Economic Highlights
New Delhi, 14 May 2018
Rate Rise To Boost Savings
OIL, $ SURGE = WAGE, FARM CRISIS
By Shivaji Sarkar
The world economy is in
turmoil as crude touches a high (since 2014) in the wake of US rejection of the
Iran nuclear deal. The Rupee is on a roll to touch one of the lowest marks
against a surging dollar, a phenomenon that occurs for the eleventh time since
1983.
Undeniably, inflation is
set to rise in India. The good news? As interest rate rises it would cause
cheer to depositors and the banking sector. This will boost savings which has
touched a low of 29% growth in 2016 from a peak of 38.3% in 2007, just before
the Lehman Brothers crisis ruined the banking sector. Malaysia and Pakistan
have already started gradual increases in interest rates.
Remember, the rupee had
touched Rs 58.96 against the dollar in May 2014 soon after the NDA Government
took over and now it has gone to a low of Rs 67.43 and is projected to fall
further. This poses a politico-economic problem as twin rises – oil and dollar
– disturbs businesses and Government and leads to an inflationary situation,
trouble for international commerce, trade balance, budgetary projections and
possible inequalities.
Pertinently, all this is
happening at a time when the UN’s Economic and Social Survey of Asia and
Pacific 2018 (ESCAP), launched in Delhi and International Monetary Fund’s (IMF)
latest economic outlook, project low regional and world growth necessitating
economic reorientation.
Undoubtedly, world
bodies are worried at the US attitude and economic roil. India is seeing a
currency crisis that had last hit it in September 2013, when the rupee had
touched almost Rs 68 to a dollar.
Certainly, this not only
makes crude more expensive for an Indian but also hits home budgets and might lead
to a farm crisis as input costs, particularly irrigation, fertiliser and
transport are bound to rise. Consequently, there might be problems for growth,
job creation and development funding. Wage rise and many readjustments are a must.
Significantly, the IMF has just projected India growth at 7.4% up from 6.7% in
2018 though advanced economies including the US would have almost 0.2% rise in
2018 at 2.9% and in 2019 at 2.7%. The Euro zone will grow 2.4% this year before
falling to 2% in 2019.
The ESCAP projection is
0.4% growth for Asia-Pacific, having 53 States with 60% of the world
population, at 5.8% in 2017 against 5.4% in 2016. India and China lead the growth
and the Russian Federation which having come out of recession on oil price
recovery might add to the cushion.
However, this year growth
in Asia-Pacific is set to fall to 5.5% as in half the countries consumption of
the bottom 40% grows at a slower pace. As real wages are not rising by rising
productivity, consumption would be led with debt and cause financial
vulnerabilities.
Social inequalities are
also set to rise with higher inflation as economies would be operating below
their potential, hit by low wage and job growth. Though e-commerce might meet
demand at lower costs, automation may further lower wages. The working classes
in the region are in for big trouble. Whereby, it might be an uphill task to
contain social discontent.
Further, trade barriers
and harsh US measures are likely to further disrupt cross-border production
networks. This may affect not only trade but also long-term investments. Even
short-term investments like withdrawals by foreign portfolio investors from the
Indian market might cause foreign exchange problems to be further fueled by
rising import bills for crude and other goods. Obversely, exports rises would
be moderate and are unlikely to offset the foreign exchange.
Significantly, a repeat
of the 1997-98 Asian financial crisis is forecast. It might have an adverse
impact on India’s Look East Policy as countries like Malaysia, Thailand, South
Korea and China face financial vulnerability in the wake of rising private debt
resulting in asset price corrections, says ESCAP. It might also impact
projected Indian investments in building roads in Myanmar and South-East Asia.
According to ESCAP India
was hedged as commercial lending rates were not lowered because of banking
sector problems. Hence, rising deposit rates would not be much of a problem for
Indian businesses and would help individual savers.
While ESCAP has stressed
on further tax widening and increases, it has not stated how rising taxes add
to citizen’s woes as it is inflationary and increases Government expenditures. This
leads to a concern of povertisation of the transitional, middle, class, says
Jaimini Bhagwati, RBI professor, ICRIER and former Finance Ministry Joint Secretary.
Adds ESCAP South and South-West Asia Head Rupa Chanda, the tax increase
measurers also leads to problem of attitudes (tax-terror) of tax officers.
Notably, if the Government
wants deposits, which had fallen because of lowering of interest rates and
taxing individual banks deposits to rise, improve health of the banking sector
it has to amend its policies and let the deposits not be subjected to TDS.
This will boost banks,
economy and reduce the Government’s burden on avoidable costs, processes, and
litigation. Since the introduction of TDS on bank deposits, reviews and
litigation have increased. If this is done away with individual and bank
liquidity is set to rise and Government finances are bound to improve with
higher consumption, tax realization and better ease of doing business.
Similarly, many
unnecessary recently introduced banking procedures also have to be simplified. For
a few rogues, all bank clients should not be punished. Tax procedures and
banking should create a friendly approach to the Government in the run up to the
2019 polls.
The ESCAP also suggests
‘macro-prudential’ measures to do away with financial (tax) excess. These, it
says, reduce systemic risks and safeguard stability of financial (banking and
revenue) system and markets. It sees problem in India’s Rs 9.5 trillion NPAs
caused by corporate leverage. Its oblique suggestion is not to hit the ‘micro’
individuals --- citizens of institutions.
Another aspect that has
to be taken care of is the surging deficits of various State Governments. The Centre’s
deficit, it finds, is controlled and overall debt is one of the lowest at 60%
compared to Japan’s of above 20%.
In sum, it finds
strengths in the Indian economy but calls for fine-tuning to make the
trajectory smoother and faster. The international situation --- oil prices and
dollar --- would remain a problem but with some ease of methods and trust in
citizens, India can remain the engine of world growth. ----- INFA
(Copyright,
India News & Feature Alliance)
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