The purpose of this post is to recognize & be able to connect various dots, and draw a clearer picture of the issues that paralyzing the Indian economy. My intention is merely to instigate a desire to comprehend issues that are rooted much deeper than what we read in our daily papers. In other words, I want to raise a few themes that I believe are all inter-related and probably, the root of several problems that the Indian economy faces.
So for starters, let me remind you of the high inflation numbers that have hurt not just the poor, but also the middle-class – perhaps more than they have hurt the poor. Traditionally, I would have gone about this by researching for CPI & WPI statistics and analyze them from that point onwards. Instead, this time I chose to simply talk to people about where they felt the pinch of inflation the most personally, just to feel the pulse of the problem. Most common areas – as expected – were food, petrol, & housing. Consequentially, their utilities bill has gone up, and savings have been dented. We will look at each of these in greater detail later.
Now let’s leave inflation & monetary policy transmission alone for a while and look at the fiscal policy facet of our economy. Let’s begin with a special mention of the various populist schemes our government has crafted to win the hearts of the nation’s vote bank. These include the Mahatma Gandhi National Rural Employment Guarantee Act (aka NREGA), and the Minimum Support Price (MSP) given to farmers, & various subsidies on kerosene, diesel and gas, fertilizers, & food items, etc. With elections not too far away, there are more such populist schemes in the pipeline, and not surprisingly, the government has no clue of how the schemes are going to be paid for. The Finance Ministry’s had already used up 70% of the annual target of the fiscal deficit in September, and announced that it needed to borrow Rs. 528 billion. This means that while the fiscal deficit target presented during the annual budget was 4.6% of the GDP, it is more likely to be around 5.5% according to experts. However, our ever-optimistic government still maintains that they can keep it under 5%.
Furthermore, they claim that the additional borrowing has nothing to do with the fact that they have so far failed (anybody surprised?) in their plans to divest their stake in PSUs. The budgeted divestment target was Rs. 400 billion for the fiscal year, raised, primarily by issuing IPOs of the PSUs. However, globally deteriorating market conditions ruined those ambitions forcing the government to postpone their plans, and managed only Rs. 11.45 billion (not even 3% of the target). To add to the woes, slowing economic growth (especially industrial production growth) coupled with a distressing rise in trade deficit (slowing exports due to global slowdown & rising imports due to growth in Indian consumption) is surely going to result in a lower than expected tax collection. And did I mention the depreciating rupee, which has not only hurt the corporate sector (thanks to their dollar borrowings & imported inputs), but also our national kitty (oil, gold, and coal)?
Simply put, these indicators are suggesting that the government has faced a rough year since it has had to deal with lower income (missed divestment targets, declining tax revenues) but higher expenses (weaker rupee and increased subsidy spending) than it had anticipated when proposing the annual budget. Such a bleak economic picture, on both, monetary & fiscal facets, could dishearten even the most optimist policymakers. While the picture is not a pretty one, it has been painted using a brush of newspaper headlines. In my next post, I will mention some reasons why I feel India, despite its issues, is the place to be for the next decade.
Strong words for a place I have only been cynical about so far, but then again, I am a Cynical Bull !
Good To the point Analysis,
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