Economic Highlights

New Delhi, 11 May 2012

ESCAP Survey

SLOWDOWN TO PERSIST

By Shivaji Sarkar

The Asia-Pacific, including India, will continue to be bogged down by commodity price volatility, inflation, hunger and poverty despite the fact that the region would continue to be the “fastest growing and an anchor of stability in the world economy”, states the UN Economic and Social Commission for Asia and the Pacific (ESCAP). This is a paradox for New Delhi as the survey clearly warns of a slowdown in India and the region.    

Stressing on the strength of the region, ESCAP Executive Secretary Noeleen Heyzer does not paint a very rosy picture. Social and income inequality is growing. The growth has not been able to create adequate employment opportunities in the formal sector. Three times more youth will remain jobless. And about one billion workers in the region are in vulnerable employment.

India is no exception, states Chief Economic Adviser to Central government Kaushik Basu, while launching the report. He wonders that despite unemployment the number job seekers have come down. In the US, according to him, employment conditions have deteriorated so much that people are not accepting job offers. “But we wonder why it is happening in India”, he adds.

It is virtually a state of jobless growth, laments the survey. Turbulence and volatility cause uncertainty. The growth in the region is to slow down to 6.5 per cent from 7 per cent and inflation to remain at 4.8 per cent. India it assesses would grow by 7.5 per cent in 2012 (6.9 per cent in 2011). China is forecast to grow at 8.6 per cent after decelerating from 9.2 per cent achieved in 2011 and is   expected to have 4 per cent inflation.

Inflationary pressures in India remain at 8.4 per cent. Coupled with this tighter monetary policy –high interest rate - is pushing up cost-based inflation. High fiscal deficit is also likely to push up prices.

Despite the supposed growth, it finds notes that the Indian economy is plagued with the problem of increasing petroleum prices, high budgetary deficit, problem of financing, falling investment, high government and corporate debt. External commercial borrowings are growing and might create a difficult situation as the value of the rupee continues to depreciate. In 2012, even if exports in terms of volume grow, its monetary value in dollar terms may shrink and may put further pressure on exchange value. High oil prices may surge inflation by 1.3 per cent making all commodities further expensive.

The Euro zone problem would continue to stalk the region and cut the quality of growth by 1.3 per cent and export value of $ 390 billion. Of this figure India would be hit about ten per cent. The US crisis would further weaken demands. However, the silver lining is the cushion being created by larger regional demand and South-South cooperation. The survey says that regional demand and trading away from Europe and the US would create the resilience for the region.

Basu, however, says the Euro zone remains important for India, as it has high levels of interaction with some of the European countries but the volatility there would cause problems for the nation’s economy. He also foresees Europe sliding into a severe crisis in 2014-15 when the stimulus given in February and December 2011 in terms of bonds would mature for repayment. If 2008 was a dip, so is 2011 and a repeat in three years puts greater risk and responsibility on the Asia-Pacific.

The global risks, he notes, can put India in a vulnerable position. The Economist magazine predicts India to be the second highest growing economy after China. But ESCAP survey pushes it down to the sixth position. If the turmoil in Europe continues and if per chance the Greek crisis leads to a break-up of the Euro zone, it would have wider ramification for India, warns Basu. Even if Asian trade develops it would only provide a small cushion, as the region still does not have the economy of scale that Euro zone has.

The survey also calls for increasing demand within India to spur growth. But a tighter monetary policy has reduced the aggregate demand. Generalisation of inflationary pressures to manufacturing products continues to be the major policy concern in the country. Industrial production growth has dipped to a virtual zero level. Additionally, it points to a critical aspect of the falling purchasing power among people and inflation and poor employment quality are stated to be the key reasons.

Another major concern is the deceleration in exports to 13 per cent growth from the level of rise of 40.6 per cent a month in early 2011. As imports surge, the current account deficit at 4 per cent is the highest so far. It had been at 2.7 per cent of GDP in 2010. Worse, the services sector, which is 59 per cent of the GDP is also not faring well. Contraction of economies in the West is impacting IT business. This does not bode well for India. Remember, the IT sector has also been generating jobs and if it contracts further then it would have a telling effect on our economy.

Unfortunately, the growth in India is not ‘inclusive’ as desired and the projected problems in IT sector could cause further problems across the country. In fact, the growth projection is more statistical. Real growth would come only when the governments in the region spend more, advises ESCAP. Can India do that with such high fiscal deficit?

Many may aver that 5 per cent deficit is not a critical figure. However, the total debt of the Centre is 45 per cent of the GDP and if States’ deficits are included it shoots up to 65 per cent. Basu is of the view that this should not cause anxiety as Japan has 100 per cent debt and Greece 200 per cent. But, he may not be correct, as the Japanese economy is in turmoil and Greece is causing upheaval in Europe. Clearly, India cannot indulge in such luxuries.

ESCAP accepts the above and calls for policy level changes for reducing poverty, inclusive growth, provision of basic services such as health care and education and generation of ample employment opportunities so that the poor can earn a livelihood. These are general objectives of the Indian Government as well but seem distant to achieve.

A change in style of governance and reduction in cost of governance may achieve this. Many unnecessary activities such as bailing out extreme sick public sector undertakings should be done away with. Taxes need to be reduced and an enabling environment created for the industry to grow without fear of taxation and corruption. Achievable alright but its implementation is questionable. ---INFA

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