. Since neither the government nor private industry have enough storage facilities for the imminent surplus, most of it is likely to rot. During agriculture boom years, 20-30% of the grain is wasted in this manner. The Food Security Act will partly lower such losses, as the government can procure extra food grain to distribute it to poor households.

Manufacturing versus agriculture
Various estimates have come out on the likely economic growth this year. The Economic Survey in February 2013 hinted it could be between 6.1 and 6.7%. FM took nearer to 7% growth in his calculations related to government revenues and fiscal deficit. In the past few months, the experts’ estimates have crashed; the most pessimistic feel it will be below 4%, and the optimistic ones talk about below 5%. Even the PM gave the best estimate at 5.5% during his recent speech in parliament.

It is evident that most economists have either missed or underestimated the impact of good monsoons across the country this year. Agriculture experts contend that while the rains may not lead to excessive production in east India, which has contributed to most of the growth in agriculture production in the recent past, it will significantly improve productivity in north, west and south India. This will add to the economic growth, and even negate the crisis in the manufacturing sector.

Back-of-the-envelope calculations indicate that if manufacturing improves a little bit over the next six months, and agriculture grows at the same clip as it did in 2011-12 (the year before last), India’s overall growth can be a minimum 5.5% and a maximum 6%. In 2012-13, the economy grew at 5%, when agriculture growth was 1.9% (compared to 3.6% the previous year). If agriculture grows by 3-4% this year (2013-14), it will boost the overall growth considerably. The next six months will indicate what will happen to India this fiscal – a dismal pre-4%, or an encouraging 5-plus %.

The fact is that most of the doomsayers belong to either manufacturing or services, both of which have not performed well in the past few months. But if we hear the voices from agriculture, the news is good. Higher agriculture production will put more money in the hands of rural households, which will give a boost to rural spending and that may spur demand in manufacturing and services too. This multiplier effect has not been properly represented in calculations on future economic growth.

Election economics
No one has really understood the dynamics of changing expenditure trends during election years. Broad insights have emerged about how the demand for petrol and diesel generally goes up, consumption of specific products like paper increase, advertising and media sectors thrive, and everyone from a rag picker to printer benefits from election economics. However, the actual impact of direct and indirect election spending on economic growth has not been studied properly.

Here we can try and establish some relationships between the two parameters. In 2009, the Centre for Media Studies estimated that Rs 10,000 crore, or then $2 billion, which included the black money component, were spent on national elections. And this figure was about 40% of the spending during the federal elections in the US, including its presidential elections, in 2008. America spent about $5 billion in 2007-08, of which just less than half was only on the presidential elections.

In 2012, according to the US Federal Election Commission, over $7 billion was spent on elections, when Barack Obama won the second term. If one calculates the 40% of this figure, one can safely conclude that India may spend almost $3 billion, or almost Rs 20,000 crore, in the three months prior to the national elections, scheduled in April-May 2014. Add to this figure, the amount that will spent in the several state elections in November-December 2013.

Clearly, if Rs 25,000-30,000 crore comes into the system between October 2013 and April 2014, it will further perk up the economy in unimaginable ways. Couple this expenditure with the earlier assumption we made that good monsoons may lead to better crops and, in turn, to higher rural spending in the second half of this fiscal (2013-14). The combined impact could add considerably to the overall growth figures. If we are fortunate, we may clock nearer to 6%.

Personally, I think that the election expenditure in 2009 was grossly underestimated. My reckoning is that direct, indirect and illegal spending between January 2014 and May 2014 may be Rs 50,000-60,000 crore. If this turns out to be true, the economy may take off in the fourth quarter of this fiscal and the first quarter of 2014-15. Once India is back on the growth track, investors will heave a sigh of relief, and the pressures on the rupee, fiscal deficit, and other economic parameters will ease.

One has to conclude with a big caveat. If the national elections throw up a messy coalition and the electorate forces the formation of a third, fourth or fifth front to cobble up a ruling regime, all the above calculations will go for a six. In such a political scenario, don’t be surprised if India’s economic growth in 2014-15 is 1-2%, just like the US, and the rupee touches 99 to a dollar!