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Dismal Economy: NO CHEERS THIS DIWALI , by Shivaji Sarkar, 21 Oct, 2011 Print E-mail

Economic Highlights

21 October 2011, New Delhi

Dismal Economy

NO CHEERS THIS DIWALI

By Shivaji Sarkar

In 2007-08 India’s GDP grew by 9.3%, today the global crisis is casting a shadow on India's economic growth. The Indian economy grew by only 7.7 per cent during April-June thus the growth rate in 2011-12 will be less than what were the Budget projections. Economists expect it to go down below 8%. Add to this rising inflation hovering over 10% and skyrocketing prices. The gist of Union Finance Minister Pranab Mukherjee economic forecast.

Clearly, underscoring that despair is in the air this Diwali. Adding to the aam aadmi’s woes, the Reserve Bank Governor D Subbarao had directed banks for a stringent credit appraisal procedure in the wake of spiraling bad loans. Topped by the World Bank-International Finance Corporation statement that India remained at a lower position in the index even vis-à-vis a disturbed Pakistan and Nepal and tiny economies of Sri Lanka and Bangladesh. More. Warning that the Euro zone trouble would create problems for India.

Amidst all this, there are indications of flight of capital. An example: The UAE is offering a reverse proposal. Instead of investing here it has invited Indian investors to come there proffering tax sops and a trouble-free business environment. An ominous sign against the backdrop that Indian businesses have stopped investing here and such proposals might suit some business houses. 

Undeniably, as the August figures indicate the slowdown is bound to continue. Industrial output growth again fell to 4.1 per cent and factory input has been growing at a very slow rate, 3.8 per cent in July compared to last year when growth remained a moderate 4.5 per cent. Plainly, the overall economic performance, in the wake of high interest rates, 10.32 per cent inflation and fall in consumer demand is far from satisfactory, in fact poor.

Additionally, the World Bank has come out with a sombre picture. Its latest assessment of the situation projects lower growth pace at around seven per cent. “The slowdown is a result of uncertainties weighing down investment. Tighter macro-economic policies intended to fight still-high inflation and the base effect of the strong agricultural rebound in 2010-11. Slow growth in core Organisation for Economic Cooperation and Development (OECD) countries means domestic drivers for growth will have to be strengthened”, it stated.

Almost in sync with Mukherjee’s growth moderation figure of around 7.5 per cent. The Adding to concerns, the Minister indicated slippage in deficit planning in the wake of inflationary pressure, high international crude prices, slow growth, re-capitalisation plan for the recently downgraded largest bank, State Bank of India.

Importantly, fiscal deficit is certain to cross the target of 4.6 per cent. The Government has to take large borrowings and depend on reduced revenue earnings. The problem does not stop here. It spills to the Government efforts at curtailing expenditure. Indeed, it is a double-edged sword. If it does not cut expenses its deficit would soar. If it reduces spending, it affects the growth momentum. A catch 22 situation.

Besides, not only was mining growth minus 3.4 per cent, manufacturing remained low 4.5 per cent with only electricity at 9.5 per cent. Production of fast moving consumer goods (FMCG), such as soaps, cosmetics and processed foods grew by a mere 2.9 per cent in August. Overall output of consumer goods slowed to 3.7 per cent, even less than the figure of August 2010, when it was mere 4.6 per cent.

Compounding matters, according to Government estimates small savings during the first quarter (April-June) of the current fiscal declined by Rs 26,542 crores! Remember, small savings provide a large kitty to the Government for its development cause. And is indicative that the average economic condition of the masses is reaching a difficult phase, if not critical.

Succinctly, an indication that people have no spare income nee disposable income. Primarily, due to high prices of food and other commodities which is eroding their income base. Adding to woos, the slowdown is not creating jobs.

The Finance Ministry tries to pat its back by announcing that it spotted Rs18,750 crores of black money in the last two years. But what it does not say is that this is a critical legal controversy, namely whether the Ministry’s arms have detected black money or not and in how many cases they have served notices to the respective persons or accounts. Given that the money detected has not come to the Government’s kitty and even the tax component, if any, is yet to be realised.

The Government’s hopes hit another road block as food prices soared once again and the index touched 10.6 per cent during the festival season. A week ago it was 9.32 per cent. Prices of all necessities, fruits, milk, eggs, vegetables and food grains rose significantly. Fuel and power inflation stood at 15.17 per cent and 15.10 per cent respectively.

Would the prices come down? Planning Commission Deputy Chairman Montek Ahluwalia says that his last year’s projection on inflation came wrong all the way but this time he is sure “it would crash December onwards”. However, circumstances only indicate that he may come a cropper yet again. Montek argued his projections failed as he had not taken the developing global factors. These are more obvious now along-with so many things happening that keeping track is not easy. One can only wish him good luck.  

In such a scenario, the RBI is to review the economy amid deceleration of industrial growth both at the consumer and capital goods’ segments. If it remains adamant on hiking rates again it might further create an extreme tight monetary regime, where growth would be a misnomer. It also needs to review its repeated (12 times) increases in rates as this could not control prices. Instead, it has caused further problem for the banking sector as its credit off-take has slowed down.

Undoubtedly, it is time the RBI accepts its inability to contain the critical economic situation and throws in the towel. Mere pretences at economic management will not help. The Government too needs to study the situation in a holistic manner and look for a lasting solution. The big question remains: Who will bring cheer to the masses? Or will there be gloom all the way? ---INFA

 

(Copyright, India News & Feature Alliance)

 

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