Fiscal Blues Turning Red
For the last many days, a post is abuzz on Twitter and Facebook claiming ‘We are back in the 90s’. Looking at the present scenario – We are back to the traditional Hindu rate of growth (latest GDP figures for the first quarter of the current financial year are 4.4%),
Sanjay Dutt is back in jail, Madhuri and Sri Devi ruling the roost in Bollywood (kind of), Narayan Murthy heading Infosys, Nawaz Sharif back as Prime minister of Pakistan and Jagmohan Dalmiya working as President of BCCI; the old days are back once again.
Barring sluggish growth rate of the country, everything else can be easily taken into stride especially ‘Dhak-Dhak’ girl’s home-coming.
Let’s narrow down to the main point now. The first quarter results for this fiscal year give a growth rate of 4.4%.This is for an economy used to be growing around 8-9% consistently for the most part of the last eight years.
The economists sitting on ruling benches don’t approve of the caveat but the situation is dismal to say the least. Furthermore, RBI is on the fence too akin to the ruling government.
In point of fact, it was all in the coming for long and we kept betting on the wrong horse in all these years.
Ruchir Sharma, head of equities for the Emerging economies at Morgan Stanley voiced the dangers of easy money emanating out of Quantitative Easing (QE) program in the US and Japan long time back. ‘Breakout Nations’ by Ruchir clearly pointed that emerging economies mainly BRICS (excluding China) are doing well just on the basis of hot money from the US and domestic policies have nothing to take credit about.
It was in the early part of the year that I was lucky enough to attend one of his sessions. Nandan Nilekani who was interviewing him asked what he thought about India’s constant economic growth trajectory. He bluntly put forward that it’s more to do with the QE and Manmohan Singh led government has no role in the rise. He believed all the major Emerging Markets (EM) will feel the pinch when the QE tapering begins.
Most of the participants just shooed his theory away like what happened in the case of the present RBI governor Raghuram Rajan back in 2004-05 when he warned the word of a major economic depression approaching.
What really went wrong?
Since the day this government came out with a poorly managed MNREGA, our fiscal deficit started looming large. We have always been a consumption based economy with a poor infrastructure for exports unlike China. Whatever exports we carry out, all are imports denominated. Presently, we are even forced to import large quantities of iron ore and coal despite having their largest underground reserves in the world.
Although, we did fairly well with the software exports much better than China lately, but manufacturing can’t be substituted by services ever.
Poor monetary and fiscal policies and total failure of the UPA has landed us on Mars with no oxygen mask. The rupee is hovering around at 67-69 levels presently and the depreciated by almost 16% since the start of the year against the dollar.
We are carrying an unsustainable Current Account Deficit (CAD) that is 4.8% of GDP for the last three years. Such a large CAD was sustained by the abundance of liquidity in the global financial system till now. During all these years when Foreign Institutional Investors (FIIs) were pumping in blind money in our equities and debts, we could have restructured our poor infrastructure and increase exports. But, sadly it wasn’t such. The government was busy spending its time in all kinds of populist schemes. It always wanted to drag us back into the Nehru’s socialist era while our countrymen want to make their lives resourceful through capitalist measures.
Interestingly, even in the latest monsoon Parliamentary session, the UPA was hell bent on passing Food and Security Bill and Land Acquisition and Rehabilitation and Resettlement Bill. The first one will surely hit badly on the already worsening fiscal deficit and the latter (which also has retrospective clause attached) will lead to escalation of land prices in the country further making acquisition of land difficult for industries, further slowing down any chances of increasing exports and growth.
Figures Suggest Worse
We have traditionally been a consumption based economy, where exports only contribute marginally to the GDP contrasting China. But, the dynamics of consumption are changing steadily as obvious from the results if the first quarter this year. The modest growth of 4.4% in the preceding quarter is way below last fiscal’s decade low of 5%. The services grew by 6.1%, industry contracted by 0.8% and agriculture & allied sector rose by 2.7%.
Additional fear arises this time because it was a rise of 9.4% in government spending in the works of social, community and personal services that helped economy grow to this level, this quarter. However, government won’t be able to maintain this spending spree in the second half of the year, so as to restrict itself inside the budgeted 4.8% of GDP.
Moreover, the HSBC/Markit purchasing manager’s index for the manufacturing industry was below 50 (at 48.5) in August. This is the lowest ever recorded figure in the past four and half years, since March 2009.
Therefore, the scenario suggests that consumer sentiment in the country has been knocked down badly. Also, the data shows comparatively lower numbers of 3.9% growth in the trade, hotel, transport and communication segment – one of the biggest contributors to the GDP and key indicator of domestic consumption power. With a low rise of about 1.6% in private consumption and fall of 1.18% for gross fixed capital formation in the first quarter (y-o-y) paints a dismal picture altogether. Therefore, the celebrated consumption story of India has taken a huge hit lately.
Experts believe that had the government spending been less last quarter, the GDP could have even contracted to dismal 4%.
Future Is Not Rosy Either
An attack over Syria by the US and its trusted allies in sight, the commodity prices are all set to rise once again. This will result in more inflation and already India is facing a double digit inflation figure. We couldn’t make the best use of fall in commodity prices in the past months due to sudden fall in the rupee and with the war approaching; the currency will experience further depreciation making hyperinflation a possibility.
Although, India doesn’t import much of crude oil from this region of the Middle East, it’s bound to get affected adversely still. The Brent Crude is already trading at $ 114/barrel. Oil Marketing Companies (OMCs) wouldn’t want to be weighed down more by the under recoveries and therefore, we are going to observe steep price hike in fuel (once again).
Anyhow, commodity prices are bound to mount as the economy of US is showing signs of improvement lately.
What economists believe is that India can only improve upon the present scenario if it comes up with some real reforms but considering the vote-bank-politics involved in hurriedly getting through the Food Security Bill and Land Acquisition and Rehabilitation and Resettlement Bill while putting important ones such as Pension Bill, insurance Bill on the backburner, the government doesn’t seem interested.
The only way out for India is to approach the IMF the fourth time in its history. But, the idea won’t ever be supported by the government considering the fact it will paint the UPA in poor light just before elections. Nevertheless, the strict austerity measures imposed by the IMF (post disbursal of loan) can only control ballooning CAD and domestic expenditures.
Raghuram Rajan will be coming out with his first macro-economic policy statement at the end of October. Let’s hope against the inevitable that our Diwali will turn out to be really special this time.