India not shining on the economy front   5 comments


Several economic as well as political factors are working in concert to dampen the phenomenal India growth story
A slowing economy in the first two quarters, falling exports, contracting industry, billowing inflation, crumbling off-shore investments, drying up capital flows, growing fiscal and trade deficits, dampened investor sentiment, a sinking rupee, volatile stock market and the government’s inertia to economic reform: looks like a perfect recipe for an economic disaster.

Making things worse are the global disturbances: the escalating euro zone debt crisis, extremely slow US recovery, China’s formidable growth machine slowing down, troubled emerging economies and high international oil prices.

Is the India growth story running out of steam? Have we run out of options? Not so long ago India’s incredible growth story was discussed in the world community and examples were set of its resilience at the time of global crisis. Volumes were written on India’s strong economic fundamentals, its stable banking system and domestic demand-driven economy, which, to a large extent, insulated India from the 2008 financial crisis. With a GDP growth rate of 8.5 per cent and an impressive $246 billion of exports (37 per cent rise from previous year), India story was shining till 2010-11 fiscal year end.

Then, what led to the slowdown? Is it only because of the European crisis? Economists opine, India is exposed and vulnerable to global financial uncertainty. So, even when some of its fundamentals are ostensibly strong, it is liable to be hit by weak investor sentiment. They say, India is vulnerable because international finance may assess its fundamentals very differently from the way they are assessed by the government.

Uncontrolled inflation
Experts also say India has its own inherent problems, the most cruel of them being soaring inflation, especially the deep rooted structural food price inflation. Although inflation is slowing down gradually and food inflation has come down drastically to 4.35 per cent in the first week of December from as high as 22 per cent in February, experts say the slide in food prices is not permanent and its is due to the seasonal factors.

India’s inflation, which is largely driven by high food and global commodity prices, is the highest among major economies in Asia. “It is too early to call off the fight against inflation. The recent drop is more due to seasonality and vegetable prices are likely to move up again in the coming months,” according to HDFC economist Jyotinder Kaur.

The soaring of food inflation has its origin in rising rural income and changing dietary habits of the poor. But, this too has its genesis in the expansionary fiscal policy which has hardly kept pace with reforms. Economists are of the view that the government is unable to bring about tight fiscal discipline. Its expenditures are still running high and revenues did not show corresponding growth.

In response, the Reserve Bank of India has embarked on a tightened monetary policy, raised rates and limited credit, squeezing expansion, squeezing demand, but of no avail.

The rise in policy rates by as many as 375 basis points in the last one year has done little to tame inflation but, on the contrary, has impacted economic growth, which slowed from 8.5 per cent in the 2010-11 to 6.9 per cent in the second quarter of the current fiscal.

Industry in the negative
Rising interest rates in the past one-and-half years have pushed up the cost of borrowings, slowed down investment and industrial production. India’s industrial production saw a shocking and sudden decline in output in October and fell by more than 5 per cent. Of course, the ban on iron ore mining in many states also added to the drop.

A more scary fact is that production of capital goods was down by over 25 per cent, implying a postponement in new industrial projects and expansions. This also means less number of new jobs will be created and unemployment rates will rise. One clear example: car sales in April-November 2011 were 3.5 per cent lower than same period previous year as against around 30 per cent growth in the previous year.

The fall was across the sectors, showing both investment and consumption in the economy have almost dried up. Worse, is the sharper decline in consumer non-durables, which means that people have started curtailing even everyday expenses. Further, the industrial output has also been affected more by the slowing down of private corporate investment expenditure, which is projected to grow less than half of its previous year’s rate.

In its Economy Watch the industry body Ficci said, “The GDP growth in the current fiscal should be 6.6-6.8 per cent, with significant downside risks.” Attributing the decline to various global and domestic factors, especially poor performance of the manufacturing sector, the chamber called for “immediate policy intervention” to deal with the situation. It further said that 2012-13 was “unlikely to be significantly better with prospects of global economic meltdown looming large.”

Sinking feeling
To top it all, there is a dramatic fall in the rupee vis-a-vis the US dollar. The recent fall in rupee from 43.95 on July 27 to nearly 54 in the past days also showed the overall uncertain global economic outlook has resulted in drying up of inflows, besides hurting exports. Falling rupee against US dollar is expected to keep import bills soaring, especially the oil import, making another dent into the cash-strapped government’s finances as India imports close to 80 per cent of its total oil requirements.

Sliding rupee should have come as a respite to the exporters, but that too did not happen as most of the India’s export goods are heavily dependent on imported inputs, which suffered due to high import prices.

The government was also unable to manage its fiscal deficit during the first six months of the year (April-September). The deficit was Rs 2.92 lakh crore or 71 per cent of the full-year target. Most economists expect the gap will reach 5.1 per cent of GDP in 2011-12, breaching the 4.6 per cent target. Rising expenditure in social sector programmes and rising subsidies (on food, oil, fertiliser, etc) have eaten into the government’s finances.

The revenue earnings too will suffer as the targeted Rs 40,000 crore earnings from selling shares in government companies is unlikely to materalise owing to weak capital markets. So far only Rs 1,145 crore has come on this account in the current year. The government is also looking at other options to unlock economic bottlenecks, such as the new manufacturing policy, opening of foreign direct investment in retail, enactment of new direct tax code, bringing out Good and Services Tax to propel growth.

The developments are being keenly watched by industry and foreign investors. Adi Godrej, the president designate of the Confederation of Indian Industry, estimates that passage of the new goods and sales tax will add upto 2 per cent to India’s GDP because it will simplify trade between states, creating a single Indian market with supply chain efficiencies.

Divided UPA
But, here the government faces political gridlock, which has conspired to dampen economic growth in Asia’s third-largest economy. A string of corruption scandals has soured foreign investors on India, with direct investment numbers down dramatically Some say it is political paralysis that has engulfed New Delhi now, and the government, held at bay on important policy matters, not only by the opposition but also its own allies, scarcely has the ability to deliver second generation reforms.

One month into the winter session, Parliament has barely conducted any business and as many as 16 economic bills, which were to be taken up in the session, are still in the lurch. The big-ticket reform – FDI in multi-brand retail – which could have acted as the game changer by adding substantially to GDP, was withdrawn within days of its commencement.

This turned off international investors, who have been huge contributors to India’s boom through stock market and direct investments. The fate of the companies bill, pension bill and insurance bill are also not clear as there is need for greater consensus to push through these initiatives.

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Posted December 19, 2011 by avinash2060 in Economy

5 responses to “India not shining on the economy front

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  1. whats shining man stock market is bullish these days..

  2. indian stock market are going well direction.

  3. It’s nice post for the tipic, thanks for it I always like and search such topics and everything connected to them. I really appreciate it.

  4. Pingback: Foreign individuals can now invest in India Previously they were only allowed to enter the stock market via mutual funds or institutional schemes. | ikners.com

  5. I am not rattling good with English but I line up this really easygoing to translate.

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