Millennium Post

Ominous trends in Indian economy

The three sets of figures released over the new week give insight into the current state of the economy. All the wrong things are rising, while what should have been rising is in effect falling. Exports are falling, industrial production is falling, prices are rising and so are imports. All things taken together, we are not in the best of situation.

The Consumer Price Index (CPI) given out on Monday showed prices rising at a robust pace at close to double-digit level. The Wholesale Price Index (WPI) released on Tuesday show the overall inflation rate going down.

The apparent contradiction is because the CPI is more focussed on prices of food products, while the WPI is a more broad-based measure and includes many other items than food.

Even if we look at the disaggregated WPI figures, it shows food prices are rising rather fast, while manufactured goods prices and those of industrial raw materials are falling. Thus the WPI shows that cereals prices are rising by close to 16 per cent, rice prices rose by 17 per cent, wheat by nearly 14 per cent and pulses by 10 per cent. Thus, staple food prices for an average Indian is rising by around 15 per cent.

Another essential item in Indian food plate, onion prices are rising by over 90 per cent. But good news is that vegetables and potato prices are down.

However, manufactured goods prices are hardly rising at just over three per cent. If we look closely at the manufactured items price behaviour, whole range of manufactured items such as machine and machine tools, leather products, chemicals prices are rising very slowly. Some items like iron and semis, which are widely used raw materials for construction to automobile making, are falling.

What the price trends are revealing is that the industrial economy of India is in recession and the demand for industrial raw materials is falling. Thus, you have rising food prices and falling manufactured goods prices. This is because of the structural rigidities and lower supplies of food items, while the pricing power of manufacturers is limited as there is more supply than demand growth. The point is you cannot cut down food intake, but rather go without some of the manufactured products. There is further contrast and that is alarming. Domestic demand – which so far sustained Indian growth – is being driven out to outside markets and imports are rising. The trade figures at least show this ominous development.

While domestic production of metals and minerals are falling, imports of metals and scrap are rising. Similarly, organic and inorganic chemicals imports are rising, when their domestic production and prices are going down. Instead of producing coal at home, we are importing ever higher volumes.

Of course, petroleum imports are surging for ever. Ironically, all the economic ministries at the centre are fighting to offer controlled pricing formula for natural gas produced within the country, while imported LBNG prices are at least five times costlier. Market driven domestic price of gas could have resulted in greater investment and production in the country.

Above all, gold imports are surging. Any rise in gold imports is in effect transferring domestic demand to overseas. In April alone the gold imports were to the tune of $7.5 billion, while in 2012-2013 the total gold imports were to the tune of $52 billion. Reserve Bank had warned about the rising trends in gold imports and underlined the need to curb this wasteful expenditure.

What this means is that we are handing over our savings overseas, instead of spending this huge amount  in projects or investments in the country. Alternatively, this amount could have been utilised for education or other social sectors to bring about a change in the future population quality.

RBI made a small beginning. It is discouraging the public sector banks to make a quick buck on gold sales. In fact, the public sector banks are selling gold through their own gold kiosks in the branches and even encouraging people to buy gold through their advertisements. These should be stopped forthwith.

There are some technical changes in gold import policies that the RBI has now introduced. However, the government should also bite the bullet, even at the cost of a little unpopularity, and swing into action to discourage the rising volumes of gold imports. India being the largest gold importer in the world, when over 300 million people are below poverty line, is scandalous.  

Statistics are often said to be damned lies. But at least sometimes they are not. At least for now, they deserve to be closely looked into and policies should be reset.
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