Economic Highlights

New Delhi, 16 December 2011

Indian Economy

RECORD OF CONTRASTS

By Shivaji Sarkar

India has been creating “record of contrasts” during the past few days. Minting of Rs 500 notes has increased 17-fold in the past decade. Individual wealth of Indians across the globe is likely to triple by 2016 to almost Rs 249 crore. The rupee is touching a new low and has breached Rs 54 barrier. Factory output has fallen to negative growth. Food inflation statistics show a fall but are above the steady increase in prices for the past two years. Farmers send out SOS as record production of potato and other vegetables has led to a crash in prices. Parliament discusses the agrarian crisis and farmers’ suicide.

On the official front, fiscal deficit may reach an unmanageable limit. The Government brings down growth estimates to 6.9 per cent, one of the lowest in recent years. The increase in printing of Rs 500 notes from 213 million pieces in 2000-2001 to 3543 pieces in 2009-10 and Rs 1000 notes from 115 million to 1008 million during the same period should indicate that the citizens are spending more and thus call for cheers. Instead, it sends a signal to the contrary.

The cost of living has gone up at an average 15 per cent increase in prices, 33 per cent increase over the past two years. The same lifestyle today requires 10 to 20 per cent more money. It is no wonder then that despite higher spending it is telling on individual savings. According to official figures, Rs 22000 crore was less saved on various small savings instruments, leading to contraction in sales and production of factory-manufactured goods. As a result the Index of Industrial Production (IIP) recorded a negative growth of 5.1 per cent.

The industry chamber FICCI’s latest survey on manufacturing projects sees a moderation, slowdown, in growth due to lower order books, moderate export growth and rising raw material costs. Investments have suffered because of high cost of corporate debt.

In the Rajya Sabha, BJP leader M Venkaiah Naidu states that farmers’ production cost owing to rise in fertilizer and other input prices has increased manifold and minimum support prices for paddy, sugarcane, wheat and cotton are short of Rs 250 to Rs 1000 per quintal.

All this reminds one of Argentina in the early 80s. Higher prices had forced its government to print million-dollar currency notes and then demonetise it to a value 100-dollar. One may only hope that India does not repeat the same. If it does many high net individuals (HNI) may become paupers as happened in Argentina, and add another record of sorts!

At the same time, “good” news is offered by Chief Economic Advisor Kaushik Basu. He states that food inflation may fall below 3 per cent in a month’s time even though WPI inflation still remains around 10 per cent. Distress sales by potato and few other vegetable producers indicate that Basu’s prediction may come out true. But, it may also turn out that there is little to cheer. It might create further stress on the farm sector as not only the input cost remains high but continues to increase. The losses are bound to mount, but little effort is being made to tackle these. Thus, the fear is that it might lead to lower cultivation next season and threaten a combination of severe food shortage with spiralling of prices.

The scenario possibly belies Finance Minister Pranab Mukherjee’s latest averment that price woes are over and instead “let’s focus on growth”. It is a difficult proposition in all likelihood. The rupee breaching to find a new low every day is yet another ominous sign. The depreciation of the rupee will push up the imported component of inflation, says rating agency Crisil. The weak rupee is pushing up the costs of imports such as edible oils, petroleum fuels, metals, machineries, defence equipment, airline and shipping operations. Even domestic travel and transportation costs increase.

The global crude prices rose by nearly 20 per cent in November 2011 compared to a year earlier. The price in rupee terms shot up by 40 per cent owing to it being weak. These trends might further put pressure on the rupee and it may follow the Pakistani rupee which is touching Rs 89 to a dollar!

The situation has left the Reserve Bank with little cushion. Though Forex reserves remain around $ 309 billion, inflow has started shrinking on lesser exports coupled with lower rupee value, lesser operations by foreign institutional investors (FII) thanks to choppy weather and not so encouraging trends in foreign direct investment (FDI). As such the central bank doesn’t have much to intervene to save the rupee.

“If there is a strengthening of dollar against rupee, we cannot do much. Rupee is a reflection of current account deficit and the extent of capital flows”, explains chairman of Prime Minister’s Economic Advisory Council and former RBI governor, C Rangarajan. 

It is a clear sign of difficult days ahead. The World Bank Chief Economist Justin Yifu Lin states: “How to use government money in a better way, which can increase the productivity and create jobs, is important. India has to come out of this economic dilemma”. It is easier said than done. The policy prescriptions are wavering. More jobs are being lost and as of now there is little to increase productivity.

Prime Minister Manmohan Singh states that his “reforms” are not over and that FDI in retail would be opened up. How is that a solution? Some multinational retail companies have been operating in the country for past over six years. These have hardly created the promised back-end infrastructure such as cold chains or marketing mechanism. If more are allowed, they may bring in additional problems. Even the present woes of potato farmers are being attributed to them.

The FICCI cautions low growth, less than five per cent, is likely in cement, steel, textiles, chemicals, capital goods, paper and electrical. Others may see a moderate growth as rising costs of raw materials would persist. So more “records” may be in the offing till such time we change the tack of so-called “reforms”. The strength is within and its time we do something about it. ---INFA

(Copyright, India News and Feature Alliance)