By S. Sethuraman
India’s polity and economy are far from reassuring for uninterrupted stability and robust growth as the nation enters its 65th year of independence. An extraordinary turn of events over the year has clouded the short-term outlook – issues of corruption in high places and governance failures thrown up like never before while continuing high inflation and structural weaknesses have slowed down the economy, off its high growth trajectory.
Lack of supportive external environment is part of the problem. But UPA-II cannot disown its responsibility for such a pass and has been justifiably assailed for policy drift and even plain neglect, especially in regard to effectively lowering inflation which has hurt hundreds of millions over the last three years. Parliament has hardly taken up any of the major legislative measures on the agenda so far in the current monsoon session, as Government is pilloried by a vociferous opposition and held to account for all the corrupt deals and policy missteps.
There has been a perceptible investment slowdown and weakening of business confidence for some months. Government, especially Finance Minister Pranab Mukherjee, has been trying to pep up the economy and remove the “perception” that there is a policy paralysis. Asserting that the fundamentals of the economy are strong, he is hopeful of giving a thrust to financial sector and other reforms in the coming weeks even as some significant initiatives have been taken, such as in regard to financing infrastructure. Half the monsoon session having been lost in uproar and adjournments, it remains to be seen what Mr Mukherjee will be able to score.
Even the Prime Minister’s Economic Advisory Council headed by Dr. C. Rangarajan which has lowered GDP estimate to 8.2 per cent in 2011-12, has said Government, which looked stable after the 2009 elections, lost the momentum to take energetic steps to tone up the economy, and a slew of corruption-related controversies over the past year has “consumed its energies and led to slowing down of initiatives to restore investment and economic confidence”.
While Government is focusing on the urgency of attracting foreign direct investment flows which were down in 2010-11 – but with some revival in the first quarter – there are critical problems ahead – land acquisition, mining, power and other shortfalls in infrastructure on which Government has been unable to make much headway to be able to give a turnaround to a slowing economy. While Finance Minister is confident of ensuring 8.5 per cent growth and adhering to fiscal deficit target of 4.6 per cent, professional forecaster and other business surveys put growth in the range of 7.5 to 8.2 per cent in 2011-12 and place fiscal deficit at 5.3 per cent of GDP.
More disturbingly, high inflation will continue to plague the economy this year, as projected in various forecasts. There would be no let-up in near double-digit inflation for most of the current year which could hopefully end with WPI still at 7.5 to 8 per cent (March 2012). By the week ended July 30th, food inflation – which has spurred general inflation -was 9.9 per cent year-on-year and prices of cereals including rise were rising by 3 to 4 per cent in the current fiscal year (April-July). Taming inflation will continue to be top priority for RBI, according to the Governor Dr Subbarao and Deputy Governor Subir Gokarn, who said reducing inflation is necessary to sustain medium-term growth at not less than 8 per cent.
In the first quarter (April-June), manufacturing had shown a pick-up in June but at 7.5 per cent in the first quarter (April-June) it was below 10.3 per cent in the corresponding quarter of 2010/11.Barring basic and capital goods, which did relatively better in June, other classified goods, especially consumer durables like automobiles, registered sharp declines in the first quarter. Exports are holding up well so far but the Commerce Ministry assumes that with demand weakening in US and Europe, Indian exports may not have as good a run in the coming months.
India’s growth is essentially domestic demand-driven but still dependent on global economy in trade and capital flows to finance the current deficits and boost investment. 2010-11 saw a sharp drop in direct investment flows though lately there are signs of a pick-up. Domestic financial stability which has been a strong positive is also prone to exogenous shocks as global financial markets have entered another volatile phase in the wake of Standard & Poor’s downgrading, by a notch, of the credit rating of USA, the first of its kind for what has been the world’s safest haven.
A loss of investor confidence has swept across both USA, struggling with its fiscal deficits and debt and bipartisan brinkmanship in Washington, and the Eurozone where sovereign debt crisis is erupting in more peripheral countries while major economies like France and UK are also taking growth hits. Wall Street saw the wildest week, since the financial crisis of 2008, with swings of 400-500 points in the Dow Industrial Average index in a turbulent week (August 8-12) which ended with a gain of 125 points, at 11,269, based on a weekly sign of a fall in job claims and rise in retail sales in July. Taking cues from US and other major markets, the Bombay Sensex took sharp downturns reflecting investor worries over rising interest rates, unabated inflation and global uncertainties.
Going forward, the weak recovery in USA, compounded by the sovereign debt difficulties in euro-zone with major economies like Italy and France also coming under strain, rule out any improvement in the global situation, even though emerging market countries like China and India are maintaining relatively higher growth albeit with some moderation. To support the faltering US economy, the Federal Reserve announced on August 9 it would hold short-term interest rates near zero through mid-2013 but hinted at no new measures to further reduce long-term interest rates or otherwise stimulate growth. Chairman Ben Bernanke had indicated in July Fed was “prepared to take further steps if needed” but the Fed policy-making committee is divided over the monetary policy stance. There is no Q3 in sight at present.
President Obama, faced with Republican resistance to consider any tax proposal to balance the huge deficits, is fighting desperately to deliver new ideas which would create jobs, and has charged Republicans with putting politics ahead of the country. His re-election hopes in 2012, with his popular rating already down, will depend, to a large extent, on his success in lowering unemployment and easing conditions for consumers. Not only the Congress is divided, opinion across America also has not swung heavily for boosting the economy by raising NRE taxes while cutting the discretionary outlays. (IPA Service)