Economic Highlights

New Delhi, 1 July 2011

India’s Stagflation

REVIEW POILCY & IMF-WB REFORMS

By Shivaji Sarkar

The country is heading for stagflation – stagnation in growth and severe inflationary situation. The lack of an integrated policy is worsening the situation.

Employment is falling. Job insecurity is growing. The number of casual jobs is increasing. Rising costs, falling turnover and piling inventories are hurting the industrial sector. The business lobby group, Federation of Indian Chambers of Commerce (FICCI), has issued a warning that the RBI’s move to harden interest rates has already begun to hurt. A RBI industrial outlook survey also confirms that Indian manufacturing companies see a cloudy picture.

Even the broking firms are hit hard. Add to this the despondency in the agriculture sector. Its neglect has led distressed debt-ridden farmers to take their lives on the one hand and on another organised corporate and realty sectors usurping farm lands. This throws up a large chunk of 72 crore people dependant on it out of job.

The National Sample Survey Organisation (NSSO) has come out with a grim data. Employment of persons in labour force has fallen from 42 per cent in 2004-05, when the UPA Government came to power, to 39.2 per cent in 2009-10. The fall has been almost three per cent.

More worrisome, as per NSSO figures, is the indication that the quality of the workforce has changed in this period. It not only saw a contraction in employment growth but also a rise in the number of casual workers by 2.19 crore.

Worse, instead of expressing concern over this disturbing trend, Planning Commission Deputy Chairman Montek Singh Ahluwalia slammed the NSSO for ostensibly coming out with the discomforting figures. Minutes later, the Ministry of Programme Implementation Secretary TC Ananth was heard “admitting” that the NSSO data is “confusing”! The official further stated that employment has increased as more women and children join the workforce.

Ananth’s statement should raise eyebrows as it is clearly an acceptance that instead of going to school, children are forced to join the labour force. It is also indicative of the fact that the severe inflationary conditions are compelling poor parents to depend additional income from their young children.

According to statistics, the casual workers constitute 30 per cent of the workforce. This is now gradually increasing as firms prefer this form of employment because of its low wage costs and social security benefits. As against this, the labour force in the organised sector constitutes a mere eight per cent. Thus, the remaining 92 per cent is in the unorganised sector. This state of affairs is alarming for the economy as casual workers have low purchasing power and do not contribute much to the nation’s growth.

In the period, 2004-09 about 400,000 jobs a year were generated. In contrast, 12 million jobs a year were added during 1998-2004. Cleary, the plan panel target of creating 58 million jobs till 2012 is a distant dream, no matter what our planners say.

There are other indicators to show that the job market is getting harder. The so-called showpiece of economy, the Bombay stock exchange (BSE) sensex currently is lower than what it was in September last year and only nine per cent higher than in September 2009. The trend is leading to closure of many stock brokering shops or their divisions.

The business in the cash segment both at the BSE and the National Stock Exchange (NSE) has almost halved, from nearly Rs 24000 crore to Rs 12,600 crore between January 2010 and January 2011. The fall in the past one year has been 29 per cent, while the slide so far in the current year is about 27 per cent. The yield per has come down to 8-9 paise from 25-30 paise per Rs 100 worth of trade.

Job cut fears have gripped the brokerage firms as total traded volume at Rs 17,068 crore hit a 26-month low. The volumes had dipped to such a low in February 2009, when the global financial crisis hit the Indian stock market. Additionally, the trend predicts a slowdown. The key to the under-performance is attributed to very high levels of inflation and high rates of interest – only second to Vietnam.

The tightening of regulations by the RBI has led to a moderation of growth. Quarterly GDP growth has steadily decelerated from 9.4 per cent in the fourth quarter of 2009-10 to 7.8 per cent in last quarter of 2010-11.

Capital goods production, an indicator for investment activity, remains a jigsaw. The old index for industrial production (IIP) shows slowing down of machinery production. The new IIP, introduced in April presents a “brighter” picture of investment activity. But the gross GDP data for the last quarter of 2011 indicates stagnation of capital expenditure.

This apart, there are other indicators to the current painful slowdown. A grim warning comes as nominal GDP – the addition of output growth and inflation – expands by over 19 per cent. In the previous such instances in 1957, 1974, 1981 and 1989 the country saw demand compressions and in 1989 even a severe balance of payments scare. Usually this happened within two years of such developments in each case.

The present trend is an indicator that in a year or two the falling growth parameters are capable of hurting growth parameters and impairing of public finances. Importantly, all this is adding to the woes of the Finance Ministry. It has already hinted that tax collections may not meet the budget figures. This means that the fiscal deficit would be higher than projected at 4.6 per cent.

Unlike last year there is no telecom auction bonanza in the offing, which had suppressed fiscal deficit last year. The Government is planning to sell-off of Neyveli Lignite and National Fertilisers. But the depressed stock market may not be able to pay enough.

A higher fiscal deficit may force the Government to raise tax rates. That would not be prudent as it would further lead to a slowdown. If the Government finances start tottering, this would lead to mayhem of the planning process and large chunk of development activities, including MNREGS, all which may reach a roadblock.

Besides, there could be long-term costs as well. A modest decline in growth or a few percentage points rise in interest could put the debt trajectory in jeopardy. It means banks would have to do with less repayment of debts and in turn there would be more bad debts.

The sum total - economic slowdown and high inflation is to stay. It requires a total policy relook and break away from IMF-World Bank-sponsored reforms to take the country to the right trajectory. ---INFA