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Millennium Post

Economy looks poised for more risks in 2013

July has opened on a grim note for the Indian economy in 2013-2014, after the setbacks of the first quarter (April-June) with a slower growth recovery, a sharper depreciation of the rupee and some outflows of debt and equity capital underlining weakened investor confidence.  Notwithstanding timely onset of monsoon, the mid-2013 outlook is one of depressing perspectives, both in regard to inflation at home as well as management on external account with the rise in short-term liabilities.
For all its blunders and inactions of the past, the UPA government, with a simulated air of confidence now. hopes to tide over a second year slowdown, with some belated correctives , such as expediting clearances for languishing projects but few of them likely to yield benefits in the current fiscal year. These have hardly stirred domestic corporates into a new burst of activity.

And government’s focus is more on pruning expenditure to hit pre-determined deficit reduction targets on the one hand, and keep up its hunt for capital flows, in whatever form, to finance the current account imbalances in BOP on the other. To this end, the Finance Minister P Chidambaram loses not a day to promise more and more reforms. This is also conditioned by continuing negatives for the real economy, the short-lived change in business sentiment post-September reforms and credit rating agencies keeping up their rants on downgrade.

That the government continues to remain out of touch with ground realities is by now universally known. In its make-believe world, UPA is not unduly worried over the elections yonder, as it expects to manage to be back on the saddle and begin to recapture the heights of magical growth rates of the pre-crisis boom years of the global economy. Meanwhile, the country goes through a situation akin to stagflation, low growth and high inflation, both reflected in industrial under-performance, (manufacturing and core sectors) and  an unrelenting consumer price inflation in double-digit. Price pressures would get compounded with the sharp rupee depreciation, by 10 per cent in June itself. These are of great concern.

But in the single-minded pursuit of fiscal consolidation, where expenditure cutting overtakes public investments and developmental and social equity concerns become secondary, growth is sought without even a semblance of price stability. Far from taking any serious steps to tackle the supply side deficiencies, which get pushed down as medium-term deliverables, the policy-makers gloat over ‘inflation declining’.

WPI or headline inflation rate has for some months now been lowering (due mainly to base effect) and was just below five per cent in May (after the 2012-2013 average of 7.9 per cent) and the ‘core’ inflation (excluding all primary articles and energy) was at 3.11 per cent.  And this is cited by government as justification for RBI to go into a curve of rate easing. But the central bank rightly makes a holistic approach in more deeply looking at CPI and food inflation, in particular, which matters to the people at large, especially the poor.

Not that RBI overlooks output concerns in growth-inflation dynamics.  CPI remains stubbornly in double-digits in India, a lead it has in the group of emerging nations, BRICS.  CPI (IW) had in fact risen to 10.68 per cent in May while rise in retail food inflation was even sharper at 13.24 per cent. After all, the consumers, hundreds of millions of Indians, must silently and willingly bear the burden as long as what it takes for our government to steer the economy out of a of a mess of its own creation.

Its most recent decisions on natural gas pricing and the latitude it extends for power undertakings to increase tariffs (over and above what states have done only recently) again leave consumers out in the cold.  The finance minister has justified the higher gas pricing as a requirement to attract investments in a vital energy sector and in an after-thought even agreed to extend some subsidy to power and fertiliser units. In other words, the consumer gets to pay for in some way for higher costs of projects resulting from time-and-cost over-runs.

Fiscal deficit pruning at any cost being the over-riding priority of UPA government, vociferously advanced by Finance Minister Chidambaram, everything else must fall in its place. In fact, he is one step ahead of even the IMF which has learnt a few lessons from the global crisis and discourages austerity at the expense of growth, as it tellingly recorded in its recent appraisals of US economy and has urged other countries as well not to ignore growth concerns in fiscal paths.

UPA clings to a development philosophy which had long ago become irrelevant for developing countries – the ‘trickle down’ theory of growth which should ultimately lead everyone to prosperity. The present and coming generations would have to wait for it indefinitely Meanwhile, we are  constantly assured of the strength of ‘economic fundamentals’ citing our savings and investment rates relatively higher than for many other countries.

If that be so, why is India under-performing?  Capacity utilisation has indeed declined. The corporate pricing power had already been exercised to the hilt. But prices keep rising across the board and in essential drugs with greater frequency. The May WPI data show rise in the indices of most sub-sectors of manufacture though the base effect would have lowered the ‘core’ inflation level.  With ever-rising prices, India has become a high-cost economy, even if for external investors the depressed wages may be one plus factor. In a predicament of meeting the challenges of development, which UPA has dressed up as ‘growth with inclusion’ and with immediate concerns focused on fiscal deficit and financing external gap, UPA’s preoccupation with coaxing foreign investors is understandable. But what afflicts the real sectors of the economy may be holding investors at bay, i.e. the very sectors which have not engaged government’s efforts as much, given the state of macro-economic deterioration.

From the beginning, government had blamed our difficulties on global economic and financial uncertainties and that all countries had been hit in one way or the other. Chidambaram feels, with whatever has been accomplished here, we may be even better-off than others. Without grudging him this satisfaction, we shall await his next package of reforms in July. In reality, however, the global situation has moved recently in ways where investors would be even more risk-averse amid uncertainties of monetary policy developments in the United States and in Europe. Nor growth prospects in these advanced regions are promising for demand for Indian goods and services. India needs more capital flows at this juncture even if occasionally we had joined the chorus with Brazil and China to denounce quantitative easing (QE), notably US Federal Reserve, for harmful effects on developing countries. Perhaps, QE facilitated some debt and equity inflows with which to balance the current account deficit in 2012-2013.

But capital outflows are also likely – some already reported in India – in the wake of the Fed’s decision on 20 June to begin tapering off the monetary easing later this year. This development triggered an upheaval in global markets and one effect already is an increase in interest rates in advanced financial markets, which could trigger more outflows from developing economies in days to come. And emerging markets – not all of them – are viewed positively by IMF for having strengthened fundamentals to an extent they do not become ‘victims of well-programmed and well-communicated unwinding of the super accommodative monetary policy of the central banks’, as M Christine Lagarde, Managing Director, put it,  in an interview to Washington Post. IPA
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