Economy under stress

BRP Bhaskar
Gulf Today

With inflation ruling high, industrial production falling and the rupee sliding, the Indian economy is under heavy pressure. While the authorities assert it has the resilience to bounce back, the current distress is certain to cause hurt in the short run.

Inflation remained above 9 per cent throughout this year, forcing the Reserve Bank of India to tighten money control by repeatedly raising interest rates. A quarter point increase in interest rate it ordered in October was the 13th since March 2010.

Last month the inflation rate dropped to 9.1 per cent, largely due to fall in the prices of food articles, particularly vegetables. This was the lowest point touched this year, but that gave the government no comfort as the figure was way above its target.

In September industrial production had registered a small expansion of 1.9 per cent. Production figures for October, released last week, showed a small contraction. This was the first time in nearly two-and-a-half years that a negative growth rate had been recorded.

A fall in industrial production had been forecast but the extent of decline surprised the authorities. As against an anticipated decline of 0.5 to 1.0 per cent over a year, there was a sharp fall of 5.1 per cent.

A comparison of industrial production figures of October with those of the same month last year reveals a vastly altered scenario. In October 2010, consumer goods output had registered an increase of 9.3 per cent. Consumer durables recorded a growth of 14.2 per cent and non-durables 5 per cent. This October consumer goods production fell by 0.8 per cent with durables recording a decline of 0.3 per cent and non-durables 1.3 per cent.

The Reserve Bank was faced with a difficult choice. Industrialists wanted it to loosen money control to help boost production. Ordinary citizens looked up to it to take further measures to contain inflation. Opting for the middle path, it decided to hold interest rates at the prevailing levels.

At the moment, the government’s major worry is the decline in the value of the rupee. Last week it fell to an all-time low of Rs 54.30 to the dollar. In a quick response, the Reserve Bank imposed curbs on forward trading in the currency. That brought some relief. The value improved to Rs 52.75 to the dollar.

During the past two years, as the advanced countries faced serious difficulties, the Indian economy had shown remarkable buoyancy, leading to a high degree of optimism in policy-makers about its ability to withstand the effect of the global meltdown. They have limitations in addressing the current situation as at the root of the troubles are some factors beyond their control such as the crisis in Europe and flight of foreign capital.

Europe is one of India’s major trade partners, accounting for 23.8 per cent of its exports and 18.7 per cent of its imports. In 2004 India became a strategic partner of the European Union and the following years witnessed a determined effort to realise the full potential of the partnership.

Unlike in the case of the other major economies, India’s trade in goods and services with the EU is fairly well balanced. Last year the EU exported to India goods worth Euro 34.7 billion and services worth Euro 9.8 billion and imported from India goods worth Euro 33.2 billion and services worth Euro 8.1 billion. EU investments in India last year totalled Euro 3.0 billion. Indian investments in EU amounted to only Euro 600 million.

While there is clamour for action by the government and the central bank to arrest the slide of the rupee, the country’s heavy reliance on energy imports and the persisting inflation limit the room for manoeuvre. Placing curbs on flight of capital is not a feasible option. Financial circles, therefore, expect the authorities to take other measures such as allowing companies to borrow abroad more freely to boost dollar inflows.

Prime Minister Manmohan Singh asserted during the weekend that the present setback is temporary and the country has the ability to sustain a growth rate of eight per cent or even nine per cent during the next five years.

However there is a problem. He believes the way out of the current difficulties is acceleration of the globalisation process, held back by political compulsions. The Western economies’ continuing troubles have not persuaded him to shed the illusion that India can move ahead along the development path charted by them which excludes social justice.--Gulf Today, Sharjah, December 19, 2011