Indian Economy Heads For Serious Trouble As Global Crisis Deepens
These are bad times. The worst fears are gradually coming true. If not handled carefully, the Indian economy could head for serious trouble as we are no longer insulated from global problems.
The US economy is still in deep trouble and the debt crisis-cum-economic turmoil in several European countries is dragging us down giving sleepless night to policy-makers.
But government’s economic spokespersons including Pranab Mukherjee, Montek Singh Ahluwalia, C Rangarajan and others are still trying to portray a rosy picture to keep our morals high.
They are consoling that we are better off than others because our economy is still reporting more than 7 per cent growth. It is another matter that rising inflation is eating away all the growth.
Free fall of rupee
The third week of November gave enough hints about the state of our economy. During that week the rupee hit its 30-month low to touch 51.34 per US dollar fuelling fears that the rupee could depreciate further.
The third week was only a trailor. In the beginning of the next week the rupee even surpassed the 52 mark to a dollar, its all-time low against the US green back. This made rupees the weakest currency in Asia fuelling speculation that it could go to even the 60 level as the RBI remained a mute spectator to its free fall. Since May, rupee has depreciated over 15 per cent.
Stock markets nosedive
As international investors have started pulling out from Indian stock markets, the Bombay Stock Exchange (BSE) Sensitive Index (Sensex) plunged 5 per cent during the third week to close at 16372 points. During that week the Sensex lost 820 points which is the biggest weekly slide in over 100 days.
The fall in equity values in the seven consecutive days trading eroded investors’ wealth by Rs 5 lakh crore.
During November third week Foreign Institutional Investors (FIIS) pulled out over Rs 2500 crore from Indian equity markets probably to book profit and to remain liquid apprehending further deterioration of European crisis.
The sale-off continued even in the beginning of the next week and the Sensex plunged by 425 points following mounting global concerns.
Gold prices skyrocket
During that week gold also hit it’s all-time high of Rs 29,440 for 10 grammes. Gold prices are also headed for further rise and this clearly indicates that the currency is fast losing its purchasing power. The high price of gold is preventing many households from buying gold during festivals and for marriage purposes.
Further, those with huge pile of black money are abetting the rising gold prices by converting currency notes into gold bars. It is comparatively easy to hide gold than currency notes and gold has become a hedge against highly depreciating rupee.
The loss in buying capacity by consumers in western countries has started affecting India’s exports. The government is very disturbed that the exports target of $300 billion could not be met. From April to October India has reached exports volume of $179.8 billion and all of a sudden exports have started falling.
According to latest data, merchandise exports that had clocked 82 per cent annual expansion during July had slowed to just 10.8 per cent for October due to weakness in western economies.
Industrial production down
In September India’s industrial production grew by 1.9 per cent as compared to the same period last year. This was lower than projected 3.6 per cent. In August industrial production reported growth of 3.6 per cent as against projected 4.0 per cent.
Consumer durable goods were the only component that showed strong growth. On the supply side, manufacturing output growth further moderated in September while mining output contracted for the second straight month.
According to analysts, even the consumer durable goods output would weaken in the near future adding to the slowdown. India’s economic activity would weaken further in the coming months.
The credibility of the Indian banking system, which remained insulated from the 2008 global economic crisis, has also come under questioning. Recently, rating agency Moody’s lowered outlook of the Indian banking system from ‘stable’ to ‘negative’ on concerns of a possible rise in bad loans, capital infusion and profitability.
Though another rating agency S&P soon after upgraded the Indian banking sector saying its domestic regulations are in line with international standards, questionmarks still remain.
To put apprehension to rest and to help banks meet international solvency norms the Indian government is planning to provide adequate capital to PSU banks during the current fiscal.
The Finance Ministry has already earmarked Rs 6,000 crore for recapitalisation of public sector banks in the budget for 2011-12. During the current fiscal SBI, Bank of Baroda, Syndicate Bank and Union Bank of India would need fresh capital to meet the global solvency norms.
The government during 2010-11 had provided capital support to the tune of Rs 20,157 crore to Punjab National Bank, Bank of Baroda, Union Bank of India, Oriental Bank of Commerce and UCO Bank.
The rising inflation is also refusing to die down causing hardship for households. This is despite RBI’s best efforts.
In October headline inflation remained at 9.73 per cent as compared to 9.72 per cent in September. The government has been going around to say that inflation would come down to 7 per cent by the end of this financial year.
The comfort for India is that this high inflation is negligible as compared to countries like Germany and Hungary.
The government is blaming rising crude prices for the stubborn inflation. Fuel price inflation in October stood at 14.79 per cent while food inflation was 11.06 per cent.
The depreciating rupee has made oil imports more expensive. India imports 75 per cent of its oil consumption.
Food prices have risen sharply and with little help from the government to ease supply side pressures, it is a key contributing factor to high inflation.
The government also remained a mute spectator when vested interests, who are very much part of the UPA government, jacked up prices of essential commodities and food stuffs for personal gains by having little concern for the common man and even middle-class households.
Inflation in Asia’s third-largest economy has stayed above 9 per cent for eleven straight months despite RBI’s 13-time rate hike since March 2010 to curb inflation. Rising interest rates and a slowing economy is causing concern in the government.
Food price inflation slowed slightly to an annual 11.81 per cent in the week to October 29.
Core inflation that excludes prices of food and fuel is still high. And this indicates continued price pressures in the economy.
GDP growth under pressure
At the same time Gross Domestic Product (GDP) growth has also come under pressure. Government spokespersons are claiming that it would remain at 7.5 per cent to 8 per cent in the 2011-2012 financial year as compared to the forecasted figure of 8.2 per cent.
The declining growth in the agriculture sector is a major concern. Farm production has been declining for the last two years and the sector is not growing at the projected growth rate of 4 per cent.
Yields of major cereals have been falling and unless productivity increases, there would be no escape of price rise.
BJP on attacking mode
The main opposition Bharatiya Janata Party (BJP) has started attacking the government on inflation since the opening of the Parliament’s winter session and this attack would continue till the assembly elections in five states as well as till the next Lok Sabha election.
All these issues could hurt the interests of the ruling Congress party, which banks on poor, rural voters to garner votes, as it gears up for the state elections this year.
China could bailout West
The International Monetary Fund recently warned Asian economies to be on the guard in the face of downward spiral of global financial instability. The IMF has started urging stronger Asian economies to work together for improvement in global financial system.
China, called the factory of the world, which is more affected by the crisis in the West is expected to contribute to a bailout fund called the European Financial Stability Facility that has been established to provide support to European struggling countries.
Every one is eyeing a major contribution from China’s forex reserves of $3.2 trillion.
Having realised the enormity of the problem China, which has been accused by the US and Europe of deliberately keeping its currency undervalued to give its exporters an unfair advantage, has now agreed to work with the US to achieve balanced economic growth.
India heads for slowdown
Alarm bells are already ringing signalling a slowdown in India’s economic growth. Inflation is rising and industrial growth is also not showing any signs of picking up.
Economists are warning that the situation may only worsen from here on and it may remain weak in 2012-13.
Our manufacturing sector that has moderated during April-September, 2011, compared to the same period last year is expected to slow down further during the October-December quarter due to a rise in input costs and uncertainties in the global economy.
Experts believe that the number of sectors recording excellent and high growth would decline and shift to moderate-growth category in the coming months.
The Index of Industrial Production (IIP) recorded a low 1.9 per cent growth in September 2011, compared to 6.1 per cent growth recorded in September 2010, marking the slowest pace of IIP growth since September 2009.
The IIP growth weakened for the third consecutive month in September 2011 to 1.9 per cent from 9.5 per cent in June 2011, 3.8 per cent in July 2011 and 3.6 per cent in August 2011.
The sectors registering negative growth rate have increased significantly and according to experts this is a clear sign of decelerating growth.
High input and capital cost and uncertainties in the global economy are the major factors constraining growth of the manufacturing sector.
NREGA in a mess
The Reserve Bank of India (RBI) has been repeatedly warning the government about the adverse impact of the doleout through the populist rural job guarantee scheme called NREGA.
In 2011-12 the government has a budget of Rs 40,000 crore to be spent under this programme which has allegedly largely contributed to rising wages and thus to inflation. In the coming year this budget could be even higher.
For over five years the government under the Mahatma Gandhi National Rural Employment Guarantee Act has been providing guaranteed 100 days of wages to every rural poor and it has been alleged that funds under this scheme is not being put into productive use and there has been no skill development for the rural poor which can give them long-term livelihood.
According to policy-makers the drain of financial resources through the NREGA and other mismanaged scheme would have severe impact on the country’s economy.
Prime Minister speak’s
Prime Minister Dr Manmohan Singh, a seasoned economist and someone who has shaped India’s destiny through economic reforms, is well aware of the troubles ahead. In an address to the nation on August 15, this is what he stated:
“The road ahead is long and arduous. Particularly, the prevailing situation both inside and outside the country is such that if we do not act with understanding and restraint, our security and prosperity can get adversely affected.
“The world economy is slowing down. The developed countries especially America and countries of Western Europe are facing economic problems. There is unrest in many Arab countries of the Middle East. There are some people who want to create disturbances in the country so that our progress gets stalled.
“All this can have a negative impact on us. But we will not let this happen. I know that if we work together, we can face any challenge. However, it is necessary that we rise above personal or political interests and build consensus on issues of vital national importance.”
Face the consequence
That was in August. In three months the challenges have multiplied. One hopes the Prime Minister has his way in handling the crisis even as the middle class would bear the maximum brunt of somebody else’s mistakes.
Five countries in the debt-ridden Eurozone such as Spain, Portugal, Ireland, Italy and Greece have seen change in regimes for inept handling of the crisis, India could be no exception though it hardly contributed to the global crisis.
By Jully Acharya