It is often said that “the data speaks for itself”. In the case of Indian economy and its future growth, it is applicable admirably. The politicians often refuse to see the true picture and instead claim that the economy has bottomed out and now is rearing to take off. Is it? On what basis are these claims made? Why then is the data released by the Indian CSO tells a contradicting story. Here is a reality check and how it is in variance with what these politicians say.
Reality Check 1: Whether we like it or not, the global economy is either in recession or in deflation safe for a few countries. The euro zone countries, which is about one third of the global economy has entered into a major recession with a best growth possibility of sub 1 percent. The Japanese economy would love to have this 1 percent growth with persistent slowdown and deflationary tendencies, it is in no position to support the global economic growth. The US economy which is approximately one quarter of the world economy has just announced 0.1 percent growth for Q1 2014. In this global environment if Indian economy were to achieve a 5 percent growth after growth rates below 5 percent for the last 2 years, we should have a celebration. Unfortunately it will be difficult for it to happen. In this regard current Chinese economy is also facing its own asset disinflation and is trying to avoid a sub-prime crisis similar to the one that took place in the US in 2008.
Reality Check 2: The Brent crude and WTI oil prices are hitting new highs. Thanks to the Sunnis insurgency in Iraq. Currently there is no disruption both in production and distribution but the price of Brent crude per barrel has touched $ 115. Only 2 years ago it was around $ 90 per barrel. If the civil war spreads damaging the production and distribution capabilities of Iraq, then the price could soar to touch the old highs of $ 146 per barrel. India’s export bill is around $ 160 billion dollars. Every $ 1 increase per barrel costs our exchequer thousands of crores. The diesel price which is currently subsidized will have to increase or alternatively the cost will be passed on to the consumer which means higher inflation.
Reality Check 3: The non-performing assets of banks, especially the PSU banks, are at an all-time high. The loan defaulters whether intentionally or unintentionally have decided not to return the loans. The lendable funds with the banks have shrunk and besides many banks will need capital to recapitalize to meet the Basel 3 requirements. The first priority of the government will be to set the banks books straight even at the cost of growth.
Reality Check 4: In the last budget, Mr. Chidambaram predicted the budget borrowing to be about 30 percent. This itself is outrageous. Unless drastic action is taken by Mr. Modi’s government the borrowing could go even higher. Selling the public sector undertakings may generate some money but in the last 2 budgets the efforts yielded marginally. Non availability of resources will be a major deterrent to growth.
Reality Check 5: With the CPI inflation edging slowly towards double digit and the monsoon playing truant with 40 percent deficiency up to now, there is hardly only chance for the food prices to come down. On the contrary the prices of fruits, vegetables and cereals are shooting up. Given the present trend I am afraid that we may be ending up with a very low economic growth and high inflation. Honestly speaking, only a miracle can save the Indian economy.
Reality Check 6: This in fact is the most favorable possibility and can change the picture completely. Borrowing huge amounts of money from China and Japan and attracting FDI in large amounts would certainly help in the current scenario. This is our best bet as it stands today. The recent Argentine crisis with a possible credit default and the disobeyance of court order. Countries which have surplus funds will think twice before lending any money and if they did will come with all conditions.
Reality Check 7: The savings rate in our economy is falling rapidly. There are two aspects to it. One part of the saving is going into gold. A large number of Indian citizens are convinced that the only way to ensure future security is to divert the funds to gold. The interest rate provided by the banks for the deposits is abysmal and below the inflation rate which gets worse after taxes. Besides, gross capital formation is moving towards new lows. This will be a major dent to the economy.
Finally, the new government’s hands are tied and will stay clueless. The UPA government has literally driven the economy into a hell hole with huge debts. Their subsidy program, a largely welfare scheme has cost our country’s growth horrendously. But in the end, who cares. At least the bottom of the pyramid benefited but unfortunately they became disloyal to the UPA in the last election. Every government honestly wants to do good things to its people. Support the poor and give them hope but economic reality dents this aspiration.
Great Lakes Institute of Management 