Economic Highlights

New Delhi, 30 December 2011

Economic Slowdown

WILL NEW YEAR BRING CHEER?

By Shivaji Sarkar

The New Year always comes with expectations. But nobody is sure whether 2012 would bring in cheer or continue with the gloom that has set over the past three years.

The global economic downtrend has not yet touched its bottom. Every day accelerates the downward journey be it in Europe, the United States or Asia. Even the so-called engine of growth, China, is on a reverse gear.

India is certainly not in a happy scenario or position. Prices remain uncontrolled. The supposed “record” fall in wholesale food price index is undoubtedly deceptive. It sounds an alarm bell for the potato and vegetable farmers, as due to machinations by some large corporate, the prices have crashed. We have witnessed farmers in Punjab dumping potatoes on the roads. Notwithstanding the crash, the prices are still above those of the previous year and fail to give any solace to the consumers.

Milk, meat, egg, pulses, wheat and many other food items even in the latest Wholesale Price Index (WPI) have become at least 11 per cent more expensive. This, however, may give some “relief” to the Government and the organised sector as it can cut down on dearness allowance payment to the employees as overall WPI shows a fall.

The WPI is deceptive. Every increase, howsoever small, even of 0.8 per cent as indicated in the food index, is over the high spurt of the last two years. It only indicates that living in India has become very expensive. The comfort zone has hurt the middle class, which was supposed to lead the growth. The slowdown in industry, manufacturing and other sectors speaks volumes in terms of the stress of the middle class. It is finding the going tough to remain on the edge of the poverty line.

In simple terms, it is an indicator of thaw in consumerism. The adverse impacts are too obvious. The top 100 companies have their cash balances hit. It rebounds on the Government as its advance tax collection comes down. This apart, indications are that the fiscal scenario looms near a dark horizon. Finance Minister Pranab Mukherjee has acknowledged he would not be able to meet the deficit target of 4.6 per cent of the GDP this financial year. This is so, because he has already breached his expenditure target by Rs 55,000 crore, which may be more in the coming months.

Indeed, not happy news. In the next budget he has to make it up either by increasing taxes, which are already at an unrealistically high level or by cutting down the expenditure. Both are prescriptions for further slowdown.

The Government harps on reforms – euphemism for continuing the 1991 path of corporatized growth. But in reality it has never thought of reforming the system. The Direct Tax Code has emerged as a sham and as complex as the Income Tax Act 1961. It has not moved an inch forward to either reduce taxes or ensure simplification of the procedures vital to put the economy back on track.

Worse, it has burdened the poor and middle class bank depositors with large deductions at source. The TDS on deposits has in reality diverted large funds from the banks to inflate the so-called black money. It also has put stress on the banking system as it has gone into a severe deposit crunch.

Additionally, the yearning for higher tax collection has landed the Government itself in an unenviable situation. There is no effort to correct it in the New Year though the nation keenly awaits it. That may be one of the first steps to correcting the economic path. The large fall in small savings deposits – over Rs 30,000 crore - is partially owed to this factor and rest to the high inflation.

The small saving goes into the Government’s kitty and is considered a low-cost option to meet fiscal deficit. This has further put pressure on the Government to increase its borrowing. More so, as it has also frittered away last year’s windfall gains from auction of the telecom spectrum.

Interestingly, the Government has come up with a wonderful innovation! It has asked the PSUs to buy stocks of other PSUs and announce hefty dividends in the wake of a difficult equity market. In a way, this is a way to show in the Budget that it has got a large chunk of Rs 40,000 crore it had proposed to raise through disinvestment of PSU stakes. While it can refurbish the books, the economic woes would continue to hit the country.

Estimate is that the Government’s borrowings are bound to go up further not only in this fiscal but in the next one because of its commitment on the proposed food security and universal health care entitlements. It is not that these are not required but the fact is that it does not have the capacity to fund the enormous expenditures. Unfortunately, well-intentioned schemes are ill-timed. The risk is that their failures may add to the widespread discontent and create further chaos.

Of late, the FDI trend only shows that India is not the destination for global investors. Red tapism, corruption and a falling rupee, which many predict might breach the Rs 60 to a dollar mark, are major obstructions. The others being investors have found interesting destinations in Vietnam, Mexico, Brazil, Indonesia and even China.

Sadly, the country has not cared to correct its approach on these scores, which it should have done long back. The fallout may be disastrous. The managers of economy wish it away as all of this may lead the country to a borrowing trap again. Managers do not like to call it a debt trap since most Indian borrowings are yet not subscribed by outsiders and thus it is “internal”.  

It is pertinent to note that Greece too had its debt largely internal or funded by Germany, Italy, France, the UK or Spain supposedly backed by a strong Euro. However, now Italy, Spain and even France are coming into the same trap for fiscal profligacy.

Here too, the Government’s profligacy in borrowings is leading to inflation and high cost of bank credit making private investments expensive. This leads to further spurt in prices and stymieing of growth. India needs to debate and decide the right path. If it does not, it may lead the country to continuation of the crisis or even worse. As a result, the cheer may remain distant in the New Year.--INFA

(Copyright, India News and Feature Alliance)