Economic Highlight

New Delhi, 2 September 2011

Indian Slowdown

RECIPES FOR FAILED ECONOMY

By Shivaji Sarkar

India has all the recipes for a difficult if not a failed economy – falling growth rate, no job growth, plunging production, household savings and investments hitting a low, banks -- as in Europe and the US-- looking for a recapitalisation, high food inflation at 10.5 per cent and much more.

It appears that, at the official level, the nation has opted for an ostrich-like policy insofar as the economy is concerned -- see nothing bad (real) and repeat “India is the future of the world”. The developments point to a dismal future, if immediate corrective steps are not taken. It also calls for appointing a pragmatic politician, not a so-called economist, as head of the Planning Commission.

India’s macro-economic fundamentals could slip further as the finances do not leave much room for stimulus measures, the Reserve Bank has warned. It is intriguing that New Delhi is ignoring the obvious alerts. This is also a pointer that the US and European pro-corporate policies are leading India to the same destination where these have landed the westerners. The corporate has high reserves and profits in the West. And, it is no different in India.

Undoubtedly, it calls for a serious review of the policy since 1991 that hinges on a corporate-led growth. The policy was based on private sector---corporate investment and cutting down on public expenditure even on essentials such as health, education, poverty alleviation and it was presumed that the corporate would fill in the void. While this did not happen, it certainly as in the West bolstered their profits to an unimaginable high.

In the melee of liberalisation, the nation forgot that the corporate was tapping public funds from financial institutions and even the Government and filling up its coffers. It did not invest from its own reserves. This has led to depletion of funds with the banks. The SBI is the first one trying to sustain on Government dole to meet its immediate capital needs. Other banks may follow suit. The Finance Ministry is infusing Rs 3,000 crore – taxpayers’ money – in to the SBI.

That SBI’s is a serious malaise is further confirmed by the decision of the RBI to double the reserves for contingencies from Rs 5,168 crore last year, to Rs 12,167 crore, according to its annual report. The RBI has taken the step amid fears of the return of financial instability, such as the one in 2008.

Lower returns on some of the assets also led to the Central bank reducing transfer of surplus funds to the treasury by 20 per cent to Rs 15,009 crore from last year’s Rs 18,759 crore – a three-year low. The rating downgrade of the US by S&P’s is singing RBI’s profitability on international transactions. Earnings from deployment of foreign currency assets and gold fell 15 per cent to Rs 21,149 crore.

It is leading to another crisis. Government’s fiscal deficit is to surpass 4.6 per cent of the GDP. It may be close to 6 per cent leading to severe problems for managing the macro-economy as by all indicators the world led by western economies are slipping into deep recession.

The Government is planning to come out of it by further reducing its liabilities. It is now mulling over allowing education institutes to run for profit. An affordable education has led to the level of growth the country has achieved so far. It has also been able to keep the rich-poor gap manageable. What the Government is planning and has even partially implemented even in many the institutions sun by it has a potential danger for the future. It might disturb the social equilibrium.

Candidly, this is not the way to fight the slowdown. The growth rate has touched 7.7 per cent in April-June quarter against the targeted 8.5 per cent as manufacturing, mining and services decelerated. Industry growth rates are unlikely to be better as Business Confidence Index is now at a two-year low, warns the FICCI.

Unemployment rate is reaching a historical high. It was reported at 9.4 per cent in 2009/10 fiscal year but is becoming more critical. From 1983 until 2000, India's unemployment rate averaged 7.2 per cent reaching a historical high of 8.3 per cent in December 1983 and a record low of 5.99 per cent in December 994.

High joblessness and severe inflationary pressures are a lethal combination. It is not only adding to the number of poor but also has led to a complex problem of low-consumption scenario leading to the deceleration of industrial growth.

Worse, the country’s household savings, which have fuelled growth for a number of decades, have dropped to below 10 per cent – 9.7 per cent in reality - of the GDP or national income for the first time in 13 years! High prices are leaving people with no spare money, called disposable income in the jargon of the economists. All kinds of deposit savings with banks and non-banking finance companies, cash, investment in stocks, life insurance, provident fund and pension funds are dipping.

No respite is being seen from the rising price syndrome. The worrying aspect is that this is happening because the income of an average worker either remains stagnant or has fallen in many cases. Another concern is that the price index at 10.05 per cent is over and above the average of 15 per cent price increase during the past three years.

In such a dismal scenario what should have been considered as good news looks suspect. Forbes Asia’s “Best Under a Billion” list includes 35 smaller Indian companies and they figure among the top 200 Asia-Pacific corporations. It includes India’s largest storage battery producer Exide. The company is earning profits as power tripping is a common phenomenon and the inverter has become the mainstay of Indian homes. Another pointer to a dismal infrastructure.

The challenges are greater for India. It does not have the political and military strength of the US. But it has to increase its defence expenditure to counter China, Pakistan and a gradual withdrawal of the US marine and land forces in the region. Higher defence expenditure is possible not with borrowings, which is what the Government is now doing. It has to turn the growth story into reality by working hard, as stated by Finance Minister Pranab Mukherjee.

But so far it has not come out with a tangible strategy. If it is delayed it would not only be a difficult story for India but also its neighbours, who look towards India for their own growth trajectory. ---INFA

(Copyright, India News & Feature Alliance)