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