Economic Highlights

New Delhi, 25 September 2009

India’s Whirlpool Economy

PLENTY RESOURCES, NO STRATEGY

By Shivaji Sarkar

The nation’s economy is in a vortex. Clearly, not too bright and worse, the country lacks a strategy for growth. So far, it has only been reacting to individual situations. Admittedly, the Finance Minister, Pranab Mukherjee, has been cautious in accepting the recent “positive” trends in the industrial index. The Reserve Bank too in its latest review warns that the subdued growth and the risk of high inflation are the greatest concern for the economy.

Indeed, it is a legitimate concern belying hopes that various Government agencies orchestrate. The current depressive economic state requires high spending by the people. In other words, they need to be encouraged to buy more. But this is not happening. High inflation is eroding their purchasing power and thus demand is not growing. The big question is: How will the industry sell its products? If sales do not improve the hopes for growth would obviously remain a dream.

However, there is an alternative i.e. sell the products abroad.  But this too does not seem to happen with both the US and Europe becoming more protectionist along with the country losing to an aggressive China’s business tactics. In many cases even Pakistan and Sri Lanka have emerged as threats to the international trade. The China-Pak-Lanka trade axis is affecting many small-scale sectors and traditional exports such as tea, carpet, gems and jewellery and “Basmati” rice being adversely affected.

Sadly, alternative strategies have not emerged. These veer around tax breaks, lower exercise and customs and concessional financing. But the country is lacking the vision to capture the world market. The recent 28 per cent export fall is a grim indicator. Worse, this is likely to aggravate the woes of the industry as China leads a campaign the world-over to boost its economy. And India, which is projecting itself as an emerging major economic driver, is losing grounds to Beijing in many spheres. Understandably, the lack of strategy to counter the Chinese economic “aggression” is proving very expensive.

All this is likely to further hit the incomes of the margnialised sectors in the semi-urban and rural areas, which are currently expected to spur the growth. The rural lack of demand has moderated growth prospects. The share of its total household consumption has not increased for years. It has remained at 55 to 60 per cent for the past decade. And, this year the rural consumption is unlikely to increase as it is hit by 11.5 per cent consumer price inflation and deficient rainfall.

A concerned RBI admits that though the stimulus measures, through farm debt waiver and the Sixth Pay Commission increased the Government’s share of consumption by 11.1 per cent, its impact on individual consumption is not being observed. Clearly, it is a warning about the virtual failure of the stimulus packages announced. In addition, high food inflation is too negating the benefits of the packages.

Regrettably, no policy initiative is being taken to contain inflation. The lack of will results in hoarding as has recently been seen by unearthing the country’s sugar stocks. Food grains too are being hoarded accompanied by shortage of productions. Worse, there is a lack of an intervening market or Government system which is helping the unscrupulous traders and business community. This apart, it is truly unfortunate that many Central leaders are either directly or indirectly supporting such elements or lobbying for them. As a result the Government succumbs to these pressures, ignoring the interest of the people who elect them.

The above scenario has too many ramifications. It is not just that the people are crumbling under the pressure of high prices but worse it is also affecting their savings that had spurred the GDP growth to 9.5 per cent. The savings had reached 37.7 percent of GDP in 2007-08 up from 23.5 per cent in 2001-02. Further erosion in the savings pattern is bound to happen given the subdued performance of public sector enterprises owing to the slow down, large number of job losses, depressed corporate earnings and fall in demand. This is endorsed by latest reports which state that bank deposit growth has severely come down which is likely to further affect the growth process. A vortex al right.  

An alternative would be to have liquidity in the financial sector as it is not stated to be lacking. But the Finance Ministry’s 2009 status report on external debt shows that the foreign capital supporting the country’s investment plans may remain muted till the global financial system adequately addresses structural and supervisory issues and the process of recapitlising it, in the wake of the Lehman Brothers scandal. 

Bank credit growth too has slowed down to 13.2 per cent on September 11 from 14.1 per cent two weeks ago. Last year the growth was 26.1 per cent. This indicates that the corporate growth is likely to be affected in the days to come. If that happens the economy is unlikely to rise even to the revised levels of 5.5 or 6 per cent.

A fortnight ago, the Planning Commission Deputy Chairman, Montek Singh Ahluwalia, said that the real concern now was whether the international financial system would support the rapidly expanding need for credit. External commercial debt flows are 64 per cent lower at $ 8.2 billion – Rs 39,300 crore. The credit growth is seen as a must for any early signs of recovery. The Government stimulus cannot be sustained longer as apart from raising borrowings it is likely to cause market induced pressures and may also further engender the inflation situation. This again is likely to work against the recovery.

Indeed, the situation is complex and policy initiatives are not focused. They remain reactive to individual situations due to political compulsions. The nation, however, needs a pragmatic approach. It cannot depend on international demand. The International Monetary Fund’s latest July outlook suggests that global growth would contract to 1.4 per cent and the volume of trade would decline by 12.1 per cent.

Therefore, the policies have to be domestic oriented. Overall, Indian growth continues to be driven by domestic demand and savings, foreign capital or trade only supplement it. The most optimistic growth projections do not claim more than six per cent growth. The pessimistic one puts it at 4.5 per cent.

The global crisis is an opportunity to turn inward and begin a fresh policy formulation to ensure domestic demand-oriented growth with the foreign trade only as a supplementing factor. It also needs to look at predatory moves to annihilate industries and crafts and deal with it strongly. The nation does not lack in resources. But these have to match with the political will to surge forward.--INFA

 (Copyright, India News and Feature Alliance)