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A Consensus Solution

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Can the economy bounce back from the real and perceived threats to its growth? Concerned over slowdown, Finance Minister Pranab Mukherjee on Tuesday said the government will make efforts to build broad consensus on reforms as the economy has resilience to overcome the problem.

He said questions have been raised whether the economy is going to be derailed in the wake of IIP figures turning negative and overall growth slowing.

"We have the capacity and resilience to overcome the crisis," he said, winding up a debate on Appropriation Bill in the Rajya Sabha.

The industrial production declined by 5.1 per cent in October, while the rupee crossed all time low of Rs 53 to a dollar.

The Finance Minister said that for the economy to recover, it has to be demonstrated that Parliament and other institutions can function without disturbance.

He expressed disappointment over frequent disruptions in Parliament. "Let us not institutionalise instability in Parliament", he said, adding coalition governments have become stable since 2000.

Despite all the growing gloom about the economy, there has been a thread of hope that the economy may be able to bounce back the way it did from the 2008 global financial crisis. Ashok Ganguly writing in The Telegraph pointed out that it is the global economy which is in a mess and in
stark contrast, the economies of Brazil, China and India continue to be buoyant and are expected to remain so in the near-term future. He finds it mysterious as to why there is such a sense of pessimism engulfing the people of India.

Are We Going Overboard With The Pessimism?
So is the Indian and global media overreacting? For if Indian policymakers are hoping that the country's slowing economy will rebound the way it did from the 2008 global financial crisis, they are dreaming.

The reason is the government cannot wield some of the tools it could the last time the world picture was gloomy.

This time, the strained government finances, beset with high fiscal deficit together with high inflation leave little room for the strong doses of fiscal and monetary stimulus that supported consumer demand and shielded the economy three years ago.

"India does not have any fiscal headroom to provide any stimulus," said Andrew Kenningham, an economist with Capital Economics in London, talking to Reuters. "It will have to brace itself for an economic slowdown longer than the one after the 2008 financial crisis."

So what are the indicators that have brought on the gloom scenario?

# On Tuesday, the rupee hit a new all-time low. 

# India's October exports grew by just 10.8 per cent annually compared with a 36 per cent rise in September, as demand for the third-largest Asian economy's items slowed due to weak economic conditions in the euro zone.

# Car sales, which form one of the key exports from India, rose by an annual rate of 7 per cent in November after four consecutive months of decline.

# India's infrastructure output growth slowed to a meagre annual rate of 0.1 per cent in October,  sharply lower than 2.3 per cent in the previous month.

# The HSBC Markit India Manufacturing PMI fell to 51.0 in November from 52.0 in October, when it had rebounded for the first time in six months.

# The RBI may hold rates at its policy review on December 16 as growth risks from a slowing economy and a fragile global economic environment take centre stage.

Before the global financial crisis, India was close to achieving 10 per cent annual economic growth. When the financial tsunami hit, growth slumped to 6.8 per cent and then rebounded to 8 per cent and 8.5 per cent as the world emerged from the crisis India still has a growth rate many countries envy, but the pace is dropping quite sharply and -- unlike during the 2008 global crisis -- it's hard to see how government fiscal policies can jack it up.

The government's tax-to-GDP ratio is now less than 10 per cent, down from a peak of 11.9 per cent  in 2007-08. Public debt is 70 per cent of GDP, up from 68.7 per cent in 2007-08.

This year's fiscal deficit target of 4.6 per cent is expected to end up around 5.5 per cent. The government also failure to withdraw all the stimulus after the 2008 crisis, adding to its burden now. New Delhi faces higher fuel and fertilizer subsidy bills with the fuel subsidy bill for this fiscal year is already Rs 30,000 crore more than estimated earlier. Fertilizer subsidies are set to top Rs 90,000 crore.

Add to that a June decision to cut taxes to offset the impact of hikes in diesel, cooking gas and kerosene prices which has cost the government at least Rs 24,000 crore.

A rising subsidy bill has compelled New Delhi to seek parliament's approval for spending Rs 97,800 crore extra this year.

With total subsidies for this fiscal year projected to rise by Rs 1 trillion, the government looks set to borrow more from the market.

Fiscal constraints put the onus of reviving economic growth mainly on RBI, which has so far refused to cut interest rates as it battles inflation.

During a nine-month period in 2008-09, the RBI flooded the banking system with liquidity and cut rates by 425 basis points.

Since March 2010, the RBI has raised its main lending rate by a total of 375 basis points to quell price pressures, and has enough headroom to cut if the economic slowdown persists.

"But I don't see the RBI cutting rates before the April-June quarter," said Robert Prior-Wandesforde, an economist with Credit Suisse in Singapore. "They would wait for inflation to slow down below 7 per cent."

Ultimately there is no alternative to speeding up policy reforms and removing investment hurdles. A loose monetary policy "could leave India with a legacy of higher inflation," says Kenningham of Capital Economics.

Coming back to the Indian Finance Minister, Pranab Mukherjee said political parties have to demonstrate that Parliament and other institutions function and it will have its impact on the government and confidence will return in the economy.

On its part, he said, "the government will not be found lacking in building consensus on broad economic policies."

Denying a perception that there is paralysis in decision making process, the Finance Minister said, "It is not so."

(With Agencies)