Government yet to stabilise domestic economy
By S. Sethuraman
At last, the Finance Minister Mr Chidambaram has recognised that there are no quick-fixes to lift our economy from the morass into which it has been driven, more by our own past failings rather than as a fall-out of uncertain global environment. Yes, trade and finance are areas where the economy has had to bear the impact of volatile financial markets and weak post-crisis recovery in major developed economies hitting investment inflows and exports for nearly two years. For the immediate, however, the Government and the corporate sector would prefer a rate cut by RBI in its mid-quarterly policy review onJune 17. With a decline in WPI to 4.7 per cent in May, continuing weak industrial growth at 2 per cent and better outlook for monsoon in 2013, as of now, it is assumed, RBI can nudge its monetary stance more toward growth and make a further cut in key lending rate (repo) from 7.25 per cent. Taking a hard look at the global situation, the ongoing currency turmoils, largely in emerging economies, and the underlying inflationary forces, economists generally caution against a further easing of policy rates at present, especially in the context of a still overvalued rupee and a possible flare-up in prices. In growth-inflation dynamics, RBI has hitherto given more weight to CPI as it affects the people at large, particularly the poor, and the consumer prices, though lowering, are still close to double digit, even if WPI may be coming down to comfort zone.
Beyond the level of inflation, RBI would certainly have to take into account the steep fall in the rupee and its impact on the economy. It has intervened in the exchange market to reduce excessive volatility but there are limits to such intervention given the virtual stagnation in the level of India’s reserves in 2012/13. In the policy review, RBI would also have to weigh the new risk emanating from any move by US Fed to begin the process of gradual exit from its Quantitative Easing, which is helping US economy and indirectly supportive of global growth.
Such a contingency would certainly lead to higher interest rates generally, as the World Bank points out in its just published mid-year global outlook. Countries and businesses which had borrowed at low rates for longer term projects may have to face some losses while debt servicing costs would also go up. India, high up in the list of countries with large current account deficits and rising short-term liabilities, would find it more difficult to make needed adjustments. It is, therefore, voices are coming out for caution and even in favour of rupee depreciation to promote exports competitively.
It is, therefore, on a mature consideration perhaps of the risks still inherent in the global environment as well as the time lag involved in overcoming domestic deficiencies with all the belated correctives (such as new project monitoring mechanisms) to take hold, that the Finance Minister is setting his sights on stable medium-term growth, ruling out “quick fixes”. He may overlook, but not investors abroad, on the uncertainties that have begun to plague the political scene in the run-up to 2014 elections.
Mr Chidambaram will certainly contrive to achieve his fiscal deficit targets but he cannot yet talk with equal assurance about moving up growth of the economy above 6 per cent in current fiscal or 7 per cent in fiscal 2015 under a post-election dispensation. Our growth path has been badly interrupted by a confluence of adverse factors, partly external and largely domestic, such as the accumulated infrastructural and other procedural hurdles, which have deterred our own corporates, some of them preferring to make investments abroad.
With costs going up all around due to persistent inflation and impending tariff revisions, a turnaround in business environment is not easy. Contrary to smug assumptions here about growth potential at 8 per cent or above, the World Bank study avers that for countries including India, the output gap is currently close to zero or less than one per cent and, therefore, the scope for acceleration in the short-run is limited.
Supply constraints rather than deficient demand may be at the root of slower growth in recent years. For return to pre-crisis growth rates on a sustainable basis, the Bank calls for tackling the supply side bottlenecks arising out of weak regulations, corruption, power shortages or inadequate investments to improve educational and health outcomes. Continued progress in fiscal consolidation and in reducing structural constraints will determine the pace of recovery, it says.
Growth had slowed in the past year in several developing economies including China but India stands out in several respects for lacklustre performance though, for Mr Chidabaram, UPA may be “shining”. Keeping the supply side and structural problems in view, global institutions (IMF and World Bank, in particular) have projected India’s growth at 5.7 per cent in 2013 and 6.2 to 6.5 per cent next year. The World Bank’s medium- term projections take India to close to 7 per cent, which may be an anathema for the overly growth-focussed UPA economic chieftains.
Derveloping countries including India should prioritize structural reforms like easing the cost of doing business, opening up to international trade flows and foreign investment, and investing in infrastructure and human capital – measures which underpinned strong developing country growth over the past 20 years are worth sticking with,” says Mr.Andrew Burns, lead author of the World Bank Report.
The immediate challenge remains the current account deficit. The Finance Ministry says the steps taken already in regard to gold imports and a pick-up in exports along with lower oil prices should help the process of narrowing the current account deficit to continue over the next few months. Despite a significant 7.5 per cent depreciation since May, it is contended that the rupee is also expected to recover with a reversal of factors leading to it as a result of recent measures both RBI and Government have taken. While Mr. Chidambaram’s “big bang” policy measures of September 2012 including FDI liberalisation in multri-brand retail and the constant refrain of more reforms being unleashed had not evoked the kind of foreign investor response anticipated – barring one entry in the aviation sector, till now, FIIs have helped to bring in substantial portfolio flows which help to balance the deficit on current account. (IPA)