Many of us tends to be happy to think that India has become an economic superpower and swear of its GDP growth at the rate of around 10%. But here are some reasons why I think that we are nowhere near becoming an economic superpower. Don’t give me the argument that due to size of our middle class and burgeoning population we have the capacity to drive our economy on our own. It must be remembered that only domestic consumption can’t bring you so far to achieve the double digit growth which we have claiming to achieve very soon. I am of the contrarian view as I find many gaps in our policies and holes in our systems which would deter us to go where we want to.
First thing first and which is related with all of us i.e. inflation. The headline inflation is near 10% and it is a big challenge for the policy makers to contain it. Various measures (mostly monetary) have been taken in last one year but still the inflation is above danger mark. How it affects the growth of the economy, let’s see. To rein in high inflation the Reserve Bank of India has increased the interest rate and made the lending expensive. But this expensive lending is a burden for the manufacturers as for upgradation or expansion they need the fund and to borrow at high cost does not suit them. It reflects in the lower output in industrial production which leads to the slowdown of the GDP growth. In recent months we have seen the index of industrial production going southwards, which shows the current state of our industries. Also, despite the attempts of RBI, inflation couldn’t be controlled as there was lack of fiscal or administrative steps needed to aid the fiscal ones in order to contain inflation.
It was said time and again the inflation is due to the supply side problems but in last two year hardly we see any attempt on the part of the government to tackle it. The government was busy in manipulation of statistical data and trying to show that everything was under control. So consumers have to bear the burden of high inflation and due to it the demand of many goods and services started to decline. If the things become costly and your income remains same, obviously you would have to cut down your expenses. Once again it leads to the overall slowdown in various sectors of the economy which we are seeing now. And if you are finding me at fault, I must tell you that even the government’s chief economic advisor Kaushik Basu accepted that the picture was not looking rosy. He was talking about not only inflation but the whole economy.
Now we can talk about the dual challenge which government is facing today on account of its fiscal discipline. I am talking about the existence of fiscal deficit of 4.6% of GDP(which may cross even 5%) and current account deficit of 2.6% of GDP in 2012 and there is no solution visible. The high inflation, expensive lending, low industrial output, low tax collection, falling share market, record low level of rupee, diminishing forex reserve and poor global economic environment have made a vicious circle for the government and the economy and it seems almost impossible to come out of it. Due to the low industrial output the government has not been able to collect tax as per its target and there are real threat of crossing the set limit of fiscal deficit. Also due to the poor market conditions, the government has not been able to execute its divestment plan so there are very few measures left to it to generate resources.
So far current account deficit is concerned, it is more than 2.5% of GDP and there are chances that it crosses the comfort limit for the government as due to the poor global conditions, the exports are not at satisfactory levels. It is to be mentioned here that the current account deficit mainly consists of the trade deficit which is burgeoning in India’s case. In October 2011, this was the highest in last 17 years as it touches 19.6 billion dollar. In October, the import was 39.5 billion dollar while the export was merely 19.9 billion dollar. It must also be remembered that the trade deficit for the first seven months of the current financial year was $93.7 billion and with this rate, it may breach the $150 billion mark at the end of this fiscal.
This is not all, but there are many more things to be discussed about the situations which are interlinked with above mentioned problems of Indian economy. How these trade deficit, fiscal deficit and falling rupee adding woe to our future growth, in next part of this article. But what I discussed so far should convince you not to boast of on our economy.
3 comments:
The numbers you present in your post are perfectly in order - the IIP numbers, the inflation or even the fiscal deficit. But to my mind, this data is not what justifies "Why We Are Not An Economic Superpower". This is an outcome of the fact that we are not; it is the hard, cold proof, that we, at least this time around, missed the bus.
Global indications seem to suggest there is not going to be a bus for a while. If there were opportunities to grab after 2008 and till 2011, it is history that will judge whether we did justice to these opportunities.
But coming back to the topic at hand - Why, really are we not an economic superpower? Perhaps the answer to that is a lack of will and a lack of confidence. We have no dearth of brilliant minds - the PM, the Home Minister, the Dy Chairman of the Planning Commission, the Finance Minister and a whole band of well-wishers and do-gooders in the NAC - who one would have thought were sufficient to take the country well into the way to prosperity. And yet, we missed the bus.
From whatever little I understand of economics, politics and governance gives me the impression that too many cooks indeed are spoiling the broth. There is little unanimity in government and its agencies, there is a lot of pettiness. There is little will to serve and perform, there is a lot of will to claim credit. And as far as the bureaucracy is concerned, there is little that is moving with the latest spate of scams. I remember reading in a number of places how babus are so scared that each of their approvals will be met with scrutiny, they have stopped procurement of any kind. As a result, procurement of something as basic as a pencil, now takes something like 8 months.
Perhaps the question to ask is "Will we ever be an economic superpower?" The answer to that is possibly - only if others continue to mess up more than we do.
'Why We Are Not An Economic Superpower'- The question has many answers, neither being enough nor sufficient... And the current economic situation, is just a part of the story...at least, a paragraph; at best, a chapter.
Coming back to your post, the argument that you are making, has been doing the rounds for quite some time now, especially in the amongst the advocates of free market economics. The current situation of 'High Inflation, High Rate' regime is the result of a flawed economic structure, where the top 2% of the population, earns more than 98% of the total income generated.
And to understand the current situation, you need to keep in mind the kind of growth the country has witnessed over the last decade. The average GDP growth has been around 7-7.5% over the last 10 years, the per capita income has also risen by a similar factor. But what we have missed in the play of numbers,is that, there are sections of the population where the growth in per capita income has been multiples... it has been in geometric progression, rather than arithmetic progression.
If you listen to the current debate ranging on inflation, you'll realise that a lot of food inflation debate is around the higher demand of pulses, lentils, and meat... and much of it attributed to the rising demand in rural India, and almost seen as a problem. While, the position taken by 'economists' is deplorable, there is some truth to the argument that there is a genuine rise in demand, and the mis-managed supply chain system has contributed to the price rise.
But this has started correcting, and food inflation is coming down.
Now the inflation is being driven by non-food items, especially by manufacturing. If you look hard enough, you'll realise that manufacturing inflation was always on the rise, even while, people were obsessing about high food prices.
The obvious question is what is driving manufacturing inflation... A couple of things... One rising raw material prices, and second, a genuine demand. To understand this better, take the case of the auto sector... Steel prices have increased manifolds in the last two years... And even though auto sales have dipped, the current sales figures match upto those in 2007... which essentially means that we are selling as many cars, as we were before the slowdown. That means that there is genuine demand in the country, and this is driving up prices [Almost all manufacturers have raised prices]
So, what does the auto story tell us about the Indian economy?
Although it is an interest rate sensitive sector, there are enough people who are willing to shell out more for their dream set of wheels. So, even while we raise interest rates, the upper cross section of the society has enough money to afford it.
Inflation, by definition, is a situation when too much money chases too little goods… That essentially means that there is enough money in the system, a bit too much than what the RBI expected… And, this is the disposable income. Consider this, last year salaries increased in comparison to the previous year, and this year too, salaries are expected to grow. Also consider that although, corporate results have been poorer compared to their results last year, majority of the companies have registered an increase in income & profits, albeit, at a lesser pace.
[ON AN AVERAGE SALARIES GREW BY 5-7%, WHEREAS INTEREST RATES HAVE GONE UP BY ONLY 3.5%, AND THIS IS WITHOUT CONSIDERING THE RAISE THIS YEAR]
So, to come back to my earlier point of disparate distribution of income… The growing income scenario has ensured that there is enough liquidity in the system to keep pushing the prices up.
Then should RBI start loosening its belt? No. Infact, the RBI should keep on raising rates, till the disparity between rise in incomes, and interest rates is bridged. Only then will inflation start showing signs of slowing down.
You might argue that if inflation is being driven by non core items, then the loosening rates should not impact the health of the nation… So, what if we have high inflation, we have high growth too? The problem with that is just one… The high inflation, high growth scenario would really heat up the economy, and we might have to face a situation of hyper-inflation and zero growth, something that you would not want.
So, keep the statistics aside my friend, and stop listening to the industrialists. They are here to make money, and they will keep on making money. It should not really matter if high interest costs & high fuel costs is grounding Kingfisher… that is the rule of the market economy… You win some, you lose some… It’s similar to farmers committing suicide in Vidarbha… they too were driven by high interest rates… When there was no hue and cry there, why should there be a ruckus here?
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