Ways of looking at the economy

BRP Bhaskar
Gulf Today

India’s star shines bright amid global economic challenges, International Monetary Fund Managing Director Christine Lagarde said in New Delhi earlier this month. It now has the fastest growing economy and the largest and youngest workforce and is in the process of reforming the system, she noted.

The reform process began in 1991. A quarter century later, it still faces many obstacles. The first Congress-led United Progressive Alliance government could not go ahead with some proposals due to strong opposition from the Left parties which sustained it in office. When UPA II came up with a constitutional amendment to provide for a uniform pattern of tax on goods and services across the country the Bharatiya Janata Party, which was in the opposition, did not cooperate. Now, as the ruling party, the BJP is eager to take the measure forward but the Congress stands in the way.

The BJP and the Congress agree on steps to make it easy to acquire land for industries but the people who stand to lose their farmlands and homesteads are up in arms against them. Changes of the kind the International Monetary Fund is pressing for may not, therefore, come easily. However, India is well set to retain its status as the fastest growing economy as no credible challenger is in sight.

According to World Bank data, China’s growth rate stood at 9.5 per cent in 2011 and India’s at 6.6 per cent. Since then China’s growth has fallen continuously and India’s has risen except in one year. In the process, they levelled at 7.3 per cent last year. The projection for India in the current financial year is 7.5 per cent against China’s 7.1 per cent.

On the strength of the growth rate, Finance Minister Arun Jaitley claimed that the economy had recovered from the effects of the global slowdown. But former Prime Minister Manmohan Singh, who, as Finance Minister, had initiated the economic reform process in 1991, termed the recovery very fragile. Touched to the quick, Jaitley said, “In a global slowdown situation, to have the fastest growth rate in the world certainly does not make the Indian economy fragile.”

Chief Economic Adviser Arvind Subramanian sought credit for the government for the fast growth rate. He said the manufacturing and service sectors, which were under the government’s control, had done well while the farm and export sectors, which were not under its control, had not done so well.

The steep fall in oil prices in the international market helped India, which imports 70 per cent of its crude requirements, to contain inflation and the current account deficit. But it also hurt to some extent by reducing foreign demand for its products.

Alyssa Ayres, Senior Fellow at the Council on Foreign Relations, in a testimony before a Congressional committee urged the US to “elevate support for India’s growth to the highest bilateral priority” and to “work more comprehensively to integrate India in the global economic institutions”.

She mentioned in particular the Asia Pacific Economic Cooperation (APEC) forum, which has not acted upon India’s application for membership for two decades, the Organisation for Economic Cooperation and Development (OECD), where India has the status of “key partner”, and the International Energy Agency (IEA).

China, which is watching the US moves, is of the view that unrealistic praise and forecasts for India are painting a false picture. “There is no possibility of India surpassing China,” the Communist Party’s English tabloid, Global Times, said in an article last week.

Growth rate is not a reliable measure of the robustness of the economy. A developed economy cannot be expected to chalk up a high growth rate. The US growth rate in the last four years, for instance, ranged between 2.9 per cent and 4.1 per cent. Assessment of the economy entirely on the basis of the growth rate will, therefore, be misleading.

“It is inescapably clear that India won’t easily outgrow China as predicted by the West,” the Global Times article said. “From a macro perspective, China’s GDP in 2015 was nearly $10.42 trillion, which is around five times as much as India’s $2.18 trillion.”

IMF data of GDP shows that vast gaps separate India from China, and China from the US. In per capita terms, China’s GDP is 25 per cent of the US’s and India’s 11 per cent. Until India is able to carry with it the vast excluded sections of its population, the high growth rate will be of little avail. - Gulf Today, Sharjah, March 22, 2016.

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: Hope and despair

BRP Bhaskar
Gulf Today

India’s $1.9 trillion economy is showing signs of slow recovery but the big rebound which the recession-hit countries are looking for, in their own interest, is still not in sight.

Data released by the Central Statistical Organisation last week shows that the economy registered a growth of five per cent during the financial year which ended on March 31. Growth in the previous year was 6.2 per cent.

The new figure is in line with the CSO’s previous estimate which Finance Minister P Chidambaram had discounted, saying it was based on outdated data. Clearly the minister and his advisers are out of tune with ground realities. 

The current growth rate is the lowest in a decade. Many challenges have to be overcome to push it back to the previous best of nine per cent and fulfil the expectation of becoming a major driver of global economic recovery.

All sectors of the economy declined last year. In agriculture the growth rate was down from 3.6 per cent to 1.9 per cent, in manufacturing from 2.7 per cent to one per cent and in the services sector from 8.2 per cent to 7.1 per cent. The mining sector witnessed a drop of 0.6 per cent for the second successive year. There was, however, a slight all-round improvement during January-March, the last quarter of the financial year, raising hopes of a turnaround.

One factor, which retarded the growth rate during the year, was the cut-down on public spending. The government deliberately held down expenditure to prevent a slide in the country’s investment-grade sovereign rating. Incidentally, this did some good to the economy by reducing the fiscal deficit to 4.9 per cent of the gross domestic product from 5.8 per cent last year.

Another factor which kept the growth rate down was the inflationary pressure which reduced private spending. Capital investment was also low.

Foreign and domestic business interests have been pressing for acceleration of the reform process to attract more investment. The government, which opened up retail trade and the aviation and insurance sectors to foreign direct investment last year, is ready to do more but the political climate is not conducive to quick forward movement.

The Congress-led United Progressive Alliance is in a minority in parliament and is surviving on the goodwill of several parties which are not supportive of reforms. It is keen to make changes in the law to make it easy to acquire land for mega projects and grant environmental clearance. The Bharatiya Janata Party, the main opposition, is in agreement with the government on these issues but foiled its efforts to pass the necessary legislation during the last session of parliament by repeatedly disrupting the proceedings on the issue of corruption.

Even if the government has its way, it will have to overcome widespread popular sentiments against alienation of land and destruction of the environment. Many big projects are in trouble because of stiff opposition from the people, not because of inadequacy of laws. Repressive measures are not an easily exercisable option when elections are less than a year away.

Notwithstanding the current low growth rate, the Paris-based Organisation for Economic Cooperation and Development reckons that India may have already overtaken Japan, which has been in the doldrums for many years, and become the world’s third largest economy after the United States and China.

The OECD’s Economic Outlook report, released last week, says China is likely to overtake the US and emerge as the world’s largest economy in the next few years. It expects China to continue to record the highest growth rate among major countries till about 2030 before experiencing a slowdown which will enable India to get ahead of it. 

It adds, “Between now and 2060, GDP per capita is seen to increase more than eight-fold in India and six-fold in Indonesia and China.”

Can this rosy forecast come true while poverty dogs the nation’s footsteps? A World Bank study released in April said India accounts for one-third of the world’s poor. Many of the measures the government is contemplating to promote economic growth will directly hurt the poor and make their lives more miserable.

The mowing down of 27 Congress leaders of the predominantly tribal Chhattisgarh state by ultra-left guerrillas in a daring attack on May 25 is a bloody reminder of the dangers of pushing ahead with reforms, ignoring the widening gap between the rich and the poor. -- Gulf Today, Sharjah, June 4, 2013.

Price of economic reform

BRP Bhaskar
Gulf Today

Encouraged by recent government measures indicating a new resolve to forge ahead with reforms, which were held back under political compulsion, foreign analysts and investment brokers last week held out before India visions of a new phase of rapid economic growth.

In a recorded conversation with JP Morgan Chase International chairman Jacob A Frenkel, Stanford University economics professor Nicholas Bloom said India has the potential to grow at least as fast as China if it sorted out domestic problems like labour regulations, the permits system, restrictions on trade and foreign direct investment (FDI) and “a horribly ineffective court system.”

Arjun Singh, Senior Economist at the India office of a firm which claims to be the world’s leading source of business information, said in a newspaper interview that the country could not leverage its large fundamental growth drivers because of lack of reforms. He expected a turnaround in the economy by the middle of 2013 if the government carried forward the reform process.

While India’s demographics give the best potential GDP growth rate, inability to introduce effective policy change is a persistent source of disappointment, said Golden Sachs Asset Management Chairman Jim O’Neill in a note distributed to the media. Based on signs of change in the government’s approach, he hinted at the country doing better than expected in the coming year. The US National Intelligence Council’s forecast, released on December 10, was music to Indian ears. In the once-in-four-years Global Trends report, it averred that by 2030 Asia, mainly India, would straddle international commerce and dominate the world economy, as was the case before 1500 CE.

With the Chinese economy decelerating and the West in decline, India will have the chance to power the world after 2015, it said. Although China is ahead at present, India will be able to close the gap and forge ahead of it. While China’s working population will peak to 994 million by 2016 and decline to 961 million by 2030, India’s will continue to grow until around 2050. Also, India will have more middle-class consumers than China.

The reports about the bright future that awaits India are apparently intended to goad the government into going ahead with reforms.

World Bank Chief Economist Kaushik Basu, who is a former chief economic adviser to the Indian government, chipped in with an exhortation to keep up the blitz of reforms as it will help the economy, which slipped this year to the lowest growth rate in a decade, to return to the nine per cent growth recorded earlier.

More reform measures will certainly please foreign and domestic investors. But the poor will have to pay a heavy price for it. Not surprisingly, this fact does not figure in the experts’ forecasts.

After years of hesitation, the government recently allowed FDI in multi-brand retail trade and raised the FDI cap on insurance and aviation sectors, overlooking the objections of some of the parties supporting the ruling coalition. When the opposition challenged the retail FDI decision in parliament it had a tough time cajoling these parties to vote with it or stay out.

Last week the government decided on two more measures to address foreign investors’ complaints of bottlenecks. It set up a Cabinet Committee to grant swift clearance to projects with investment of over Rs10 billion. It also approved the draft of a new land law to facilitate quick acquisition of land for industries.

Besides promising farmers higher prices for their land, the new law will enable companies to buy contiguous property if 80 per cent of the owners agree to sell. In the case of projects involving public-private partnership, the assent of 70 per cent owners will suffice.

With farmers refusing to give up their lands and tribals resisting eviction from their traditional homelands, several big projects have run into difficulties. Since the land issue involves a large number of small and marginal farmers, many political parties will find it difficult to go along with the government.

In the circumstances, the bill to amend the land law is bound to meet with stiff opposition in parliament. This will call for more arm-twisting than on the FDI issue. The parties will have to weigh how their stand will affect their prospects in the parliamentary elections due in 2014. If the government is defeated on a crucial legislative measure like this it will have no option but to bow out.--Gulf Today, Sharjah, December 18, 2012.

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

Economy looking up

BRP Bhaskar
Gulf Today

With parliament unable to function for several weeks, the Indian political scenario presents a depressing picture but there is good news from the economic front. The rate of growth of industrial production has climbed back to two digits and the authorities expect faster growth this year than was earlier anticipated.

The finance ministry, in its mid-term review, said the economy could grow at the rate of 8.75 per cent or even above 9 per cent in the current fiscal.

“It is estimated that growth in 2010-11 will be 8.40 to 9.10 per cent,” it said. “The range indicates the possibility of crossing the 9 per cent mark this year itself, but is wider than the earlier estimate owing to higher risk factors, which includes the economic situation in the Euro area turning worse.”

Official figures released last week showed a growth of 10.8 per cent in industrial production in October, which was way above the targeted figure of 8.5 per cent. What made this possible was a spurt in the manufacturing sector, which registered a production increase of 11.3 per cent.

In July, industrial production had soared to 15.1 per cent but there was a sharp fall later and the growth rate was only 4.4 per cent in September. The cumulative growth for the period April-October this year was 10.3 per cent as against 6.9 per cent for the corresponding period last year.

Automobile and television sales pushed up the growth rate of consumer durables to 31 per cent. As a result, despite the tardy growth of only 0.1 per cent in non-durables, there was an overall growth of 9.6 per cent in consumer goods production.

The message that flows from these figures is that the country can look forward to achieving a growth rate of 8.75 per cent in the current year.

Two factors helped the Indian economy to withstand the impact of the global meltdown with comparative ease. One was that the process of integration with the global economy was far from complete. The other was that the country’s financial system was still in the conservative mould of the pre-globalisation era.

However, there is room to doubt if such factors can be relied upon beyond a point. The recent revelations of massive manipulations by the powerful corporate sector and the high volatility of the stock market contain warnings that cannot be ignored.

The Bombay Stock Exchange, which touched the pre-meltdown levels earlier this year, came under severe selling pressure in the wake of the 2G spectrum allocation scam, which has brought parliament to a standstill. To make things worse, some grave irregularities in housing finance also came to light. The head of a public sector corporation and some bank executives were among those arrested by the Central Bureau of Investigation in connection with suspicious housing loans.

Some outflow of foreign capital was also reported. However, the authorities do not see that as a major problem. They believe India retains the ability to attract capital as it offers a better return on investments than most countries.

Global financial experts generally share the Indian authorities’ optimistic outlook. Early this year Morgan Stanley had raised its estimate of India’s economic growth rate from 8 per cent to 8.5 per cent. It cited increased domestic demand and investments as the key driving forces.

At the same time, it warned that higher growth would be followed by higher inflation. This is a problem the authorities are well aware of. Finance Minister Pranab Mukherjee recently acknowledged the need to return to fiscal consolidation. He noted that India has a trade deficit of $56 billion and a current account deficit of three per cent and said they could not be maintained at these levels for long.

One worry for India in this context is the Euro crisis. Europe accounts for 36 per cent of India’s exports. Europe’s economic health therefore has a bearing on India’s.

“The government needs to keep a watch on the surging inflation number,” Mukherjee said. Planning Commission deputy chairman Montek Singh Ahluwalia concurred. “We cannot afford to relax the vigil on inflation,” he said. “It still remains a matter of concern.”

The whole sale price index, which is watched closely to gauge inflationary trends, was 8.62 per cent above the previous year’s level in September and 8.58 per cent above in October.

The Reserve Bank of India, the country’s central bank, is already in the process of exiting from the “accommodative” policy that was laid down to tide over the situation resulting from the global meltdown. It is expected to step in if inflation does not decline to an acceptable level by March next year.

While the economy does well, politicians and even businessmen may be able to get away with their misdeeds. -- Gulf Today

, Sharjah, December 13, 2010.