Mumbai, our city of hopes and dreams, our icon of economic growth, shattered into pieces yesterday. The lives lost, including of our valiant policemen, are tremendously saddening. So much trauma, unbelievable tragedies. Today, I shed tears while watching the news, early morning at my end of the world.
I don't know why it feels like the end of the world. While I carp about slowing economic growth and rant against Government inaction, there has always been a sliver of hope. Someday, sometime, things will come together, and India will be back on track to deal with the crushing, grinding, inhuman, undignified poverty that hundreds of millions of its population have come to terms with. I think about enterprising young boys who make a living through jugaad, farmers happy about good monsoons, people coming to Mumbai to find a job and staying on, vendors with their carts and plastic sheets on the ground, all earning livelihoods. In a decade or so, at least people may not have to worry about empty stomachs.
But terrorists destroy a heritage building in Mumbai, attack 9 other popular and crowded areas, and suddenly even that tiny sliver of hope vanishes. India is inextricably drawn into the ever-widening circle of terror, part of the Pakistan-Afghanistan network. It gets labelled as an insecure nation, as ineffective in dealing with terror.
The Government has been appallingly weak in confronting terror. Last week, PM addressed state police chiefs and said we need stronger intelligence. For heaven's sake, he is not an elder statesman! He is the person in charge. He could very well have spent a few thousand crores on better equipping his police and intelligence forces, instead of letting them use carbines that look as if they still need to be greased with animal fat. We have central anti-terror outfits; they are under his administration. There were enough bomb blasts the previous few years all over the country to forecast a major one coming any moment. Surely we could have upgraded and modernised our training, equipment, intelligence gathering, etc. And where is our disaster management set-up?
This is an occasion when the PM should admit defeat and simply walk away into the night. Call general elections as soon as possible and let someone else with grit and determination handle the country. And let us remember that we are a single united nation, not a conglomeration of states with different governments. We need a single administration for national problems, and should not anymore indulge in blame games between state and central governments.
We are India.
Wednesday, November 26, 2008
Monday, November 24, 2008
More Laughs from Political Leadership
“There is a silver lining in this crisis,” Chidambaram said. “We have to seize the opportunity to review and revisit pending reforms.” He was speaking at the Economic Editors' conference on 24th Nov. So now it is clear, direct from the horse's mouth - there is no opportunity to move on pending reforms until there is a global crisis of such magnitude that the whole world is shaken in its aftermath.
http://www.bloomberg.com/apps/news?pid=20601091&sid=acU4Tmov9lzg&refer=india
"India is nowhere near a recession, although the country faces a difficult situation, the finance minister said. " Everyone knows that the definition of a recession is two successive quarters of negative growth. I am not sure that any of the economic editors and analysts have ever mentioned recession as a possibility for India. However, in India's context, anything less than the high of 9-10% is equivalent to recession.
"India has, if I may say, weathered the crisis,” Chidambaram said. “We paid a price in terms of inflation, but we still recorded high growth. I hope that the worst is over.” The worst is just beginning. But FM will be gone.
“The fundamentals of the Indian economy have been strong and continue to be strong.” FM cannot tout this theme for much longer. Apart from savings and investments, there is hardly much in the economy that remains strong. The economy has never been more vulnerable than it is now, except in 1991, when again the Rajiv Gandhi government had swept ills such as high public spending under the carpet.
Unfortunately, high public spending has again become the accepted way to deal with the crisis, and since everyone is talking about doing it, it must be right. It is only a matter of days before strong action will be announced by the Gorement - a committee will be set up. It might even have a deadline to submit its report. Rs 50,000 crore stimulus plan will be studied. By that time, elections will have come and gone.
A real stimulus? Slash interest rates, announce steep direct tax deductions, withdraw taxes that yield less than a certain amount and cause more administrative hassles, reduce prudential norms for SME even if that leads to slightly higher NPA down the road, disinvest from banks immediately. These can be done tomorrow without discussion. If Gorement does not seek consensus in announcing Rs 60,000 crores loan waiver and can add an extra Rs 10000 crore because Rahul Baba asks nicely, it does not need approvals for announcing measures that can save us with immediate effect.
Since according to FM the worst is over, if the UPA returns to the Center after the elections, we will have to wait another ten years for a global economic crisis before reforms can be carried out.
http://www.bloomberg.com/apps/news?pid=20601091&sid=acU4Tmov9lzg&refer=india
"India is nowhere near a recession, although the country faces a difficult situation, the finance minister said. " Everyone knows that the definition of a recession is two successive quarters of negative growth. I am not sure that any of the economic editors and analysts have ever mentioned recession as a possibility for India. However, in India's context, anything less than the high of 9-10% is equivalent to recession.
"India has, if I may say, weathered the crisis,” Chidambaram said. “We paid a price in terms of inflation, but we still recorded high growth. I hope that the worst is over.” The worst is just beginning. But FM will be gone.
“The fundamentals of the Indian economy have been strong and continue to be strong.” FM cannot tout this theme for much longer. Apart from savings and investments, there is hardly much in the economy that remains strong. The economy has never been more vulnerable than it is now, except in 1991, when again the Rajiv Gandhi government had swept ills such as high public spending under the carpet.
Unfortunately, high public spending has again become the accepted way to deal with the crisis, and since everyone is talking about doing it, it must be right. It is only a matter of days before strong action will be announced by the Gorement - a committee will be set up. It might even have a deadline to submit its report. Rs 50,000 crore stimulus plan will be studied. By that time, elections will have come and gone.
A real stimulus? Slash interest rates, announce steep direct tax deductions, withdraw taxes that yield less than a certain amount and cause more administrative hassles, reduce prudential norms for SME even if that leads to slightly higher NPA down the road, disinvest from banks immediately. These can be done tomorrow without discussion. If Gorement does not seek consensus in announcing Rs 60,000 crores loan waiver and can add an extra Rs 10000 crore because Rahul Baba asks nicely, it does not need approvals for announcing measures that can save us with immediate effect.
Since according to FM the worst is over, if the UPA returns to the Center after the elections, we will have to wait another ten years for a global economic crisis before reforms can be carried out.
Friday, November 21, 2008
Congress, reforms and the Indian economy
I love waking up in the morning and seeing the most ridiculous reports on what our leaders have to say about the economy. And today finally it is clear - Congress has been the brilliant genius in the Indian economic story. As Sonia Gandhi pointed out in her address yesterday, Indira Gandhi showed tremendous prescience in protecting India from the global financial crisis. It was absolutely brilliant to nationalise the banks and see! here we are protected from the worst of the global crisis.
She didn't mention that it has been a policy of the 'carefully calibrated' reform process of the Congress to keep the people of India poor so that they remain badly malnourished - after all, that will protect them from obesity-related health problems in 40 years.
Of course, lack of water, electricity and housing in villages is also a brilliant prescient decision. We don't have to worry about mortgage foreclosures, carbon emissions and climate change.
I guess there is some brilliant design to illiteracy also - we'll know in another 40 years.
It was really kind of Sonia Gandhi to assure us that she didn't intend to go back to the license raj era. That yes, industry could continue to do more or less what they do as they do it. We are grateful for her magnanimity.
I didn't read the full text of the Prime Minister's speech. The headline that he continues to expect 8% GDP growth for the year gave me all the laughs I need for the day.
The revered Grand Architect of Reforms and the Father of Liberalisation deigned to go to USA for the G20 summit to give his valuable insights as an educated leader into the global crisis. "It is not of our making, but we are suffering," he intoned, or words to that effect. His complete paralysis in the policy sphere over the last almost five years makes one really wonder at the 1991 action. How is it possible that this man, who has displayed exemplary sclerosis for five years, could become Finance Minister in June 1991 and come out with a brilliant visionary reform document removing most controls by July 24th?
No, I rescind. I am wrong to doubt him. After all, his government anticipated the worst of the global financial crisis in February, and therefore put together all the needed policy measures to tackle it, such as farm loan waiver, NREGS expansion, and subsidies. Brilliant measures to infuse demand in the economy just in time for the global crisis in demand.
Congress has ruled the country for 40 of the last 60 years. I look forward to waking up to more such stories for the next 40 years.
She didn't mention that it has been a policy of the 'carefully calibrated' reform process of the Congress to keep the people of India poor so that they remain badly malnourished - after all, that will protect them from obesity-related health problems in 40 years.
Of course, lack of water, electricity and housing in villages is also a brilliant prescient decision. We don't have to worry about mortgage foreclosures, carbon emissions and climate change.
I guess there is some brilliant design to illiteracy also - we'll know in another 40 years.
It was really kind of Sonia Gandhi to assure us that she didn't intend to go back to the license raj era. That yes, industry could continue to do more or less what they do as they do it. We are grateful for her magnanimity.
I didn't read the full text of the Prime Minister's speech. The headline that he continues to expect 8% GDP growth for the year gave me all the laughs I need for the day.
The revered Grand Architect of Reforms and the Father of Liberalisation deigned to go to USA for the G20 summit to give his valuable insights as an educated leader into the global crisis. "It is not of our making, but we are suffering," he intoned, or words to that effect. His complete paralysis in the policy sphere over the last almost five years makes one really wonder at the 1991 action. How is it possible that this man, who has displayed exemplary sclerosis for five years, could become Finance Minister in June 1991 and come out with a brilliant visionary reform document removing most controls by July 24th?
No, I rescind. I am wrong to doubt him. After all, his government anticipated the worst of the global financial crisis in February, and therefore put together all the needed policy measures to tackle it, such as farm loan waiver, NREGS expansion, and subsidies. Brilliant measures to infuse demand in the economy just in time for the global crisis in demand.
Congress has ruled the country for 40 of the last 60 years. I look forward to waking up to more such stories for the next 40 years.
Thursday, November 20, 2008
Q2 GDP Growth
Next week, CSO will be coming out with its figures for GDP growth for the Indian economy in the second quarter. Nobody is looking forward to it.
A back of the envelope calculation - assuming agriculture growth at 3%, taking industry growth at 4.4% and believing that services could not have come in at less than 9% - leaves one with the amazingly low figure of 6.2% for the quarter. This is before the worst of the global economic crisis hit in October.
Agriculture remains a bright spot, and we should not ignore its demand impact on the rural population which has little to do with global developments. Bumper harvests are expected due to the good monsoons. [The massive Bihar floods unfortunately are below the monsoon performance radar, and most people have forgotten that millions remain unable to go back to their homes due to flood waters still not receded - but that is another blog]. Farmer credit will be a major problem going forward if the markets remain frozen in confidence.
Industrial growth has plummeted unbelievably low. Even CMIE has lowered its growth forecast, an institution that remained confident on the basis of corporate results that it monitors, quite forgetting that the unorganised sector is estimated to contribute over half of all output, including agricultural. It may talk about faulty IIP, but essentially, IIP is a wide-area survey and gives a good picture of direction.
Services, which contribute over half of economic growth, are the uncertain factor. We can keep all fingers crossed that it would not have gone lower than 9%, or even the 6.2% will appear too optimistic.
I firmly believe that the common man has greater economic savvy than the economic forecaster. So I would ask the vegetable vendor or the plumber about their opinions on life. If they grudgingly said 'okay' then GDP would come in at over 9%. If they launched on a rant against high prices and the Gorement, things were looking down. And if they wore an expression of stoic calm, things were really bad. Since I moved out of India, this ready reckoner is alas not available.
No, I certainly am not looking forward to 28 Nov
A back of the envelope calculation - assuming agriculture growth at 3%, taking industry growth at 4.4% and believing that services could not have come in at less than 9% - leaves one with the amazingly low figure of 6.2% for the quarter. This is before the worst of the global economic crisis hit in October.
Agriculture remains a bright spot, and we should not ignore its demand impact on the rural population which has little to do with global developments. Bumper harvests are expected due to the good monsoons. [The massive Bihar floods unfortunately are below the monsoon performance radar, and most people have forgotten that millions remain unable to go back to their homes due to flood waters still not receded - but that is another blog]. Farmer credit will be a major problem going forward if the markets remain frozen in confidence.
Industrial growth has plummeted unbelievably low. Even CMIE has lowered its growth forecast, an institution that remained confident on the basis of corporate results that it monitors, quite forgetting that the unorganised sector is estimated to contribute over half of all output, including agricultural. It may talk about faulty IIP, but essentially, IIP is a wide-area survey and gives a good picture of direction.
Services, which contribute over half of economic growth, are the uncertain factor. We can keep all fingers crossed that it would not have gone lower than 9%, or even the 6.2% will appear too optimistic.
I firmly believe that the common man has greater economic savvy than the economic forecaster. So I would ask the vegetable vendor or the plumber about their opinions on life. If they grudgingly said 'okay' then GDP would come in at over 9%. If they launched on a rant against high prices and the Gorement, things were looking down. And if they wore an expression of stoic calm, things were really bad. Since I moved out of India, this ready reckoner is alas not available.
No, I certainly am not looking forward to 28 Nov
Tuesday, November 18, 2008
HIGHER AND HIGHER....
Here's the latest score on India and the US in higher education: Indian students in USA -94 thousand plus plus; American students in India - less than 3000. Guess which country can ill afford to send its youngsters out, yet wants to maintain its tight control on higher education, and includes education loans under priority sector.
I would not say that we are still sending out our best and brightest, because many of these students may not have got admission in decent Indian colleges, given that 'decent Indian colleges' is a contradictory statement. But even sending out the next tier, maybe mostly on scholarships, is costing us a lot of money. If the average cost is USD 40000 per student, how many zeros is that? And then there are the thousands of others who assiduously apply for US colleges - spending money on SAT and GRE/GMAT exams, application fees, coaching, consultants and touts - without finally making it. And there are the thousands who go to UK, Australia, Singapore, New Zealand, and even Malaysia. A back of the envelope calculation easily places annual expenditure on foreign education at $6 billion.
To its credit, the Gorement has examined the effects of liberalising higher education for FHEP (Foreign Higher Education Providers). The concerned report happily said it would be a good thing for India. Kamal Nath enthusiastically announced FDI in higher education three years ago. That was the last that was heard of it. From being a reputed and attractive destination for overseas students (at one time, 50000 students from Malaysia were studying in India), India has become a major buyer of higher education services from other countries.
Gorement has made a major push for expanding centers of excellence in India. Proposed are many new IITs and IIMs, science universities, central universities, et al. The heavy control of UGC will loom large over them, admissions will be limited by reservations, quality will continue to remain suspect. In the meantime, private colleges of relatives of politicians will continue to be set up without much regulation, affiliated to some state university nobody ever heard of. On the other hand, ISB Hyderabad with no affiliation is a highly reputed institution because of its strong backing.
So how can the higher education conundrum be resolved? More competition is needed in the sector. Easier entry, better regulation, and marketable skills. Most of all, FDI from reputed sources must be allowed in the area. In these days of internet connectivity, it is really impossibly foolish to imagine that by not allowing 'subversive' foreign universities, we are protecting our culture and morals. And the money we could make from getting overseas students to Indian colleges! Alas, like all other areas, nobody wants to ease the rent-seeking that comes from imperfectly functioning higher education.
I would not say that we are still sending out our best and brightest, because many of these students may not have got admission in decent Indian colleges, given that 'decent Indian colleges' is a contradictory statement. But even sending out the next tier, maybe mostly on scholarships, is costing us a lot of money. If the average cost is USD 40000 per student, how many zeros is that? And then there are the thousands of others who assiduously apply for US colleges - spending money on SAT and GRE/GMAT exams, application fees, coaching, consultants and touts - without finally making it. And there are the thousands who go to UK, Australia, Singapore, New Zealand, and even Malaysia. A back of the envelope calculation easily places annual expenditure on foreign education at $6 billion.
To its credit, the Gorement has examined the effects of liberalising higher education for FHEP (Foreign Higher Education Providers). The concerned report happily said it would be a good thing for India. Kamal Nath enthusiastically announced FDI in higher education three years ago. That was the last that was heard of it. From being a reputed and attractive destination for overseas students (at one time, 50000 students from Malaysia were studying in India), India has become a major buyer of higher education services from other countries.
Gorement has made a major push for expanding centers of excellence in India. Proposed are many new IITs and IIMs, science universities, central universities, et al. The heavy control of UGC will loom large over them, admissions will be limited by reservations, quality will continue to remain suspect. In the meantime, private colleges of relatives of politicians will continue to be set up without much regulation, affiliated to some state university nobody ever heard of. On the other hand, ISB Hyderabad with no affiliation is a highly reputed institution because of its strong backing.
So how can the higher education conundrum be resolved? More competition is needed in the sector. Easier entry, better regulation, and marketable skills. Most of all, FDI from reputed sources must be allowed in the area. In these days of internet connectivity, it is really impossibly foolish to imagine that by not allowing 'subversive' foreign universities, we are protecting our culture and morals. And the money we could make from getting overseas students to Indian colleges! Alas, like all other areas, nobody wants to ease the rent-seeking that comes from imperfectly functioning higher education.
Tuesday, November 11, 2008
OBAMA MANIA
With the whole world coming out with blogs on the new US president, I couldn't let myself be left behind in the opinion rush. Admittedly, I followed the entire election process from the beginning of the year as avidly as if it was a hot reality show. The CNN atmosphere is still much like The Amazing Race.
The 'first African American president' part didn't really appeal, because Obama didn't run on that platform and was never a black leader. It is even doubtful how much of the African American experience he represents. His father was truly from Africa, but he was a student rather than a descendant of slaves/immigrants. Plus he was raised quite apart from the African American historical baggage. In a part of America which was probably more racially diverse than most parts. But if African Americans can get inspired by him, who are we to quibble - we are just as inspired.
What was impressive, apart from the oratory, was the immense organisational aspect of the whole process. It literally took on the establishment and overset it. That in itself portends change. Also, the multicultural experience, especially in a developing economy, is beyond the ordinary American's life.
Nobody expects the follow-through to be as dramatic, as we are all ultimately cynics. But there is still a grain of perverse hope that maybe peace, or rather less hostility, can come to the world, with this man who can turn water to wine and can part the ocean.
For India, he has no option but to engage forcefully. The nuclear deal stressed bipartisan support from the US Congress for us, and we are basically harmless souls. We are also a large market, and a low-cost producer. And we are not China.
This is a reality show that will be on air for at least the next four years, and we will all be watching.
The 'first African American president' part didn't really appeal, because Obama didn't run on that platform and was never a black leader. It is even doubtful how much of the African American experience he represents. His father was truly from Africa, but he was a student rather than a descendant of slaves/immigrants. Plus he was raised quite apart from the African American historical baggage. In a part of America which was probably more racially diverse than most parts. But if African Americans can get inspired by him, who are we to quibble - we are just as inspired.
What was impressive, apart from the oratory, was the immense organisational aspect of the whole process. It literally took on the establishment and overset it. That in itself portends change. Also, the multicultural experience, especially in a developing economy, is beyond the ordinary American's life.
Nobody expects the follow-through to be as dramatic, as we are all ultimately cynics. But there is still a grain of perverse hope that maybe peace, or rather less hostility, can come to the world, with this man who can turn water to wine and can part the ocean.
For India, he has no option but to engage forcefully. The nuclear deal stressed bipartisan support from the US Congress for us, and we are basically harmless souls. We are also a large market, and a low-cost producer. And we are not China.
This is a reality show that will be on air for at least the next four years, and we will all be watching.
Saturday, November 8, 2008
TOO LITTLE, although not too late
The official economic cognoscenti is patting itself on the back - with the delirious momentum of the international financial crisis going on, at least our policy-makers took some decisions. No more can people fault them for slow or even non-existent reactions. They woke up, smelt the smoke, and took rapid measures to douse the fire. Thus RBI cut the repo rate, slashed CRR and lowered SLR, flushing Rs 100000 crores into the system. Great.
A great article recently pointed out that while some commentators were felicitating previous RBI governor Reddy for his cautious approach, others were talking about the reforms that India's financial system still needs. The latter seem keen to fix on a conventional inflation-management regime for the central bank, and let the rupee take its own course. Both approaches are flawed. A cautious approach may protect us from financial ills elsewhere in the world - and it may be noted that such crises arise once every decade or so in different parts of the world - but it ultimately rebounds on the entire economy as savings and investments are not properly matched, and financial inclusion and integration with the world remain distant.
At the same time, India's central bank cannot remain a single-agenda manager and control only inflation. This is not a perfect world. India is a developing country, and conventional monetary mechanics of developed economies should not be ritually applied here. Rupee management is a must, considering that so much of India's competitiveness depends on it. If China had really allowed its currency to float - I mean, less than 10% in three years! does anybody still think it is a float? - it would not be vying for the post of top exporter. The damage the yuan has done over the past ten years will only be analysed in economic history books. Meanwhile, America is bankrupt, other developing economies are happy enough to export low value-added items to China, and everyone is worried about the future.
There is immense room for further interest rate cuts, if only to make Indian industry more competitive. It might help restore some demand, and prevent job loss. RBI needs to take drastic measures to deal with the drastic situation.
A great article recently pointed out that while some commentators were felicitating previous RBI governor Reddy for his cautious approach, others were talking about the reforms that India's financial system still needs. The latter seem keen to fix on a conventional inflation-management regime for the central bank, and let the rupee take its own course. Both approaches are flawed. A cautious approach may protect us from financial ills elsewhere in the world - and it may be noted that such crises arise once every decade or so in different parts of the world - but it ultimately rebounds on the entire economy as savings and investments are not properly matched, and financial inclusion and integration with the world remain distant.
At the same time, India's central bank cannot remain a single-agenda manager and control only inflation. This is not a perfect world. India is a developing country, and conventional monetary mechanics of developed economies should not be ritually applied here. Rupee management is a must, considering that so much of India's competitiveness depends on it. If China had really allowed its currency to float - I mean, less than 10% in three years! does anybody still think it is a float? - it would not be vying for the post of top exporter. The damage the yuan has done over the past ten years will only be analysed in economic history books. Meanwhile, America is bankrupt, other developing economies are happy enough to export low value-added items to China, and everyone is worried about the future.
There is immense room for further interest rate cuts, if only to make Indian industry more competitive. It might help restore some demand, and prevent job loss. RBI needs to take drastic measures to deal with the drastic situation.
Monday, October 13, 2008
Eating My Words...
I published my first blog on Sep 19th. Amazing how three weeks have insanely depressed economic mood. While the first blog attempted to hold back negative sentiments by listing the positives of the economy in the face of an increasingly gloomy outlook, the last blog counts out the unsound macroeconomic fundamentals even as everyone is rushing to talk about how the economy remains strong.
Three weeks ago, commentators were talking only about inflation, high interest rates, and slowing industrial production to lower their growth forecasts. Growth forecasts are still being lowered, but now it is due to impact of global developments, rather than our own economic indicators. Well, we still have the high savings and investment ratios, the strong rural demand, and the government's high expenditures. But investments may be drying up in the light of the credit crunch, which is another factor that has taken a u-turn in the last three weeks. The fall of the rupee has hit crisis proportions, and FDI has become tremendously iffy.
I hate to talk about sneezing and colds when everyone else is doing so already. The whole purpose of this blog is to have a contradictory opinion. And therefore my opinion now is: GET THOSE REFORMS REVVED UP
Three weeks ago, commentators were talking only about inflation, high interest rates, and slowing industrial production to lower their growth forecasts. Growth forecasts are still being lowered, but now it is due to impact of global developments, rather than our own economic indicators. Well, we still have the high savings and investment ratios, the strong rural demand, and the government's high expenditures. But investments may be drying up in the light of the credit crunch, which is another factor that has taken a u-turn in the last three weeks. The fall of the rupee has hit crisis proportions, and FDI has become tremendously iffy.
I hate to talk about sneezing and colds when everyone else is doing so already. The whole purpose of this blog is to have a contradictory opinion. And therefore my opinion now is: GET THOSE REFORMS REVVED UP
Saturday, October 11, 2008
SOUND MACROECONOMIC FUNDAMENTALS??
The last two days have had frantic interventions on 'sound macroeconomic fundamentals' by various bigwigs of the Indian economic scene, including FM, RBI governor, and corporate leaders. I would like to know what exactly is the definition of macroeconomic fundamentals. Perhaps our leaders are referring to the FX reserves, which at $283 billion are still in the comfort zone. Regarding other economic indicators, we should not just be afraid, we should be very afraid.
1. Inflation - continues to be at close to 12% where it has been lodged for the past 15 odd weeks. This was enough to elicit rapid-response measures from RBI and FM a couple of months ago, when CRR was hiked, all kinds of exports were banned and import duties were frantically lowered. Well, the rate has come down from 12.2% to 11.8%, and now it has become a sound macroeconomic fundamental.
2. Production - With the April-August IIP at 4.9%, a massive slide from last year's robust double-digit figures, this is the only aspect that seems to have been affected by the anti-inflation rapid-response measures. If industrial growth is coming in at less than 5% for the year so far, it can only be considered a sound macroeconomic fundamental if we compare it to the rest of the world, which is not exactly a useful exercise considering that the only other comparable economies are those in Africa or China.
3. Fiscal deficit - Everyone knows that despite high tax revenues, the government has frittered away any advantage by totally irresponsible spending on subsidies, salaries, and agricultural loan waivers. We will be fortunate if we can have an overall 10% fiscal deficit for the year, including state government deficits. The myth of 2.5% deficit has been thoroughly discredited, and along with it the reputation of the government is in tatters. There is no point in searching for a sound macroeconomic fundamental on this front.
4. Trade deficit - If the fiscal deficit is an instance of false numbers, so is the trade deficit. In the last week of September, coinciding with PM's visit to USA, the March import figure from USA was suddenly revised from $13 billion to $21 billion. This brought imports from USA in line with their Commerce Department figure of exports to India. Our favorable trade balance with USA of some $7 billion was reversed entirely. Trade deficit overall is now $90 billion, and the current account balance cannot by any account be listed as a sound macroeconomic fundamental.
5. Financial system - Oh yes, the banks are still sound. That's because the government has so far 'calibrated' financial system liberalisation so very carefully. We might as well return to pre-1991 days if we are to talk about financial system as a sound macroeconomic fundamental. Let's impose those 350% import tariffs, ask companies to acquire licenses for increasing production by 5%, and go back to higher taxes for redistributing poverty.
Of course, it will be difficult for the government to say that there is a mess and that it got us into the mess in the first place. It is only too easy to blame global woes for internal problems.
Read http://economictimes.indiatimes.com/Opinion/Its_time_for_hard_policy_decisions/articleshow/3581751.cms
1. Inflation - continues to be at close to 12% where it has been lodged for the past 15 odd weeks. This was enough to elicit rapid-response measures from RBI and FM a couple of months ago, when CRR was hiked, all kinds of exports were banned and import duties were frantically lowered. Well, the rate has come down from 12.2% to 11.8%, and now it has become a sound macroeconomic fundamental.
2. Production - With the April-August IIP at 4.9%, a massive slide from last year's robust double-digit figures, this is the only aspect that seems to have been affected by the anti-inflation rapid-response measures. If industrial growth is coming in at less than 5% for the year so far, it can only be considered a sound macroeconomic fundamental if we compare it to the rest of the world, which is not exactly a useful exercise considering that the only other comparable economies are those in Africa or China.
3. Fiscal deficit - Everyone knows that despite high tax revenues, the government has frittered away any advantage by totally irresponsible spending on subsidies, salaries, and agricultural loan waivers. We will be fortunate if we can have an overall 10% fiscal deficit for the year, including state government deficits. The myth of 2.5% deficit has been thoroughly discredited, and along with it the reputation of the government is in tatters. There is no point in searching for a sound macroeconomic fundamental on this front.
4. Trade deficit - If the fiscal deficit is an instance of false numbers, so is the trade deficit. In the last week of September, coinciding with PM's visit to USA, the March import figure from USA was suddenly revised from $13 billion to $21 billion. This brought imports from USA in line with their Commerce Department figure of exports to India. Our favorable trade balance with USA of some $7 billion was reversed entirely. Trade deficit overall is now $90 billion, and the current account balance cannot by any account be listed as a sound macroeconomic fundamental.
5. Financial system - Oh yes, the banks are still sound. That's because the government has so far 'calibrated' financial system liberalisation so very carefully. We might as well return to pre-1991 days if we are to talk about financial system as a sound macroeconomic fundamental. Let's impose those 350% import tariffs, ask companies to acquire licenses for increasing production by 5%, and go back to higher taxes for redistributing poverty.
Of course, it will be difficult for the government to say that there is a mess and that it got us into the mess in the first place. It is only too easy to blame global woes for internal problems.
Read http://economictimes.indiatimes.com/Opinion/Its_time_for_hard_policy_decisions/articleshow/3581751.cms
Friday, October 10, 2008
INDIAN ECONOMY CRASHES!!!
Soon after I went out and bought two huge bars of chocolate to avoid depression due to global developments, the bad news from the real, as opposed to the monetary, sector hit my screen. August IIP at 1.3%. Just a month ago, we were bragging about our robust macroeconomic fundamentals, our $700 billion worth of investments in the pipeline and our strong corporate performances. Export figures were still growing, FDI was flowing in at over $10 billion in the first quarter, and tax revenues continued to be higher than expectations. So what happened suddenly?
In August, the world economy had not yet collapsed, investment banks were still around, and there was no sign of a $700 billion bailout requirement. Moreover, the Indian holiday season, synonymous with the Indian buying spree, was just round the corner. And yet manufacturing growth fell (we will not even go into the electricity sector and the mining sector, in which nothing much is going to happen until there is some sign of government action). The CSO happily says that as many as seven out of seventeen industries showed positive growth - this just means that ten industries declined.
Obviously, companies, and more importantly, those legions of self-employed persons in the SME and unorganised sectors, were not taken in by declarations of macroeconomic soundness. These people knew better than the rest of us seat-of-the-pants economists and investors that there was a major convulsion just down the road. They knew that the high interest rates would continue to impact demand, and they knew that the best option was to hunker down, stop borrowing, and keep their fingers crossed. And this was well before the credit markets shrivelled up and died.
The good news is that all commodity prices are down by huge percentages unimaginable just a short summer earlier, when oil prices were predicted to hit $200 per barrel. Strangely, RBI has allowed the rupee to plunge drastically, thereby reversing all price gains. Inflation therefore persists at the 12% level. With some $282 billion in foreign exchange in hand, why is the rupee sliding to its lowest levels ever? All these years, we have been proudly touting the ballooning FX reserves as our insurance against current account deficits. Last year, RBI sent the rupee to dizzying heights, drawing the ire of exporters.
While the CRR reduction was essential (although Indian banks so far have been insisting that they are well-capitalised and have enough liquidity), the far greater need is to slash interest rates by 200 basis points, control the runaway rupee downfall, and make enough liquidity available. After a long time, RBI is taking the cue from what other central banks are doing, but it may be too late.
At least FM has made himself visible after a prolonged absence. Although he may look slightly ridiculous talking about sound macroeconomic fundamentals, his presence reassures us that the government is on the job. The economic valleys of India will neither be so deep, nor its extent as long, as the recession in other parts of the world. This year should be the trough, but recovery can be ours from next year onwards, provided interest rates are cut enough to revive the economy. The government so far has desisted from strong policy action on any front, and that is all that is required of it going forward.
For the rest of the world, though, the prognosis is not quite as healthy. All of us seat-of-the-pants economists and investors with fancy models have a simple option - go out and buy more chocolate.
In August, the world economy had not yet collapsed, investment banks were still around, and there was no sign of a $700 billion bailout requirement. Moreover, the Indian holiday season, synonymous with the Indian buying spree, was just round the corner. And yet manufacturing growth fell (we will not even go into the electricity sector and the mining sector, in which nothing much is going to happen until there is some sign of government action). The CSO happily says that as many as seven out of seventeen industries showed positive growth - this just means that ten industries declined.
Obviously, companies, and more importantly, those legions of self-employed persons in the SME and unorganised sectors, were not taken in by declarations of macroeconomic soundness. These people knew better than the rest of us seat-of-the-pants economists and investors that there was a major convulsion just down the road. They knew that the high interest rates would continue to impact demand, and they knew that the best option was to hunker down, stop borrowing, and keep their fingers crossed. And this was well before the credit markets shrivelled up and died.
The good news is that all commodity prices are down by huge percentages unimaginable just a short summer earlier, when oil prices were predicted to hit $200 per barrel. Strangely, RBI has allowed the rupee to plunge drastically, thereby reversing all price gains. Inflation therefore persists at the 12% level. With some $282 billion in foreign exchange in hand, why is the rupee sliding to its lowest levels ever? All these years, we have been proudly touting the ballooning FX reserves as our insurance against current account deficits. Last year, RBI sent the rupee to dizzying heights, drawing the ire of exporters.
While the CRR reduction was essential (although Indian banks so far have been insisting that they are well-capitalised and have enough liquidity), the far greater need is to slash interest rates by 200 basis points, control the runaway rupee downfall, and make enough liquidity available. After a long time, RBI is taking the cue from what other central banks are doing, but it may be too late.
At least FM has made himself visible after a prolonged absence. Although he may look slightly ridiculous talking about sound macroeconomic fundamentals, his presence reassures us that the government is on the job. The economic valleys of India will neither be so deep, nor its extent as long, as the recession in other parts of the world. This year should be the trough, but recovery can be ours from next year onwards, provided interest rates are cut enough to revive the economy. The government so far has desisted from strong policy action on any front, and that is all that is required of it going forward.
For the rest of the world, though, the prognosis is not quite as healthy. All of us seat-of-the-pants economists and investors with fancy models have a simple option - go out and buy more chocolate.
Monday, September 29, 2008
We in the financial crisis
There are two major lessons to be learned from the US financial crisis: one, just as the fall of the Soviet Union signalled the end of Communism, the fall of the investment banks signals the demise of capitalism as we knew it; and two, them guys wid their fancy ties and financial models don' know nothin'!
Our PM can smile smugly from behind his beard, and maintain the myth about India being insulated and therefore not subject to slowdown. This reminds us uncannily about the East Asian financial crisis during which we smiled just as smugly, although then it was the current Finance Minister doing the honors. No matter - this time as earlier, somebody else will be picking up the pieces.
Currently, our domestic list of woes includes suffering from insidious fiscal and trade deficits, manufacturing slowdown, and stubborn inflation. Our corporate honchos can emphasize the $700 billion investments in the pipeline, and maintain that growth cannot possibly come down by much, given our 54% below the age of whatever. However, so far growth has been solely due to the good monsoons, and no one can expect that to continue forever.
So if the corporate sales and revenues are intact, where is the manufacturing slowdown happening is the question. (BTW, this has nothing to do with the US crisis so far - we have come to this state of affairs on our own steam.) CMIE may talk about a faulty index of industrial production, but nobody mentioned that when the manufacturing sector was growing at 12%. The answer could well be that the interest rate hikes have halted expansion in the non-corporate sector, which is a better bellwether of economic winds than the corporate sector which is full of guys wid fancy ties.
Add to this the wealth impact of falling stock prices and real estate, and the only people happy in India are the ones on the millionnaires list. What really upsets me is the talk of overheating in the economy because of which interest rates have been tightened. In an economy of massive unmet demand, business cycle theories as well as money supply theories need to be out the window. But that is another blog.
Examining the impact of the US financial crisis seems a pretty redundant exercise, when we are already doing our level best to stifle growth. Investments in India may get dented due to the financial crisis in the US. Expect shelving of FDI plans. Exports may or may not be affected, depending on the downward shift to lower cost products by consumers in the affected countries. Certainly our gems and jewelry exports will get hit, but the other export fast-mover, petroproducts, will in any case not lower employment as it functions on capital equipment. IT exports again will suffer in the short-term, until financial restructuring gets underway in the US and companies turn to our low-cost financial-cum-IT wizards. The poor miserable rest-of-the-country will remain unaffected, except possibly prone to some gloating.On the whole, the scenario may not be totally unpleasant, provided the monsoons cooperate.
What would be a major disaster would be the set-back to financial sector reforms, just when so many committees had been set up, so many learned reports had come out, so many Communists had been booted out of the government, and reforms were finally gaining some traction. At least, let us not re-learn the mistakes following the East Asian financial crisis, when we smiled so smugly that we forgot financial reforms.
Our PM can smile smugly from behind his beard, and maintain the myth about India being insulated and therefore not subject to slowdown. This reminds us uncannily about the East Asian financial crisis during which we smiled just as smugly, although then it was the current Finance Minister doing the honors. No matter - this time as earlier, somebody else will be picking up the pieces.
Currently, our domestic list of woes includes suffering from insidious fiscal and trade deficits, manufacturing slowdown, and stubborn inflation. Our corporate honchos can emphasize the $700 billion investments in the pipeline, and maintain that growth cannot possibly come down by much, given our 54% below the age of whatever. However, so far growth has been solely due to the good monsoons, and no one can expect that to continue forever.
So if the corporate sales and revenues are intact, where is the manufacturing slowdown happening is the question. (BTW, this has nothing to do with the US crisis so far - we have come to this state of affairs on our own steam.) CMIE may talk about a faulty index of industrial production, but nobody mentioned that when the manufacturing sector was growing at 12%. The answer could well be that the interest rate hikes have halted expansion in the non-corporate sector, which is a better bellwether of economic winds than the corporate sector which is full of guys wid fancy ties.
Add to this the wealth impact of falling stock prices and real estate, and the only people happy in India are the ones on the millionnaires list. What really upsets me is the talk of overheating in the economy because of which interest rates have been tightened. In an economy of massive unmet demand, business cycle theories as well as money supply theories need to be out the window. But that is another blog.
Examining the impact of the US financial crisis seems a pretty redundant exercise, when we are already doing our level best to stifle growth. Investments in India may get dented due to the financial crisis in the US. Expect shelving of FDI plans. Exports may or may not be affected, depending on the downward shift to lower cost products by consumers in the affected countries. Certainly our gems and jewelry exports will get hit, but the other export fast-mover, petroproducts, will in any case not lower employment as it functions on capital equipment. IT exports again will suffer in the short-term, until financial restructuring gets underway in the US and companies turn to our low-cost financial-cum-IT wizards. The poor miserable rest-of-the-country will remain unaffected, except possibly prone to some gloating.On the whole, the scenario may not be totally unpleasant, provided the monsoons cooperate.
What would be a major disaster would be the set-back to financial sector reforms, just when so many committees had been set up, so many learned reports had come out, so many Communists had been booted out of the government, and reforms were finally gaining some traction. At least, let us not re-learn the mistakes following the East Asian financial crisis, when we smiled so smugly that we forgot financial reforms.
Saturday, September 27, 2008
Nuclear deal
So now that the nuclear deal has been passed by the House of Representatives and Condoleeza Rice will be coming to India as soon as Minister of External Affairs, Pranab Mukherjee, is back from conducting puja in his village, can we celebrate India's arrival onto the global power scene? Or should we give voice to grave misgivings about what the deal will do to India's future security scenario?
Any step taken in India these days is progress, and none more so than the nuclear deal, which seems to have occupied policy mindset so overwhelmingly that our government has been unable to focus on anything else since June 2005, including terrorism, homegrown militancy and growing Naxalism, land acquisition, financial sector reforms, etc. etc. So we can now be thrilled that by 2050, as much as 25% of our electricity needs could come from nuclear sources. Of course, this is in a best-case scenario, provided India makes progress on the policy front in implementing visionary announcements, an area where our track record has not exactly been exemplary. More likely, we may be able to achieve something like a 15-20% proportion. Dependence on coal, hydro, and oil is likely to continue. Still, even this proportion will be significant.
Even more significant may be spin-offs accruing from our ascendance to the nuclear technology 'high table'. India is currently deprived, we are told, of technology that may help us in our space programs, missile development, and cutting-edge industries, where we, due to our superior brain-power, have natural advantages. Billions of dollars worth of new opportunities may open up. Excellent.
But say in the next 8-10 years, before our first nuclear power plants start functioning (again best-case scenario), one of our neighbours tests a nuclear device or aims more nuclear warheads at us. What will be our options? We will have already spent several of those billions of dollars on importing the reactors and setting them up. We will already have contracted for regular supplies of material to keep them going. Will we now have to negotiate with 45 NSG members before we can retaliate? Or do we conduct our own nuclear test in the emergency, and then negotiate with 45 nations not to impose sanctions?
Probably, retaliatory tests will not attract sanctions, although there is little clarification available on this. Testing is testing, whether retaliatory or not, and the US government has several times said that testing is not permissible under its laws. But the energy program could get severely undermined if any of the 45 nations is in any way unhappy with our foreign policy decisions.
In the next several weeks, expect euphoria on the deal, lots of billion-dollar contracts being signed, smiles on faces of industry honchos, many more overseas visits by bureaucrats, and a hope that at last we can get our act together on power supply.
In the next several years, expect the floundering of the nuclear deal on practicalities - such as location, corruption, etc. - acceleration of nuclear weapons programs of our neighbours - who practically have us over a barrel now - and much diplomatic negotiation with other countries on our foreign policy direction. On the other hand, being now officially a hand-maiden for the world's greatest power (which may not be so bad), we can run to the US for protection whenever the world bullies us.
Any step taken in India these days is progress, and none more so than the nuclear deal, which seems to have occupied policy mindset so overwhelmingly that our government has been unable to focus on anything else since June 2005, including terrorism, homegrown militancy and growing Naxalism, land acquisition, financial sector reforms, etc. etc. So we can now be thrilled that by 2050, as much as 25% of our electricity needs could come from nuclear sources. Of course, this is in a best-case scenario, provided India makes progress on the policy front in implementing visionary announcements, an area where our track record has not exactly been exemplary. More likely, we may be able to achieve something like a 15-20% proportion. Dependence on coal, hydro, and oil is likely to continue. Still, even this proportion will be significant.
Even more significant may be spin-offs accruing from our ascendance to the nuclear technology 'high table'. India is currently deprived, we are told, of technology that may help us in our space programs, missile development, and cutting-edge industries, where we, due to our superior brain-power, have natural advantages. Billions of dollars worth of new opportunities may open up. Excellent.
But say in the next 8-10 years, before our first nuclear power plants start functioning (again best-case scenario), one of our neighbours tests a nuclear device or aims more nuclear warheads at us. What will be our options? We will have already spent several of those billions of dollars on importing the reactors and setting them up. We will already have contracted for regular supplies of material to keep them going. Will we now have to negotiate with 45 NSG members before we can retaliate? Or do we conduct our own nuclear test in the emergency, and then negotiate with 45 nations not to impose sanctions?
Probably, retaliatory tests will not attract sanctions, although there is little clarification available on this. Testing is testing, whether retaliatory or not, and the US government has several times said that testing is not permissible under its laws. But the energy program could get severely undermined if any of the 45 nations is in any way unhappy with our foreign policy decisions.
In the next several weeks, expect euphoria on the deal, lots of billion-dollar contracts being signed, smiles on faces of industry honchos, many more overseas visits by bureaucrats, and a hope that at last we can get our act together on power supply.
In the next several years, expect the floundering of the nuclear deal on practicalities - such as location, corruption, etc. - acceleration of nuclear weapons programs of our neighbours - who practically have us over a barrel now - and much diplomatic negotiation with other countries on our foreign policy direction. On the other hand, being now officially a hand-maiden for the world's greatest power (which may not be so bad), we can run to the US for protection whenever the world bullies us.
Friday, September 19, 2008
Position today
Data was recently released on the performance of the Indian economy in the first quarter of 2008-09, placing GDP growth at 7.9%. This is 1.3 percentage points lower than Q1of 2007-08, and a source of concern given the urgency of rapid economic growth in eliminating poverty. A major cause of the slowdown has been the industry sector, particularly manufacturing. The question is how much lower can GDP growth go, and how long will it take for growth to revive to the 9-plus percent of the last three years.
In the last month or so, we have seen a number of forecasts on the Indian economy, including from the Reserve Bank of India, the Economic Advisory Council, international banks and think tanks. Most of them believe that GDP growth for the year will end at around 7.5%, more than a percentage point lower than last year. As the fiscal year has progressed, a sense of impending doom seems to have pervaded the country. Marginal decline in the rate of inflation, recent descent of oil and commodity prices, and USA’s strong Q2 GDP growth at 3.3% have not eased pessimism either.
Often, gloomy forecasts tend to be self-fulfilling prophecies, impacting investment decisions and economic policies. Therefore it is all the more urgent to present the bright side of the picture. To begin with, with industrial and economic statistics at the current incomplete stage, Q1 GDP may well be understated and could be revised up to as much as 8.2%. I am confident that this higher estimate will prevail. Here’s why.
The investment to GDP ratio came in at a high of 37.4% in 2007-08, and the Economic Advisory Council expects this to be retained at around the same level. This had brought us GDP of 9% in 2007-08, and the capital efficiency of the economy is unlikely to drop drastically from one year to the next. Even assuming a fall in investment arising from higher interest rates, this should not dent the growth rate to below the 8% level.
There are huge demand injections coming into the economy from increased Government expenditures on NREGS, loan waiver, and Sixth Pay Commission award. These are likely to boost the sagging consumer durables sector. All eyes will be on the festival season, coming early this year.
The services sector has continued to perform well in the first quarter. This is an area that is somewhat immune to poor infrastructure, lack of adequate power and incomplete physical connectivity. The sector now comprises over 55% of the GDP, and its continued performance can help preserve the growth momentum.
Corporates are maintaining the pipeline of investments of $700 billion over the next three years in projects already committed. CMIE’s data also reveals that corporate investments are robust, with announcements of fresh investments at $117 billion in the first quarter of FY09. In July alone, $45 billion of new projects were noted, as compared to the monthly average of $33 billion last year. As per the CSO data, bank credit expanded by 25.8% in Q1. There is no liquidity crunch in the Indian financial system, and banks are ready to lend. Non-food credit to the commercial sector went up by 25.9% in the first week of July compared to 24.6% in the same period last year.
FDI inflow has also been very healthy, although FIIs have reversed the earlier positive flow. For the first quarter, FDI of over $10 billion came into the country, as compared to $25 billion in the whole of 2007-08. Indian companies are also sourcing funds overseas at lower costs. As per RBI figures, ECB in 2007-08 was 54% more than the previous year, while equity raised through ADR/GDR in Q1 FY 09 was three times that in Q1 of last year.
Rural demand remains strong, buoyed by excellent agricultural performance last fiscal and continued growth in Q1. Sowing in the kharif season came in at 1.3 million hectares more than the corresponding period last year. High global rice prices have boosted area under rice cultivation. The weakening of the monsoons in the last month might impact agricultural growth, but demand in villages is not expected to slacken.
Export performance continues to be robust. It is likely that as overseas banks cut costs, they will turn increasingly to cheaper outsourcing, and India has proven strengths in financial software services. In the goods market, global downturn could mean shifting of price preferences to more competitive sources and India should take advantage of this.
There are indications that economic activity might pick up in the remaining three quarters. A big boost has been the performance of the US economy in the second quarter, which might point to a faster recovery from recession than expected, although employment figures are still of concern. US growth has been driven by exports, which in turn arose from the declining value of the dollar. However, the dollar is again strengthening against major currencies, particularly the Euro, and implications for the US recession are uncertain. US pain has been felt globally with major economies experiencing slower growth, but it is widely believed that recession will last only through this year.
For India, a falling rupee means more goods and services are exported. At the same time, commodity prices have also moderated, particularly oil. Analysts, who just a few months ago were talking about $200 per barrel prices, are now pointing to the global economic downturn as a reason for oil prices to come down below $100. These developments are good news for India, and once the effects of the monsoon become clearer, we can expect inflation to come down and growth to resume at the earlier level.
Inflation remains the key threat to the economy at well over 12%. Tolerance for price rise is low in India, although CPI is estimated to be below double-digit rates. Interest rate hikes since 2006 have helped limit the upward spiral, as compared to other countries which have been facing much higher inflation rates. Responses to inflation have varied across the globe; weaker growth and slowing inflation have prompted many central banks – Australia, Eurozone, and Canada - to consider maintaining their interest rates unchanged this month. In India however RBI is likely to continue raising rates this year.
This would further put the lid on GDP growth, and would definitely hit future investment plans. Interest cost rise coupled with higher input costs and demand deceleration are acting as major brakes to incremental investments. So far, industry has been able to deal with rising cost pressures through improvements in factor productivity, driven by innovations. However, if interest rates continue to be hiked and returns to investment drift downwards, industry may be constrained to review fresh investment plans.
The higher rates of inflation call for rapid response measures in other areas such as alleviating supply chain bottlenecks. The persistence of supply chasms in power, transport, mining, etc. adds tremendously to inflationary pressures. Reforms to increase agricultural productivity, improve PPP in infrastructure, boost the mining sector, and better the investment climate are sorely needed. Some measures can be taken rapidly for immediate results – for example, increasing ECB limits - while others would take time to play out. Overall, though, such measures would reduce transaction times and costs across the economy and raise competitiveness with respect to the global economy.
Another source of concern is the pressure on the fiscal performance of the Government. Although tax revenues are still buoyant, hidden Government expenses are expected to push the fiscal deficit to as high as 7-8% and higher if deficits of state governments are added. Oil under-recoveries to the tune of Rs. 200,000 crores and issuance of bonds of up to half that amount can crowd out funds in the long run. This would negatively impact infrastructure financing with long time horizons. The solution lies in hefty additions to the consumer prices for petroleum and products, a politically and socially sensitive move. Government would have to weigh long-term costs of oil subsidies to future prices and growth against possible social unrest and inflationary pain in the short-term. There are no easy answers.
After five years of heady growth, we are potentially in a crunch situation. Tough decisions will have to be made at all levels – government, industry, consumers – and some belt-tightening might be in order. While there are pressures on top- and bottom-lines, India’s growth trajectory cannot but remain steeply upward bound as 1.1 billion people aspire to a better future.
In the last month or so, we have seen a number of forecasts on the Indian economy, including from the Reserve Bank of India, the Economic Advisory Council, international banks and think tanks. Most of them believe that GDP growth for the year will end at around 7.5%, more than a percentage point lower than last year. As the fiscal year has progressed, a sense of impending doom seems to have pervaded the country. Marginal decline in the rate of inflation, recent descent of oil and commodity prices, and USA’s strong Q2 GDP growth at 3.3% have not eased pessimism either.
Often, gloomy forecasts tend to be self-fulfilling prophecies, impacting investment decisions and economic policies. Therefore it is all the more urgent to present the bright side of the picture. To begin with, with industrial and economic statistics at the current incomplete stage, Q1 GDP may well be understated and could be revised up to as much as 8.2%. I am confident that this higher estimate will prevail. Here’s why.
The investment to GDP ratio came in at a high of 37.4% in 2007-08, and the Economic Advisory Council expects this to be retained at around the same level. This had brought us GDP of 9% in 2007-08, and the capital efficiency of the economy is unlikely to drop drastically from one year to the next. Even assuming a fall in investment arising from higher interest rates, this should not dent the growth rate to below the 8% level.
There are huge demand injections coming into the economy from increased Government expenditures on NREGS, loan waiver, and Sixth Pay Commission award. These are likely to boost the sagging consumer durables sector. All eyes will be on the festival season, coming early this year.
The services sector has continued to perform well in the first quarter. This is an area that is somewhat immune to poor infrastructure, lack of adequate power and incomplete physical connectivity. The sector now comprises over 55% of the GDP, and its continued performance can help preserve the growth momentum.
Corporates are maintaining the pipeline of investments of $700 billion over the next three years in projects already committed. CMIE’s data also reveals that corporate investments are robust, with announcements of fresh investments at $117 billion in the first quarter of FY09. In July alone, $45 billion of new projects were noted, as compared to the monthly average of $33 billion last year. As per the CSO data, bank credit expanded by 25.8% in Q1. There is no liquidity crunch in the Indian financial system, and banks are ready to lend. Non-food credit to the commercial sector went up by 25.9% in the first week of July compared to 24.6% in the same period last year.
FDI inflow has also been very healthy, although FIIs have reversed the earlier positive flow. For the first quarter, FDI of over $10 billion came into the country, as compared to $25 billion in the whole of 2007-08. Indian companies are also sourcing funds overseas at lower costs. As per RBI figures, ECB in 2007-08 was 54% more than the previous year, while equity raised through ADR/GDR in Q1 FY 09 was three times that in Q1 of last year.
Rural demand remains strong, buoyed by excellent agricultural performance last fiscal and continued growth in Q1. Sowing in the kharif season came in at 1.3 million hectares more than the corresponding period last year. High global rice prices have boosted area under rice cultivation. The weakening of the monsoons in the last month might impact agricultural growth, but demand in villages is not expected to slacken.
Export performance continues to be robust. It is likely that as overseas banks cut costs, they will turn increasingly to cheaper outsourcing, and India has proven strengths in financial software services. In the goods market, global downturn could mean shifting of price preferences to more competitive sources and India should take advantage of this.
There are indications that economic activity might pick up in the remaining three quarters. A big boost has been the performance of the US economy in the second quarter, which might point to a faster recovery from recession than expected, although employment figures are still of concern. US growth has been driven by exports, which in turn arose from the declining value of the dollar. However, the dollar is again strengthening against major currencies, particularly the Euro, and implications for the US recession are uncertain. US pain has been felt globally with major economies experiencing slower growth, but it is widely believed that recession will last only through this year.
For India, a falling rupee means more goods and services are exported. At the same time, commodity prices have also moderated, particularly oil. Analysts, who just a few months ago were talking about $200 per barrel prices, are now pointing to the global economic downturn as a reason for oil prices to come down below $100. These developments are good news for India, and once the effects of the monsoon become clearer, we can expect inflation to come down and growth to resume at the earlier level.
Inflation remains the key threat to the economy at well over 12%. Tolerance for price rise is low in India, although CPI is estimated to be below double-digit rates. Interest rate hikes since 2006 have helped limit the upward spiral, as compared to other countries which have been facing much higher inflation rates. Responses to inflation have varied across the globe; weaker growth and slowing inflation have prompted many central banks – Australia, Eurozone, and Canada - to consider maintaining their interest rates unchanged this month. In India however RBI is likely to continue raising rates this year.
This would further put the lid on GDP growth, and would definitely hit future investment plans. Interest cost rise coupled with higher input costs and demand deceleration are acting as major brakes to incremental investments. So far, industry has been able to deal with rising cost pressures through improvements in factor productivity, driven by innovations. However, if interest rates continue to be hiked and returns to investment drift downwards, industry may be constrained to review fresh investment plans.
The higher rates of inflation call for rapid response measures in other areas such as alleviating supply chain bottlenecks. The persistence of supply chasms in power, transport, mining, etc. adds tremendously to inflationary pressures. Reforms to increase agricultural productivity, improve PPP in infrastructure, boost the mining sector, and better the investment climate are sorely needed. Some measures can be taken rapidly for immediate results – for example, increasing ECB limits - while others would take time to play out. Overall, though, such measures would reduce transaction times and costs across the economy and raise competitiveness with respect to the global economy.
Another source of concern is the pressure on the fiscal performance of the Government. Although tax revenues are still buoyant, hidden Government expenses are expected to push the fiscal deficit to as high as 7-8% and higher if deficits of state governments are added. Oil under-recoveries to the tune of Rs. 200,000 crores and issuance of bonds of up to half that amount can crowd out funds in the long run. This would negatively impact infrastructure financing with long time horizons. The solution lies in hefty additions to the consumer prices for petroleum and products, a politically and socially sensitive move. Government would have to weigh long-term costs of oil subsidies to future prices and growth against possible social unrest and inflationary pain in the short-term. There are no easy answers.
After five years of heady growth, we are potentially in a crunch situation. Tough decisions will have to be made at all levels – government, industry, consumers – and some belt-tightening might be in order. While there are pressures on top- and bottom-lines, India’s growth trajectory cannot but remain steeply upward bound as 1.1 billion people aspire to a better future.
Subscribe to:
Posts (Atom)