Friday, August 30, 2013

Elephant Stops Dancing

Economy on rocks,  not necessarily, thinks the Finance Minister even when the Re breached 68. We are still at an inflexion point as Rupee is yet to touch the downslide to 70 a dollar, as predicted by Dr Tarapore a month and odd ago in the Business Line. The inflation differential between the two countries India and US has been steady over the last two decades at 3.6% notwithstanding the great recession since 2008.  This exchange rate adjustment, that is largely market driven, need not be seen as a weakness of the economy. There is a large domestic economy, if carefully nursed, could reverse the trend though not in the immediate future. We cannot very much alter our import basket governed by the crude oil that is rising, and edible oil whose consumption in India far outstrips the production necessitating its continuing import and the heavy capital equipment required for infrastructure sector, in the short run. In sluggish manufacturing sector intensity, expecting recovery in the short run would be a wild goose chase.


If we look at the emerging economies’ trends ever since Ben Bernanke announced the QE programme of unwinding bond purchases, global GDP all along etching its hopes on them, now looks tamed at 2.1% even in 2013. Chinese economy, though sent some shivers at the beginning of the year, started quick recovery and would seem to be steady on stabilising and may be at 7.7% growth. Among the BRICS, the other major, Brazil is looking for World Football Cup to come to its rescue. It is down from 3.5% to 2.5%. Unfortunately, India does not have an event like the Commonwealth or world tournament to milk the opportunity.  

After a long slumber on the policy front, India’s economic Czars announced a slew of reforms that would move like the wheels of Lord Jagannath’s chariot. They have been announced at a time when the sectors are not poised to respond. Now, the rating agencies that have been on a simmering hope would appear too keen to downgrade India’s sovereign rating. Although on some such hopefuls, the EIA predicted GDP growth at 6% for Asia and Afroasia (excluding Japan) in June 2013, is likely to shift it at 5.5-5.7%. Although the RBI in its July 30 Monetary Policy predicted a downtrend to settle at 5.5%, even the most optimistic projection does not now seem to cross 5%.

The silver lining in the cloud of despair is that the NRI deposits are growing with the downfall of Re. Even in the backdrop of double digit consumer inflation index, domestic savings have not fallen yet; and the employment rate also remaining steady. The core sectors grew by 1% last month. Electricity generation showed improvement by 6.2% with the rise in hydel power backed by steady inflows in the command projects. More than average rain fall also predicts a hopeful growth of the farm sector. There is enough money rolling in rural areas still, thanks to the MNREGS and a few rounds of State elections that fuelled free money make a merry go-round.

What is at danger, however, is the likely bourgeoning of fiscal deficit fuelled by the implementation agenda of Food Security Act 2013. The Centre’s expected funding of the order of Rs.900bn in 2013 on Food subsidies alone that has an embedded 40% leakage if we go by the CACP study, rings alarm bells of consequence. RBI’s Governor Subba Rao without mincing words said that the Act would ‘eat into the finances’; while the incumbent Raghuram Rajan said: “there is blatant flaw in the policy making.” While the tigers are mauled alright, the elephant would stop dancing and get chained in the cage.
Can also be seen on VITALINFO