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
Monday, October 13, 2008
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.
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