Economic Highlights

New Delhi, 4 September 2009

Of Drought & Inflation

CAN THE NATION BE OPTIMISTC?

By Shivaji Sarkar

The nation should not be “over pessimistic” despite the drought, Prime Minister Manmohan Singh told the Planning Commission’s first meeting after the new Government took over. But the Commission’s Deputy Chairman, Montek Singh Ahluwalia said almost the contrary: that the growth as recorded in the official documents of the first quarter is to gradually come down and pepper off in the last quarter.

Well, the Prime Minister is optimistic that since “our food stocks are very high” the consequences of drought could be managed. He obviously meant that the situation would not be too inflationary. However, only three days ago the Reserve Bank said the “spectre of inflation is expected to rear its head by the end of the current financial year, which could pose a major challenge”.

The apex bank explains that “deficient monsoon could affect the inflation outlook more than the growth prospects”. Further, easing the base-effect and possible strengthening of fuel and food prices would take inflation to high levels, which in turn would pose a threat to the process of economic revival.

The Prime Minister has the onerous task of keeping the nation’s morale high. Therefore, it is expected that his purpose was of presenting not so gloomy a picture. One only hopes that this nation is not following Queen Elizabeth II, who in July asked why nobody had predicted the great recession. She did not remember that dozens of economists and journalists had warned repeatedly that the world suffered from unsustainable asset bubbles, imbalances and debt.

In the case of India, we often try to ignore realities. Three days after the new trade policy was announced targeting $ 200 billion exports in 2010-11, the July exports fell by 28 per cent. Along with that came the news of a further fall in the US unemployment – an indication that the global economy is not doing well and the hope of growth in exports is more utopian.

Manmohan Singh expected that there would be a growth of 6.3 per cent as against what the RBI had repeatedly said “not more than 5.75 per cent”. The recent slowing down in the core sector industries comprising steel, cement, coal, electricity and oil to 1.8 per cent following a fall in production of steel products and petrol refinery, is a grim indicator that the nation might again slip off its growth target. The core sector accounts for close to 27 per cent of the total industrial production.

The electricity sector which continues to be a bottleneck registered a meager 3.3 per cent growth down from 4.5 per cent a year ago. The Confederation of Indian Industry (CII) has expressed concern that electricity generation and capacity increase has not matched the growth in demand. In the previous two Plans, the addition was much less than anticipated. The Eleventh Plan is also not expected to bridge the gap. In stark contrast China adds far more capacity every year.    

Records reveal that the steel industry merely managed to edge upwards with a 1.2 per cent growth compared to 6 per cent growth in July last year. Only cement and coal segments registered growth, with the former by 10.6 per cent up from 5.5 per cent in July 2008 and the latter segment expanded by 9.7 per cent. But it is too early to say whether this is indicator of any revival.

The manufacturing sector is also not doing well. The index of manufactured products rose by a mere 0.1 per cent and manufactured food products by 0.7 per cent. This is an indication that people are lacking in purchasing capacity owing to job losses, high cost of living and continuous pressure of sharp rise in food prices. Principal economist of Crisil DK Joshi says this will bring the wholesale price index (WPI) into the positive zone, from the present negative, within a month.

Apparently, Manmohan Singh has based his projections and optimism on a positive global growth. In contrast, the RBI cautions that if global growth revives, demand for food items and petroleum products too could rise and result in higher inflation. In addition, private players are too playing havoc with the prices and there is a trend of hoarding, other than poaching on the farmers. To counter this, the Government has raised the minimum support price of agri-commodities recently and is mulling to raise it further.

However, the RBI warns that this would belie what Prime Minister is expecting. Instead, it would further stoke inflation. In such a situation, the call of Manmohan Singh for a public private partnership (PPP) in the social sector --- health, education and urban development is also wrought with risk. And he too is aware of it and has thus cautioned the Plan panel that any initiative must not weaken the Government’s commitment of “inclusiveness”.

Truly, it is unfortunate that the private sector has not matured over the decades and continues to be focused only on exploitative profits. The Government needs to look at this aspect and should through various industry and trade chambers start a dialogue to educate the private sector on becoming a partner in a positive manner. Most PPPs, including those on the highways, are extremely expensive propositions, have been adding to inflationary trends and affecting the growth propositions.

Surprisingly, the Prime Minister did not speak on the high Government borrowings, though only a few days back Union Finance Minister Pranab Mukherjee had said it would not have any impact on interest rates or inflation. Once again the RBI has contradicted this view and expects the interest rates to harden. It is circumspect on the Rs 40,000 crore stimulus package the Government had announced. “If stimulus is sustained longer, the imbalances left in the system could create market-induced pressures, which may work against recovery,” warns the Central bank.

Clearly, the Government is passing through the most difficult economic phase. Keeping the nation’s morale high is a challenge in itself. But high food stocks unless used properly would not bring the prices down. With the projected 20 per cent fall in kharif production and another likely fall in the rabi output, it is expected that the Government would have difficulty in building up the food buffer next year. Though nobody wants to paint a gloomy future, the trends are nowhere near being optimistic. The nation may not be pessimistic as the Prime Minister says, but it has little for being optimistic. --INFA

 (Copyright, India News and Feature Alliance)