Macroeconomic & Fiscal miscalculations

India is an emerging economy in the emerging economies slated to post immense growth rate by the 2150 AD as part of the BRIC. It may be jubilation or euphoria, but it is no better than PIGS (Portuguese, Ireland, Greece, and Spain) which are considered as Crisis economies. There is currently an economic view that throwing good money after bad is only going to make the matters worst. This holds well, some European economists feel about Greece which had seen no turnaround in its economy even though European Union has been helping the troubled Euro nation of Greece. Unless something miracle happens, European Union may see Greece exiting. So also, the after shocks of the indiscriminate fuel hike in India. Kingfisher is its first victim, even though it suffers from many diseases overtly. Should lifeline be given? Banks are mum, RBI is mum, and Government is mum. It took the Herculean effort in the Government to provide impetus to Air India or Indian airlines. Kingfisher has been declared as a “Non Performing Asset”. There was all-round skepticism about the appetite for raking more risks. Banks have refused to open the liquidity until they (banks) receive some dues. But, with more and more fights grounded, the account under operation under Garnishee Law- for Income Tax dept has attached the account; the survival of Kingfisher looks very unclear. Passenger Cars also have been affected by the petroleum product hike. This has affected the IIP output which was 5.7% in Oct 2011, 6.6% in November 2011 and 1.8% in December 2011. There has been a marked decline in the capital goods manufacturing though power sector with 8.3% growth and Services sector with 9.6%, with overall food inflation touching negative from the 16% almost six months ago, core and general inflation too, in the vicinity of 6.5%, making it clear that India is not out of the woods. The growth rate has been projected as 7%, but it is likely to be 6.8-6.9%. The foreign direct investment and foreign institutional investment has come down, and gross fixed capital formation as a proportion to GDP has come down by 4 percentage points to 29.3% from 32.9 %( 2007-8). Large scale liquidity injection by European Central Bank since Dec 2011 has lowered yields on the Government bonds. 20% of the foreign currency convertible bonds due for conversion are likely to default. Gold import has been a component which has increased the Current a/c deficit which was around 3.6% of the GDP in the first, second quarter of 2011-12. This import had to reduce merchandise imports. Primary food inflation saw acceleration of need for money wage rates, cash prices, behaviour of manufactured goods, cascading to increased subsidy bill, and higher government finances. Fiscal consolidation, which is a pillar of macroeconomic stability, budgeted at 4.6% may touch 6%. The uncertainty in the forex rates(if the exposure is unhedged), has made ECCBs which were a cheaper financing option has become costlier, making the benefit of the debt completely wiped off leaving the company on the verge of default in testing times. Come XII Plan (2012-17). The mandarins in the North and South Block in Delhi have predicted a growth of 9% in 2012-13on the conditionality that the grim world economic scenario improves. It is Monte Carlo method!

India's economic policy

All Monetary and Economic systems are a ‘struggle’ between ‘borrowers’ who favour inflation and ‘creditors’ who are determined to maintain the purchasing power of the currency. Creditors have the money, resulting their having a clout with all hues of Politicians across the political spectrum, and Borrowers have the Votes. Both are vulnerable to our country’s economic and political stability. One Finance Minister wrote off agricultural loans amounting to Rs 70,000 Cr, 2% of the nett Credit granted by Banks.

Our Planning Commission especially and the Financial experts crowding the First Floor of North Block at Delhi have been repeatedly plodding the Government to rein in subsidies, which is distorting fiscal adjustments and its direct consequence is the soaring fiscal deficit. Government is slowly plucking up courage to free prices in the oil economy, according to a news paper and instead ringfence those under the poverty line with subsidized coupons to buy from the market.

Food Security Programme like the Compulsory 100 days work is another flagship programme of UPA II is another whiff in the fresh air of the uncertain governance which has dogged the tenure of Dr Manmohan’s second term. Not a day passes without a skeleton falling from the hidden cupboard. The team of Ministers do not bind themselves as a team and look like India’s Cricket team members who look at different directions instead of concentrating on the 66 yards. Disasters and impediments must not shake the spirit of veteran political heavy weights like Prnab Mukherjee, P Chidambaram, A K Antony, who must guide the Government and the party with sync.

Below the Poverty Line is a convenient political tool to garner votes. It is an economic arsenal to get the sympathy from the have-nots. As many Schemes are conceived for their benefit and betterment, the incidence of poverty should come down. But it goes up in the case of figures of BPL population. It goes without saying that Governments should find the wherewithal to liberate these people from poverty and improve their livelihood opportunities. But with inconsistent statistics, Planning Commission figures do not match that of central Government; the states have different statistics, while NCAER provides a totally different figure. When there is a mismatch between basic figures, how would you rate the Scheme, conduct an audit amongst the beneficiaries regarding their economic and livelihood improvement?

Food Security programme is trying to tie up a number of items which would be part and parcel of it. It looks as though, instead of helping the BPL to really come out of the woods, Government seems to tend to Populist objectives to create vote banks and instead of objectively designing a Programme to obliterate poverty, and create opportunity to help them to have a meal a day. The Government should try to neutralize fuel price, which would reduce the artificial price differential between subsidized and non subsidized fuels. 39% of the Public Distribution System Kerosene is diverted by retailers and of the total value diverted, 18% is used to adulterate diesel. Due to heavy subsidizing, Oil Companies are slated to incur huge under recoveries of around Rs 28,225 Cr in 2008-9 alone.

With the increase in electrification of villages, consumption of kerosene for lighting purposes in rural areas has fallen. Dr B K Chaturvedi Committee found rural use of kerosene for lighting has fallen to 40% from 51% in 1990-2000 and 1% among the BPL uses it for cooking purposes. 24% of rural kerosene consumption goes to states which have achieved 100% electrification. Subsidized fuel reaches the hands of the unintended that use it for various other purposes other than for what it was intended.

Government has no control over the import of edible and Crude oil, which it is importing from a number of Countries at grossly nil Customs duties (Crude) and 7.5% for refined. It has been reported that the Crude is refined and put to edible uses. 80% of the 80 lakh tones of imported oil is palm oil. This 80 lakh tones imported last year was over and above India’s edible needs by +30%. This excess is stored in the State Trading Corporation Godowns. Edible Palm oil is also distributed through Public Distribution System by paying for every one litre of Palm oil purchased, Rs 15 is released. Imported Oil, Customs duty waiver (Rs 24,000 Cr loss), and subsidy through PDS (1 litre= Rs 15/-). All the exports of edible oil, ground nut, castor, coconut, gingili, olive, saffola, etc are ‘Prohibited’ for Export. Government want to keep the prices of imported oil below the domestic market price so that indigenous made edible oils will suffer as they are not price competitative.

If India has to withstand global recession, India needs to focus on labour intensive growth rather than capital intensive manufacturing growth. There is a huge shack of money in the Bank chests. The low inflation of the last three/four years have been due to reckless spending by the middle class and lower middle-class that enjoyed fat pay, improved living conditions, separation from Joint families. Cash handouts like improvement of salaries of Government staff through 6th Pay Commission also increased spending. Multiplexes and ten story mega malls made huge profits from brisk sales. Concomitant export growth also was responsible for the higher economic growth. Pump priming cannot work longer, it is like double dip.

Asia has arrived

Will the 21st century usher in Asian Revolution, just as the 15th Century belonged to the golden age of the Elizabethan era, Industrial Revolution, 17th century to American Revolution and French Revolution and 19th century to the Russian Revolution? The 21 st century Revolution however, will afford a pan loose-knit regional economic integration so that the logistics of an increasingly China-India centric supply chain could bring economy back to rails in Asia.
Asia has proven comparatively resilient against the current downturn, but hurdles still lie ahead. In order to maintain robust growth rates in the face of weak U.S. demand, the region’s dynamic economies must stoke domestic consumption and embrace environmentally sustainable development policies
Asia has arrived. The prospects for increased integration and cooperation between the region’s economies have, indeed, brightened. .
Asia of the past 30 years has done an incredibly well. China and India have driven their economies through export led growth. The Services sector in India has done innumerably well, and have exports worth $ 50 billion plus. But this model is close to having outlived its usefulness. The future of Asia will be more consumer-led, will have a growth dynamic that places greater emphasis on the quality of the growth experience, especially in terms of environmental protection and pollution control.
· Nearly 75% of the world’s economic activity now takes place outside the U.S. Worldwide investments are expected to double to more than $300 trillion in the coming years – with over $150 trillion going to new global markets.
· The steady, growing transfer of wealth and power from industrialized nations to developing regions is happening faster than anyone could have imagined.
Until recently, the global multinationals have seen developing Asia as an off shore production platform, to get goods at a cheaper price because of low labour costs. That concentrated on exports. The other option, to tap the regional consumers whose purchasing power and rising expectations were growing were ignored This is the time, for the multinationals to tap the domestic market, which is easily in their palms to exploit.
The external demands that underpin the export model are chaotic. Even though production size is growing, Asia has been developing while recession fed Europe and American economy which is in deep crisis cannot patronize Asian goods. Even if they want, pricing will be awful. Credit would extend to 6 months to 1 year. Instead of looking externally, the businesses in Asia have to look inward to reap the benefit for the country’s consumers who would average 3.8 billion who have money to buy. Economic development, therefore, depends upon the need to aggressively market its products internally rather than externally. There is no choice.
China’s GDP grew 10.4% to 13.06 trillion Yuan ($ 1.9 trillion) in the first half of the last fiscal. China has been able to quadruple its GDP since 1978. In 2002, with its 1.28 billion people but a GDP of just $ 4600 per capita, China stood as the Second largest economy in the world after United States (measured on a purchasing power parity basis). China also overtook South Africa as world’s largest gold producer in 2008, when its output increased from 270.5 tonne to 300 tonne. China exports to United States dipped by 20.5% to US$957.36 billion. Trade value between China and the country’s three major trade partners, the EU, the U.S. and Japan, was US$292.42 billion, US$239.36 billion, and US$182.34 billion during the first ten months of 2009, which averaged a drop in growth of 18.7%, 14.9% and 19.3%.
India has a well built micro scenario, but a weak macro scenario. The Micro scenario is very positive in India. A large population working in world class competitive companies, well educated, English speaking, competent and hard working talented workforce; highly competent MBA Institutes, stable financial institutions, high class engineering and medical institutions. When we come to the macro platform, India has instable savings, limited FDI, low Diaspora NRI investment, horrible infrastructure, high cost runs as project planning often goes awry in view of plethora of inhibitions at the decision making levels.
Indian exports have been blossoming, from $ 43 billion to US $ 178 billion, nearly three fold, FDI has also grown even though it is no where near to China, and remittances from Indian workers abroad contribute to around 20% of the Foreign Exchange Reserves which is around $ 280 billion.
And the most important layer of India’s ditherness is in its Politics. Between 2004-9, the Government wrote a Common Minimum programme to get the support of the Communists. Reform had to remain very much within the realms of the reformed Congress. In the election held in 2009, Congress has been voted back to power on the plane of better governance and performance. But little of the commitment they gave during election rhetoric is seen translated into action. Expect for a few and far between, the Government continues to blame the inept rains for the diminishing production of food grains leading to inflation in foodstuffs, edible oil, sugar, cerals, wheat etc. The world economy is blamed for the unimpressive show by the dithering exports. There is a huge liquidity in the system yet, the movement of circulation of currency is rather muffled.
Everybody looks to china as the Asian giant. There is no stop over. But India could be the real sleeper in Asia in a couple of years. India should not become excessively export dependent. India is also trying to increase and enhance its trade with China. It is both good and bad. Our over dependence with America should also stop. We should not be constrained by demography, as some of the States are vocal in getting many concessions over other states.
Indian Government has wisely signed a FTA with ASEAN Countries. This would spur more bi-lateral and multilateral trade between India and ASEAN. It is also true that Pakistan instead of wasting their limited resources, should venture into trade so that there will be economic boom which would provide steep employment resulting in their youngsters looking up for jobs instead getting attracted to terrorist activity. Sri Lanka is in the growth plane, after the devastating war which took all its efforts. A new global order with Asia as central point will emerge.