Economic Highlights

New Delhi, 30 January 2009

2009 Projections Worse

DEFLATION IS ROUND THE CORNER

By Shivaji Sarkar

Deflation is round the corner, warns Reserve Bank Governor D Subbarao. Seven months ago his predecessor YV Reddy had warned of a stagflation. Neither is ruled out. The Indian economy is going through a severe crisis and the Central bank says the period would last longer than it had expected.

The growth projections have been revised to 7 per cent by Pranab Mukherjee, who is standing in as the finance minister. The Central bank indicates further “downward bias”, in the words of Subbarao. So what are we looking at? Deflation-- a period of fall in the overall growth with fall in demand and prices. In some sectors like metals, the economy is facing it. The demand slump has dented Tata Steel. Its material costs has surged 80 per cent and sales have taken a hit.

Stagflation is fall in production – growth – but without a corresponding fall in prices. On the contrary prices move upwards. Most sectors are having this problem. Even RBI does not agree that prices are falling. In its latest Review of Monetary Policy, it has expressed concern over the rise in consumer price index (CPI). It touches 10.45 per cent for industrial workers to 11.14 per cent for rural and agricultural labourers.

The RBI is not surprised. The wholesale price index (WPI), which has come down to 5.64 per cent – though of late showing a sign of increase-- represents only 17 per cent of items. Prices of food articles continue to rise. This affects generation of demand for manufactured and other items. It leads to job losses and further reduction in demand. It is a vortex.

Respite is not seen. “The globalization is a double-edged sword”, says Subba Rao. India had some benefits of it but in times of crisis it has to take a hit. The economy could not be insulated, he adds, and could only be partially moderated through regulatory measures. This is so because the capacity of the Indian system is limited. Various regulators do not act on pro-active basis. They only react to situations and try to show perceptive neutrality. The RBI lifted the ban imposed in 2003, on bank auditing by Price Waterhouse Coopers at a crucial time, when it was found to be collaborating with Satyam.

Growth is contracting the world over. The International Monetary Fund (IMF) has been continuously bringing down its projections. In market exchange terms deceleration is likely to touch 1.1 per cent or even go below it. It forecasts job losses so far in the most vibrant western economies. The IMF has cautioned that the downside risks to these global growth projections have further intensified. The question is: Would affluence in the West be replaced by poverty? Nobody says it but all imply it.

This poses another stark question. The centre of economic activity might be replaced in the not so long a term. Western economies had thrived on the principle of exploitation of Asia and Africa through colonial and sub-colonial rule. Their domination had created an economy that sustained on severe disparity. More Asia and Africa suffered; more was the growth or development of the affluent West. It was an unsustainable model. But the nature’s corrective procedures are also not easy to understand.

The world is now keen to understand whether the recent change in economic outlook would change the fortunes of Indian and other Asian economies or not. The Asian economies apparently are in a state of shock. They are unable to project a path on their own. Be it India, China or Japan – they are all in a quandary. Having integrated their economies with the colonial or neo-colonial masters, they are yet to come out of the daze.

These economies need to view the present crisis as an opportunity and snatch the opportunities to create a future equitable model of growth. They should realise that the world economy requires new drivers. They should plan to take the driver’s seat.

Unfortunately, they are looking towards the new US President Barack Obama for bringing in a change in fortunes. Well, are they not backing the wrong horse? He has indicated in many words that to tide over the domestic crisis they would need to take recourse to the swadeshi mantra. It simply means that the jobs and the growth that had spilled over to some parts of Asia would now be contracted to make the US the hub of new activity. Therefore, he is likely to devise policies and a framework to insulate the US economy from global upsurge.

This is contrary to what the RBI governor is saying. If the US could consider insulation or quarantining of its economy, it is all the more reason for India to mull over it. The country has been following the West for too long a time. Now it must chart out its own course. When someone is sick, he is quarantined. The Indian economy is sick but doctors want to keep it under shroud. It is economic ‘ostpolitic’ – ostrich like policy. Insulation from the global system is required to formulate a new policy.

Sadly, the Indian system seems to lack the will. In the political front, the nation is failing to deal with a rogue State like Pakistan and on the economic front it does not show the inclination and courage to chart out a new course.

The RBI policy regrettably is restricted to issuing of grim warnings. It has cautioned about severe credit crunch. Banks are not listening to its dictat. External borrowing sources are drying up. Worse, the Government borrowings are going beyond limits– Central government borrowings rose by Rs 74,201 crore more than the budget projections of Rs 178,575 crore. It touched Rs 252,154 crore. In addition, State governments have borrowed Rs 46,327 crore. Correspondingly tax and non-tax revenue collections are falling and expenses are growing.

Clearly all this indicates that the nation has to gird up its loins. Economic indicators point to overall contraction, fall in urban consumption, stagnation in rural consumption, slowing down of industrial and economic production and fall in exports of textile, jewellery, commodities and even software. In the absence of good drivers, 2009 is likely to be far worse than the previous year. ---INFA.

(Copyright, India News and Feature Alliance)