Coping with economic ills

BRP Bhaskar
Gulf Today

With the rupee in free fall, the stock market in violent fluctuation and inflation in two digits, last week threw up evidence that India’s economy is ailing.

While presenting the budget, Finance Minister P Chidambaram had held out hopes of a growth rate of 6.1 to 6.7 per cent during this year. Replying to a debate on the state of the currency in the upper house of Parliament on Friday, Prime Minister Manmohan Singh lowered the target to 5.5 per cent. Data released by the Central Statistical Organisation later shows even this may be unrealistic.

The CSO report said growth in the first quarter of the fiscal was only 4.4 per cent, the lowest since the global meltdown of 2009. The growth rate fell in every sector of the economy except that of social and personal services, which registered an increase — from 8.9 per cent to 9.4 per cent.

Some foreign analysts and domestic critics cited the Food Security Bill, which provides for heavy subsidy on grains supplied to the poor, as one of the reasons for the decline of the rupee. The fact, however, is that the rupee began falling weeks before the bill was adopted by the lower house of Parliament, and it was caused primarily by global investors moving money out of foreign financial markets following the US move to tighten money policy in view of improvement in its economy.

The economies of many countries had suffered when the US experienced meltdown a few years ago. It is ironic that some of them now suffer because the US economy is improving.

The rupee is not the only currency affected by outflow of foreign investment. The currencies of many developing countries from Brazil to Indonesia have suffered erosion in recent weeks. However, the rupee happens to be the worst hit.

India received foreign institutional investment of $12 billion this year. About $1 billion went out in a fortnight as investors began pulling out.

The main cause of the plight of the rupee is the growth in the current account deficit — the gap between the value of imports and that of exports — which touched an all-time high of $88.2 billion during the last financial year. This was 4.8 per cent of the GDP. The government planned to reduce the CAD to $70 billion, or 3.7 per cent of the GDP, this year. High oil and gold imports foiled its efforts.

Appeals to the public to reduce oil and gold consumption having failed, the government is considering other remedial measures. Buying more oil from Iran paying rupees and keeping petrol outlets closed from 8pm to 8am are among the ideas mooted to reduce oil import bill. Austerity measures are also envisaged.

Some analysts have likened the current situation to what prevailed in the early 1990s when India borrowed heavily from the International Monetary Fund and suggested going back to the IMF. However the government says the situation does not warrant recourse to IMF aid.

Its optimism is based mainly on two factors. One is that the country has foreign exchange reserves of about $280 billion as against short-term debts of about $172 billion. The other is that since there was plentiful rain during the year the outlook on the farm front is bright.

However, Corporate India has cause for worry. Taking advantage of the economic reforms, many companies borrowed heavily from abroad and the falling rupee has pushed up their repayment burden.

A US website has quoted an official of the financial services firm Morgan Stanley as saying 25 per cent of Indian companies technically do not have enough money to make interest payments and 15 per cent have negative cash flows.

Manmohan Singh shares Corporate India’s view that the answer to the current economic problems lies in more reform. However, since general elections are approaching, he cannot overlook the fact economic reform, while benefiting big corporations, has added to the misery of the poor. The food security and land acquisition measures which the government is trying to push through are aimed at mitigating its impact on the vulnerable sections of the population.

Amid the gloom of the week the state-owned Life Insurance Corporation spread a bit of cheer by releasing a report of the global research firm Dun and Bradstreet, which said India is likely to achieve an average growth rate of over 8.3 per cent between 2014 and 2020 and realise its full potential. -- Gulf Today, Sharjah, September 3, 2013.

Economy at a crossroads

BRP Bhaskar
Gulf Today

Is the Indian dream fading? With the growth rate sliding, the rupee falling and the stock market going for a spin, this question is being raised within the country and abroad.

Last week a foreign news agency quoted a spokesman of India Inc as saying, “We have a full-blown crisis on our hands.” In a report which painted a picture of a paralysed political leadership and a drifting economy, the agency also quoted former US envoy Tim Roemer as saying the American business community was “increasingly frustrated and fatigued by flip-flops and roll-backs and reversals of decisions.”

Both were batting for acceleration of the globalisation process which has been on hold for some time in the face of strong opposition from some of the Congress party’s allies in the ruling United Progressive Alliance. Foreign and domestic business interests argue that more reform is the answer to India’s current problems but the experience of the fully globalised economies does not bear this out.

India emerged without major injury from the global economic meltdown of 2007 primarily because reform measures had not gone so far as to draw it deep into the financial convulsions of the time.  Foreign investors found it an attractive market and the economy continued to grow at a fast pace.

The scenario has changed somewhat since then. Last month the global agency Standard & Poor’s lowered India’s sovereign credit rating outlook from “stable” to “negative”, citing concerns over rising fiscal deficit and debt burden and lower growth rate.

Officials point out that there has been no general downgrading of credit rating and that the outlook on long-term ratings has in fact been revised from “negative” to “stable”. However, fears that foreign investors may shy away persist.

Finance Minister Pranab Mukherjee, who attributes the current difficulties to the Eurozone downturn, says the government has noted the concerns and is taking steps to strengthen and sustain robust economic growth.     

Advocates of accelerated reform attribute the government’s reluctance to move forward to differences between Prime Minister Manmohan Singh and the Finance Minister. They believe Manmohan Singh, who, as Finance Minister, began the process of dismantling the controlled economic system, is willing to go forward but Pranab Mukherjee, who is a pragmatic politician, is holding the government back.

The country no doubt is facing a serious situation. At the end of the last financial year the fiscal deficit stood at Rs522 billion. While the government’s income rose by only 36 per cent in the previous five years the deficit shot up by 312 per cent. The trade deficit mounted to $185 billion. The rupee fell to 54.91 against the dollar, the lowest level so far.

Many believe a slight fall in the value of the rupee was necessary as a corrective measure but with importers buying up dollars to hedge against the global uncertainty the decline has gone way beyond the desirable level. Everybody is looking up to the government and the central bank to intervene and arrest the slide but they have to move cautiously lest they should add to inflation, which is already running high.

Foreign and domestic corporate interests consider the situation ripe to press home the International Monetary Fund’s proposal to cut subsidies. When they talk of subsidies, they have in mind the subsidies on food, fertilisers and petroleum products like diesel, kerosene and cooking gas, which by and large benefit the poor and the middle class. They overlook the subsidies that benefit the affluent, which are a bigger drain on the economy than those that benefit the poor.

In the most recent budget, food, fertiliser and petroleum subsidies add up to a mere Rs2,163 billion. The subsidies to the rich, which figure in the document under the head “revenue foregone”, total Rs4,373 billion. The figure includes customs duty waiver of Rs1,953 billion, excise duty waiver of Rs1,691 billion and corporate income tax waiver of Rs729 billion.

In 2008, corporate tax in India was only 17.3 per cent while it ranged between 20.7 per cent and 37.0 per cent in the other BRICS states and between 30 per cent and 50 per cent in the developed economies. Since then it has come down to 14.7 per cent. Is it any wonder that India is producing billionaires faster than any other country?

Emergent India is at a crossroads. It has to decide whether to follow the route that landed the developed economies in the throes of crisis or furrow a new path taking into account its special circumstances. It will be disastrous to let less than one per cent walk away with undue gains and heap new burdens and make life more difficult for more than 99 per cent.--Gulf Today, Sharjah, May 22, 2012.

A year everyone wants to forget

BRP Bhaskar
Gulf Today

Political chicanery touched a new low in the closing days of 2011, and as the New Year dawned India’s ruling alliance and the opposition were blaming each other for the sad state of affairs.

The economy was not doing well. The annual growth rate slipped to 6.9 per cent. The government, forced to backtrack on opening up of retail trade to foreign direct investment, was clueless on how to move forward.

Inflation, rising interest rates and the continuing global economic crisis hit the stock exchange, causing investors a loss of Rs 20,000 billion during the year. Foreign investors, who had pumped more than $29 billion into the Indian economy, began pulling out. By year-end, they had withdrawn about $ 320 million, damaging the rupee in the process.

The news from the agriculture sector, which plays an important if declining role, too, was depressing with farmers’ deteriorating condition giving rise to fresh worries.

All across the country the marginalised people were battling with gnawing poverty on the one side and domestic and international conglomerates, intruding into their homelands to set up mining or manufacturing projects, on the other.

Little wonder that Prime Minister Manmohan Singh, in his New Year’s Day exhortation to the people to work together, avoided dwelling on the year gone by and tried instead to put the focus on the challenges ahead. But how can one work out a reliable strategy to face the future without looking back on the past and drawing appropriate lessons?

Corruption in high places was laid bare during the year as investigating agencies, pursuing cases under judicial prodding, arrested a few politicians, bureaucrats and business personnel in connection with Central and state scams. Thanks to the pressure built up by social activist Anna Hazare’s campaign the political establishment was compelled to think of a new anti-corruption dispensation.

No one expected the bill the government brought forward on this connection to have a smooth passage through Parliament since the polity was deeply divided. As it happened, the parties got together and made sure, in their own disparate ways, that the measure fell through.

The government had extended the session of Parliament by three days to discuss and adopt the bill. The lower house, sitting till midnight, adopted it on the first day itself but rejected the move to give the proposed ombudsmen constitutional status. The upper house took up the bill on the third day, discussed it till midnight and then adjourned without voting on it. Had there been a vote, the house, in which the ruling coalition is in a minority, would have rejected the bill or mauled it beyond recognition.

Anna Hazare and his chief lieutenants, who began a three-day fast, coinciding with the session of Parliament, gave up the protest midway, disillusioned by the poor response their campaign evoked this time despite continuous live coverage by the private television channels.

While the government can take comfort from the fact that the opposition and the Hazare movement, too, did not cover themselves with glory, it cannot afford to go easy on anti-graft measures. Its credibility is low, and it has to redeem itself to play its part in facing the challenges on the economic and social fronts.

The current difficulties notwithstanding, the economy is inherently strong, and the West is looking up to the 350-million strong Indian middle class as a force that can help in the global recovery. However, the government has to be mindful of the presence of an even bigger mass of people waiting to be lifted up.

The inclusive development the government keeps talking about is yet to translate itself into reality. The Prime Minister, in his New Year’s Day message, spoke of the need to focus on banishment of poverty in the 12th five-year plan, which begins in April 2012.

A big test awaits the political class in Uttar Pradesh, which goes to the polls in February along with four smaller states.

The Congress, which heads the central government, and the Bharatiya Janata Party, the main opposition, were in the fourth and third position respectively in the last Assembly elections in the state, which the Bahujan Samaj Party won with a thin majority. How well they do in this sprawling state will have a bearing on their prospects in the parliamentary elections, due in 2014.--Gulf Today, Sharjah, January 2, 2012.

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