Indian economy: Booming no more

Akrita Reyar

The Indian government seems to have suddenly woken up to the reality of the health of the economy having deteriorated to the point of needing a doctor. A seven-point agenda has been drawn up to give exports a 20% push and narrow the ever widening deficit.

The annual supplement of the 5-year foreign trade policy also bundles in a slew of tax sops on imported inputs to encourage production of goods meant for exports and emphasises on the continuation of some subsidies for the sector.

Commerce Ministry Anand Sharma has further assured that the government is looking to revamp Special Economic Zones and Export Oriented Unit schemes to boost shipments.

"These measures will infuse necessary confidence in the exporting community and provide required dynamism even in this gloomy time," Sharma said.

Why have gloomy times come upon us in the first place?

India’s last quarter results were the worst in nine years. The March quarter ended at 5.3 percent, much lower than the six plus projection. India’s Q4 figures were lower than even those of Philippines (6.4%) and Indonesia (6.3%), besides, of course, China.

The 2011-12 fiscal ended with growth at 6.5%, lower than 8% or above figures in the previous two financials. While Asian economies have also slowed down, China is still keeping its head over 8%.

One reason for alarm is the fact that India had performed better than this even in the 2008-09 Recession year, growing at 6.7%. No wonder the RBI, which had expected at least 6.9% rate of growth, was taken by surprise.

While the decline is more or less pervasive, Industry’s sorry show of just 2.5% growth as compared to its previous 7.6% jump is a particular concern area. (Indian Industrial Production figures of 0.6% in Q1 may have been a strong reason for the lower overall yearly growth.)

The Finance Minister Pranab Mukherjee admitted, "GDP growth is the lowest in contemporary period. It has been substantially because of the very poor performance of manufacturing sector."
The PM’s economic advisor C Rangarajan also opined that Industry would play a key role in deciding the fate of the current fiscal.

Considering the slide, it nearly seems that UPA sleepwalked into the crisis and has only been woken by alarm bells in the form of downgraded ratings and projections by international agencies; and also the slipping Rupee.

Morgan Stanley, for example, cut its growth forecast for India by citing a “bad growth mix”, which meant that high consumption was paired with an enlarged deficit. The Bank added that elevated rates had resulted in a decline in private investments, which was "not sustainable".

Was the UPA too comfortable in the belief that India would continue to do well, just because it has been doing so – through the US mortgage crisis and the Eurozone predicament?

As per HSBC economist Leif Eskesen, growth has been constrained due to three main factors.

First, there has been a lax monetary tightening. Year after year, we hear about promises to contain deficit only to learn in the Budget speech that those promises were meant to be broken.

However compelling the reasons, this is one area where the government would have to crack the whip.

Second, and undoubtedly, the international meltdown and the subsequent degrowth or anemic growth rates of Western economies have had a spillover effect on the domestic sentiment.

Exports get hit on weak global demand.

Thirdly, and most importantly, the persistence dilly-dallying of government on policy is sending out a negative message like no other.

The Government is trying to look pro-active, but failing. The Prime Minister at an economic meeting held this week unveiled a raft of projects that aim at USD 1 trillion investments in infrastructure over the next 5 years.

But simultaneously, the Pension reform proposal that was taken off the shelf, dusted and presented for perusal was unceremoniously deferred owing to “differences”! As usual, some coalition partners could not be brought on board.

While HSBC’s Esken is reasonably confident of continued domestic consumption, he is more doubtful about investments. An area precisely that Indian businessmen have been alluding to while voicing apprehensions.

The HSBC report says: "To lift growth more notably, going ahead, India needs more traction on deep supply side reforms, which will lift potential growth over the medium term. This will also help lift growth in the short term by improving sentiments and, thereby, the private investment cycle."

A falling Rupee is not helping either – and is infact a bit of a catch 22, with the currency weakness being an outcome of poor fiscal management. A weaker Rupee in turn drives inflation up and, thus, discontentment among the prized electorate.

The Indian economy is currently on a wing and a prayer. Solid, decisive and unwavering measures are needed to make it soar again. If hard decisions are needed, then the government must have the courage to bite the bullet. It may displease some and provoke them to vote against a hattrick for the UPA. Still, the government will have an outside chance.

But if the government does nothing except twiddling its thumbs, there is no doubt that it would be booted out. 2014 is not that far.