Economic Highlights

New Delhi, 10 December 2010

Growth Fears

ALL NOT WELL

By Shivaji Sarkar

The time for elation has not yet come, economically speaking. The Mid-Year Analysis by the Finance Ministry speaks of more concerns, some major, in the sustainability of growth projections. The growth is being driven by Government spending and private consumption, but the key to the process has not increased.

Agriculture still remains a laggard and the Government is worried about the weakening in industrial production, which had peaked during the last quarter of 2009-10. There has been slowing down in the manufacturing and electricity sectors, according to the Government. A deceleration has been noticed in the capital goods sector and moderation is seen in consumer durables. Consumer non-durables, the report notes, are yet to show recovery.

Inflation, though the analysis claims is moderate, is beyond the RBI’s tolerable limit, asserts RBI Governor Subba Rao. He has a point. Even the approximately 9 per cent inflation based on the new WPI basket is over and above last year’s high WPI inflation rate of over 11-plus percentage points. This in reality means a total inflation of 11-plus 9 percentage points.

This is not all. The food inflation has increased to 19.95 based on WPI and of primary articles to 18.9 per cent in the current year. The figure last year for food was 12.65 per cent and primary articles 8.8 per cent. So the claim that “inflation in terms of all prices has come down to single digits” is questionable. Another worrying factor is that inflation in terms of the consumer price index (CPI) for agriculture labour and rural labour was higher than the CPI for industrial workers.

Inflation, thus remains an area of concern and it might further affect the actual growth process by the end of the fiscal year though figures could be manufactured to show that it is not much far off the target – 8.5 per cent - set in the Budget.

Two aspects are marring the growth of private consumption. Namely, high inflation and direct and indirect tax rates. However, not much of a policy change is noticed in the area. The new direct tax code (DTC) which the Government is keen to introduce from the next financial year has not given any relief.

If the Government is serious about reversing the trend it needs to introduce an extremely low tax regime raging from 5 per cent for an income of up to Rs 10 lakh and 20 per cent beyond Rs 30 lakh.

Undoubtedly, the Government has to remain a major spender but that could be sustained only when an individual and families consume more. Notwithstanding, Government finances having improved over the years as the tax rates were moderated from a very high tax regime.

A fall-out of the inflation and poor job market is also noticed in the decline of one per cent over the income tax collections of 2009-10. Corporate tax growth has been more than satisfactory as it rises by 17.9 per cent. This also poses a question. How the corporates could manage such a feat as actual industrial growth spurred by private consumption has yet to take place? This may be possible by pricing their products expensive leading to high profits and reducing on staff strength. Both are not in the long-term interest of the economy.

Arguably, does the Government have a strategy to counter it? This again calls for a lower and affordable tax rates. It would improve the purchasing power and further increase the Government’s kitty as this would improve manufacturing and consumer goods growth. Even corporates need that to create jobs and work at low profits.

Another concern is seen in the decline in the share of non-food bank credit this year. Increase or decrease in non-food bank credit is taken as an indirect indicator of the activities in the industrial sector. The micro and small sector, which accounts for a far larger share in manufacturing, exports and is a high job provider, is apparently gasping. Its share in gross outstanding credit is only 12 per cent indicating that the sector is less than functional.

There is time for correction still as the budgetary process has just begun. The Government should not be a miser in introducing the tax rate changes nor should it delay it. A delay in changing the norm might mean a heavy burden on the economy for some more time. There is no risk in it.

A lower tax regime at a time when the West is also cutting on its taxes to come out recession would place the country in a better position. It would help it challenge the West when it comes out of its present situation. This is the time for preparing the Indian economy.

But here is another impediment. The Mid-Year Analysis finds tightening of liquidity conditions. Deposit growth has not kept pace with credit growth. The 3G telecom spectrum sale that brought Rs 1.06 lakh crore to the Government was financed by the banks leading to the present situation.

This has led to increased external commercial borrowings, which rose sharply to Rs 25,525 crore in the first six months against Rs 14,356 crore during 2009-10. This has both positive and negative signs. It shows India’s high creditworthiness. But it also increases the debt burden.

That all is not well with the Indian economy is voiced well by the Chief Economic Advisor Kaushik Basu. He says to reach double digit growth some key challenges must continue to be addressed. This includes reduction of fiscal deficit, which remains very high even by Government’s own standards.

The crisis in some larger economies like Spain, Portugal, Ireland and Greece and elsewhere in Europe and slow recovery in the US is likely to affect export growth as demand remains sluggish there even during the peak Christmas season.

There are many other shocks that could hit the Indian economy .With rising interest rates foreign capital flow could increase manifold. This would require prudent norms to tackle possible overheating and further strengthening of the rupee. The country has yet to decide whether it needs a stronger rupee that could cushion its petro import bill and take care of the balance of credit problems or not.

The mid-year review summarises that the economy is still not on a robust course, in spite of some strides. True, the growth mark set by the Government may be breached but that is not an indicator of the overall well-being. ---- INFA

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