Open Forum

New Delhi, 27 July 2008

RBI Annual Statement 

INDIA HEADING FOR STAGFLATION?

By Shivaji Sarkar

 
Is India heading for stagflation? Reserve Bank Governor YV Reddy says it has never happened in India and is unlikely. But, his Annual Policy Statement for the current fiscal is unclear of what he is saying. It hints at global stagflation.

A look at the RBI statement suggests that it is replete with scepticism about the economic scenario. The scepticism is linked to the inflationary tendencies. When the statement was released inflation was at seven plus per cent. Now it is crossing 11.05 per cent, based on wholesale price index (WPI). At the retail level it means five to six per cent more. It may be recalled that in 60s and 70s inflation was measured in terms of consumer price index (CPI). Coupled with this, the last quarter industrial growth has slipped to an alarming three per cent.

It is also a pointer to what Congress spokesman Abhishek Singhvi has remarked in an article, "Invisible hand of market, in the Indian context, cannot fulfil the supply-side constraints (something that also causes anxiety to RBI governor) - it cannot provide water, sanitation, rural infrastructure and connectivity. The pace, content and grammar of growth cannot be unidirectional; equitable growth is must."

In its previous statement early this year, the RBI had predicted the rise in inflation but had hoped it would not surpass 5.5 per cent. The Governor still feels it is the ideal level and is prodding the Government to bring it down. But it seems unlikely. Though the RBI assessment is no different from that of Singhvi and not as vocal, it is indicative of the flaws in the growth pattern.

In fact, the Reserve Bank is too scared of "overall uncertainties", when it states: "It is useful to recognise the anticipated global slowdown and heightened uncertainties in to mounting pressures. Whether the slowdown would have a moderating effect on inflationary pressures or whether the global economy would slip into stagflation is not clear".

In regard to interaction between global and national economies, the Bank sees some revival of protectionism globally as for food and fuel policies. This, it feels makes the impact of the global economy on India, particularly in regard to inflation capital flows, "extremely difficult".

While noting there is greater inflationary pressure than expected, Reddy tries to reassure the domestic consumers that "growth would be on projected path". However, in the same breath he adds that economic integration is global and so is inflation. "There are unprecedented dilemmas and response of market not assessed. It is an extraordinary global situation".

Besides, he cautions "There are too many uncertainties and we may have to prepare for adverse developments". In reality, the steps of squeezing money out of public circulation, raises interest rates and that further add to the inflation. Raising CRR to 8.5 per cent may help theoretical considerations but practically it would create problems for the both the people and the market.

In such a grim scenario, the statement is vague on the sustained growth path. "Growth forecasts have been moderated in the face of the financial turbulence and the anticipated slowdown in the US economy". It simply means that the RBI has views that are different from the Finance Ministry and foresees a slowdown at the national level. Does it mean the country is waiting for a severe recession? RBI is silent on it, but eloquent about increasing dangers of global recession.

It does, however, express concern over the "demand driven economy and supply side pressures". Simply, that demand for goods – particularly food and other commodities – are more than could be supplied in the market. The prediction: “Supply side pressures are expected to persist in the coming months with considerable uncertainties surrounding the evolution of key commodity prices and second order effects".

The analysis thus is that relief to people is not in sight in the near future as too many negative effects are foreseen. It enlists the reasons as pressures from international food and energy prices, risks from financial markets – leading to enhanced vulnerability of the financial system. RBI expressing concern says, "There was growing uncertainty as to when, how and to what extent would the withdrawal of liquidity take place and impact economies like India".

That there is little relief from the present inflation-recession scenario is evident from the firm statements of the RBI – "Volatile capital flows, large movements in cash balances of the government and consequent changes in liquidity conditions continue to complicate monetary management".

The RBI does indirectly call for putting a halt to the process of global integration of economy. It warns that protectionism would grow. In reality, it wants that more protectionist measures were taken because it finds it difficult to maintain the level of rupee against the US dollar, which has been depreciating since 2006.

But, it has its impact on the growing trade deficit as exports have become expensive in dollar terms. It is also affecting the Business Process Outsourcing (BPO) sector, wherein real income has come down. It has translated into lower pay packets and near closure of many smaller BPO units. Even manufacturing units are not functioning to their capacity owing to a fall in demand by the inflation-affected populace.

The situation is likely to turn more grim as the IMF’s World Economic Outlook forecasts a slowdown in global GDP to 3.7 per cent in 2008 from 4.9 per cent in 2007. It says food price inflation would remain a key risk to global stability.

The Food and Agricultural Organisation’s (FAO) global food price index, which rose by 40 per cent to the highest level on record, has continued to increase in the first quarter of 2008, as world food stocks have fallen to their lowest levels in 25 years. In the global food grains market, prices of major crops such as corn, soyabean and wheat have increased by 58.2 per cent, 86.3 per cent and 56.5 per cent respectively by April 25, 2008 from a year ago in response to surging demand.

Since agriculture has been ignored since 1991 and food production has fallen in India, there is little relief in sight. This coupled with global credit scenario, even Indian banks are affected. .

In a scenario like this, it is unlikely that there would be any relief from the pressures the economy is suffering. At the national level, the lack of political will to deal with the situation is complicating the process. Indian growth is likely to be skewed, if not stymied. Disparity is increasing. Whether the neo-rich are on firm footing the coming few years would tell that.

The architecture of growth is not inclusive and unless that is done, piecemeal growth would not solve the problems. There is the issue of how to disintegrate the economy from global pressures without severing ties with the world economy.

The RBI only sees decelerating impulses and possibilities of prolonged global turmoil. It sums up, "On the domestic front, the outlook remained positive up to January 2008. Since then, the prospects for growth in the year ahead have been trimmed as risks to inflation and inflation expectations from the upside pressures due to international food, crude and metal prices have become more potent and real than before".

Presently, the scenario is seen as grim and little relief is predicted for the common man. Stagflation or not, it is definitely not the best time for Indian economy. The worrisome question is where the slide would lead to and when would it come to a stop. --INFA

(Copyright, India News and Feature Alliance)