Economic Highlights

New Delhi, 18 February 2012

Economy In Tizzy

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By Shivaji Sarkar

This is certainly not the best of years. In fact, it’s one of the most difficult since 1990. The Government’s financial condition remains critical. In Budget preparation mode, the Finance Minister Pranab Mukherjee has to toy with options of fiscal consolidation, expenditure cut and pep up the falling growth trends, which is likely to hover around 6.5 per cent. Tough, indeed!

It is just not the Government coffers, but banks too are in a tizzy. Cash payments during State elections, intervention to stabilise the rupee, and slowing loan repayments by companies drain money out of banks. The Finance Ministry in a quick auditing found the banks are showing profits while their non-performing assets (NPA) or losses in real terms are growing. It is an ominous sign and needs to be probed further whether it is as deep a malaise that afflicted Lehman Brothers. May be not to that extent, but it does cause concern.

The other parameters of the economy too are not that bright. If the Government increases its deficit – borrowings – to present a window-dressed attractive budget, it would land the banks in a further soup, as these would be left with little money to lend.

The good or bad news is that owing to signs of stress industrial, home, auto and personal loans have seen sharp fall in growth. The good part would cause less credit demand and the bad part would further limit prospects of growth.

Overall loan growth to capital-intensive industries slowed to 19.8 per cent from 31.6 per cent a year ago. Growth to agriculture credit and related activities fell to 5.6 per cent from 25.4 per cent. If the trend continues, Prime Minister Manmohan Singh’s happiness of having higher food grain output may be short lived.  

Power, cement and engineering also witnessed loan growth nearly halving during the past one year. Sectors that relate to retail consumption of loans were also affected. Personal loan growth dropped to 12.3 per cent from 16.7 per cent in 2010; auto loans to 17.75 per cent from 29.8 per cent; education loans to 13.8 per cent from 23.4 per cent and mortgages to2.3 per cent from 10.7 per cent.

The RBI’s 13 times rate increase since March 2010 and an average inflation of around 15 per cent, particularly in food items, during the past two years have hampered demand in the economy.  Inflation as per WPI index may have come down to 6.5 per cent but it has to be remembered that it is over and above the high inflation during the past over two years. And, in reality it remains high.

The Central Statistical Organisation (CSO) data shows an income rise on an average and per capita annual income touching Rs 60,000. The statistics is fine but it does not spread over in a uniform manner. It does not speak of rising income disparity, loss of jobs and income losses to the millions. It only means that there are many more impediments to growth, which even if the Finance Minister wants cannot overlook.

Undoubtedly, it has led to tense moments for Manmohan Singh, who has held over half a dozen meetings to look for solutions. And he has reason to worry. As per the CSO, investments are to drop to 5.6 per cent, close to crisis level of 2008-09 further hitting the manufacturing, mining, construction and other areas.

Trade balance is also going into a critical region. The imports are rising and becoming expensive as rupee runs out of steam. Exports are falling owing to crash of European and US economies. Almost all European economies are facing rating cuts by international agencies. The falling Forex kitty is somehow being managed with higher inflows from non-resident Indians (NRIs), who have started remitting more money as the rupee falls and deposit rates increase. The big question is whether it can be a long term solution or not.

Additionally, the aggravating Iranian situation may cause further strain on the Indian economy as petroleum prices may spurt. Besides, New Delhi would need to spend more on international manoeuvrings. Hence, Pranab Mukherjee would have to bear all this brunt. He has already given hints of expenditure cut and sounded the ministries to limit spending even on Government’s signature programmes. Importantly, he wants to limit additional gross budgetary support to Rs 50,000 crore. The Finance Ministry wants to cap the gross budgetary support (GBS) increase at 11 per cent above the Rs 4.4 trillion GBS of 2011-12.  This was a 15.8 per cent hike.

As it is the first year of the 12^th Plan, the ministries are resenting the move as they need higher funds to provide impetus to their programmes. The obvious impact would be on the social sector programmes, including water, sanitation, health, irrigation, urban renewal and rural missions and centrally sponsored programmes.

Unfortunately, this is ill-timed. The expenditure cut has to start with the Finance Ministry. It has increased its expenses on income-tax department by almost four times in a decade. It needs to reduce staff and do away with some of the assets. Income generating department eats up almost 50 per cent of the revenue it collects. Had it been a corporate, the company would have gone bust long back.

The RBI and Asian Development Bank want the Government to consolidate its finances. But if administrative expenses increase and the cut is affected in welfare and growth-oriented projects, it would have a further adverse impact. Sadly, as the ADB urges it to cut revenue expenditure, the babus (bureaucrats) are resisting as they don’t want any cut on themselves.

Hence, Mukherjee needs to usher in a new debate on spending cut. In critical times, it has to spend more on growth-related schemes, be it industry or infrastructure. The Government has to remain the pivot. Often such spending cuts are implemented across the board, which need careful examination.

The method of the Geethakrishan Committee on cutting down spending was too hackneyed. It needs a review and seek a cut on administrative staff of all sorts, right from the top, those who are mostly non-productive. Besides, there is need for a blueprint for staffing both Central and State government offices. The motto thus should be: minimum staff, maximum output.

Additionally, it has to re-look at how it could bring down tax rates, have a wider net, ease rules and give a boost to overall investment atmosphere. Stringent tax rules prevent private money coming out in the open. If it can do the basics, perhaps not this year but the next budgetary exercise would not be so difficult. There’s no more time to waste. ---INFA

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