Indian Economy and Post-election

Hopefully on May 17, 2014 we will have elected a government who will use the next 5 years to transform the country into a high growth oriented economy. The last 10 years of UPA government have made the Indian Economy a deplorable hellhole. In the last 10 years, the prices of essentials have gone through the roof making it harder and harder for the middle class to survive. While the rich were protected because of the massive appreciation of real estate prices and gold, the poor became the victims of handouts. But for the various types of handouts the poor would have suffered immensely. We are at a critical juncture that unless the new government focuses all its attention on the various economic issues we will move our economy a few notches lower. Let us just look at the issues.

  1. India is currently going through very high levels of inflation. Both the WPI and CPI are in the ranges of 6 to 9 percent. Blame it on scarcity poor supply chain, failed monsoon. Unless the inflation rate is brought down at least by 3 percent (namely CPI 6 percent and WPI 3 percent) the citizens will face severe economic hardship. More and more people will then move from lower middle class to poor class. This will provide the foundation for social unrest.
  2. Our foreign reserves are around 309 bln $ while our foreign liabilities exceed 400 bln $. This is bankruptcy. We can for a while using the reserves to defend our currency. Sooner or later this will not work. Our current account deficit must be brought down by 20 to 30 bln $ from the current 88 bln dollars. This is going to be a big challenge since both the WTI crude and Brent crude are currently trading above $ 100. Last year our oil bill constituted approximately one third of all the imports. Due to tension in Ukraine, Syria etc, the price per barrel is refusing to come down. There is a real need for curbing foreign borrowing along with strong import restrictions. They are unpopular measures but let us bite the bullet before it is too late.
  3. The budget deficit and debt are ever increasing with the internal borrowing hitting through the roof. Efforts must be made to reduce the deficit substantially. Various subsidies have to be removed and this is not an easy challenge. Deficit target is a must. Otherwise we will become one more banana republic.
  4. Dr. Raghuram Rajan made a statement that he plans to liberalise its financial markets with rupee internationalization. Currently the dollar dominated debt held by corporate sector is around $ 225 bln (Financial times of London, April 11, 2014). About half the $ 225 bln dollar dominated debt stock held by India’s corporate sector is estimated to be unhedged. Given the global economic slowdown and India’s Corporate overseas borrowing in dollars, this may lead the country in high overseas indebtedness. It may be easy to attract funds from overseas but RBI must ensure that we have the ability to repay the dollar loan with interest.
  5. Every year nearly 1 crore people become available to join the work force. They are mostly illiterate, non-skilled and unemployable. The government can make them non-productive by giving food and cash support through the various subsidies scheme. This is danger in the offing. These people are real national burden and will be a major number to reckon with. Converting these people to productive resources will be a major future challenge.

Finally when the new government takes over, they will not have honeymoon time but should start embarking on new policies to revive the economy. Currently the gross domestic savings rate and capital formation are steadily moving lower. If the new government do not act decisively we will end up with a 5 percent or lower economic growth rate for years to come. For an average citizen patience is running out and it is the responsibility of the new government to deliver. Will they? Continuing with the erstwhile government policy is a certain recipe for an economic disaster.

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1 Response to Indian Economy and Post-election

  1. chunawalla says:

    The new government must deliver the goods! I am glad of Dr. Rajan’s recent stand on not slashing repo rates. Monetary policy is the lookout of RBI. Why doesn’t the government cut subsidees on gas and petroleum?

    As you rightly pointed out, our inflation is mostly imported inflation. With a corrupt bureaucracy, taxes collected are just not enough. Import duty is a major source of revenue for the government. Crop failures cause agricultural inflation which further adds to it.

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