Depressed Indian economy
Source: By Charan Singh: The Tribune
IN the RBI's first quarter report for 2013-14 the worst expected has materialised as many argumentative economists, visiting and resident in India, would amicably agree. The growth projection for 2013-14 has been revised downward as domestic economic activity weakened during April-June 1013. Industrial production is muted and consumer durables have declined mainly due to a fall in passenger cars and motorbikes.
The capital account deficit (CAD) is expected to deteriorate as the jaws of trade deficit have widened, on account of contraction in exports and a sharp rise in gold imports. The risks to CAD have increased as unwinding of the unconventional policy in the US begins, as was evident by the trailer that had caused global bond sell-off and capital outflows from the emerging markets. Worst still, external sector vulnerability indicators have deteriorated, especially short-term debt rising to 44 per cent of the total debt at the end of March, 2013.
So, very worrisome is the fact that the services sector has recorded the lowest growth in 11 long years. The asset quality of the banking sector has deteriorated which has kept the credit growth below the indicative trajectory. Despite such a tight monetary policy, CPI inflation has hovered around double digits and food inflation has not eased up either, though WPI inflation has been lower than 5 percent. In a nutshell, everything except inflation, house prices and subsidies, is down and so also are business expectations. As would be anticipated, having taken strong monetary measures in the last fortnight, monetary policy has not initiated any change in interest rates, which have already been high for some time now.
The Indian economic situation continues to be rather grim but then every failure is an opportunity in disguise. June 1991 was a turning point in India's economic history. But should India always wait to be at the brink to realise the consequent abyss? To arrest the slide some concerted efforts would have to be made and innovative measures undertaken as traditional methods have failed to yield results. A herculean battle seems to be on the horizon for policy-makers in India.
There are available opportunities and windows that can help the economy recover. In addition to the standard stalled reforms, and projects which the government would hopefully clear soon, there are specific projects which the government can consider. First, the housing sector suffers from a shortage of nearly 18 million units, especially for the low and economically weaker sections of society. As housing has linkages with nearly 300 industries, the housing sector, can be incentivised. Secondly, in view of the general slowdown, government revenue is expected to be lower than budgeted. In this context, expenditure saved is income earned, and the government rather than resorting to traditional curtailing of capital expenditure could reconsider the implementation of the Food Security Bill 2013 until the economic situation improves.
Further, if rising imports of gold are any indication, then it implies that there are available financial resources in the economy, and nearly three-fourth of gold demand comes from the rural sector in a quest to address uncertainty in the market. The demand for gold is expected to continue to be high as the price of gold, based on various international estimates, is expected to be benign for the next few years as also due to a large proportion of the young population below 25 years in India, implying an increase in marriages, and rapidly rising rural incomes. Therefore, instead of simply imposing controls on gold imports, to curtail the demand for gold, the government should offer an alternative financial instrument to the public, especially in the rural areas. One such avenue to consider could be inflation-indexed small saving instruments to be sold through the network of more than 1,55,000 post offices, and bank branches.
To tap resources from the rural sector, the government could consider unconventional means like floating local and specific-project related infrastructure bonds. These specific infrastructure projects, which also hava links with many industries, should be physically visible so as to interest the rural population like the construction of a local bus station, a trading-cum-shopping centre and a local road connecting to the nearest urban centre. In view of the fact that the project is located in the local area would appeal to local sensitivities, attract local financing and ensure local subscription.
Still better would be to make the local authority responsible and accountable for the completion and operations of such infrastructure projects. Also, given the crowded shopping malls, swelling numbers of cell phones and crowded airports/luxury hotels/dance bars, it may be time to tap the resources swirling in black markets and raise resources through special bearer bonds once again.
The global economic environment is not very encouraging for India's exports. In addition, the exchange rate had been depreciating rather rapidly for which many in the markets were not prepared and hence had sought the RBI's intervention to restore the rupee to a range of Rs.54-56 with the US dollar. And the RBI intervened rather strongly. This level is difficult to justify by economic logic. In the determination of exchange rates, inflation differential between the two countries is an important factor in the long run. Illustratively, the average annual inflation rate in India has been 6.0 percent during 1993-94 to 2011-12 compared with 2.4 percent in the US over the similar period. The average exchange rate of the rupee with the US dollar was Rs 31.4 in 1994 and adjusting for the inflation differential of 3.6 percent per annum would justify an adjustment of the rupee, which should continue.
Finally, the RBI would help the economy recover by lowering interest rates. The government could consider lower interest rates, at least for loans to the housing sector and infrastructure to spur growth. Finally, to ensure recovery, special concessions could be considered for auto industry as were granted by President Obama in the USA. The need is to revive growth and all-out effort to achieve growth should be made by the policy-makers.
IN the RBI's first quarter report for 2013-14 the worst expected has materialised as many argumentative economists, visiting and resident in India, would amicably agree. The growth projection for 2013-14 has been revised downward as domestic economic activity weakened during April-June 1013. Industrial production is muted and consumer durables have declined mainly due to a fall in passenger cars and motorbikes.
The capital account deficit (CAD) is expected to deteriorate as the jaws of trade deficit have widened, on account of contraction in exports and a sharp rise in gold imports. The risks to CAD have increased as unwinding of the unconventional policy in the US begins, as was evident by the trailer that had caused global bond sell-off and capital outflows from the emerging markets. Worst still, external sector vulnerability indicators have deteriorated, especially short-term debt rising to 44 per cent of the total debt at the end of March, 2013.
So, very worrisome is the fact that the services sector has recorded the lowest growth in 11 long years. The asset quality of the banking sector has deteriorated which has kept the credit growth below the indicative trajectory. Despite such a tight monetary policy, CPI inflation has hovered around double digits and food inflation has not eased up either, though WPI inflation has been lower than 5 percent. In a nutshell, everything except inflation, house prices and subsidies, is down and so also are business expectations. As would be anticipated, having taken strong monetary measures in the last fortnight, monetary policy has not initiated any change in interest rates, which have already been high for some time now.
The Indian economic situation continues to be rather grim but then every failure is an opportunity in disguise. June 1991 was a turning point in India's economic history. But should India always wait to be at the brink to realise the consequent abyss? To arrest the slide some concerted efforts would have to be made and innovative measures undertaken as traditional methods have failed to yield results. A herculean battle seems to be on the horizon for policy-makers in India.
There are available opportunities and windows that can help the economy recover. In addition to the standard stalled reforms, and projects which the government would hopefully clear soon, there are specific projects which the government can consider. First, the housing sector suffers from a shortage of nearly 18 million units, especially for the low and economically weaker sections of society. As housing has linkages with nearly 300 industries, the housing sector, can be incentivised. Secondly, in view of the general slowdown, government revenue is expected to be lower than budgeted. In this context, expenditure saved is income earned, and the government rather than resorting to traditional curtailing of capital expenditure could reconsider the implementation of the Food Security Bill 2013 until the economic situation improves.
Further, if rising imports of gold are any indication, then it implies that there are available financial resources in the economy, and nearly three-fourth of gold demand comes from the rural sector in a quest to address uncertainty in the market. The demand for gold is expected to continue to be high as the price of gold, based on various international estimates, is expected to be benign for the next few years as also due to a large proportion of the young population below 25 years in India, implying an increase in marriages, and rapidly rising rural incomes. Therefore, instead of simply imposing controls on gold imports, to curtail the demand for gold, the government should offer an alternative financial instrument to the public, especially in the rural areas. One such avenue to consider could be inflation-indexed small saving instruments to be sold through the network of more than 1,55,000 post offices, and bank branches.
To tap resources from the rural sector, the government could consider unconventional means like floating local and specific-project related infrastructure bonds. These specific infrastructure projects, which also hava links with many industries, should be physically visible so as to interest the rural population like the construction of a local bus station, a trading-cum-shopping centre and a local road connecting to the nearest urban centre. In view of the fact that the project is located in the local area would appeal to local sensitivities, attract local financing and ensure local subscription.
Still better would be to make the local authority responsible and accountable for the completion and operations of such infrastructure projects. Also, given the crowded shopping malls, swelling numbers of cell phones and crowded airports/luxury hotels/dance bars, it may be time to tap the resources swirling in black markets and raise resources through special bearer bonds once again.
The global economic environment is not very encouraging for India's exports. In addition, the exchange rate had been depreciating rather rapidly for which many in the markets were not prepared and hence had sought the RBI's intervention to restore the rupee to a range of Rs.54-56 with the US dollar. And the RBI intervened rather strongly. This level is difficult to justify by economic logic. In the determination of exchange rates, inflation differential between the two countries is an important factor in the long run. Illustratively, the average annual inflation rate in India has been 6.0 percent during 1993-94 to 2011-12 compared with 2.4 percent in the US over the similar period. The average exchange rate of the rupee with the US dollar was Rs 31.4 in 1994 and adjusting for the inflation differential of 3.6 percent per annum would justify an adjustment of the rupee, which should continue.
Finally, the RBI would help the economy recover by lowering interest rates. The government could consider lower interest rates, at least for loans to the housing sector and infrastructure to spur growth. Finally, to ensure recovery, special concessions could be considered for auto industry as were granted by President Obama in the USA. The need is to revive growth and all-out effort to achieve growth should be made by the policy-makers.
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