Economy on the cusp of crisis

By Swapan Dasgupta

Last Friday, for a short while and until the Reserve Bank of India intervened in the forex markets, the US Dollar breached the Rs 50 mark. The steady decline of the Indian Rupee, even at a time both the American and European economies are deeply unsettled, may be greeted with whoops of delight in circles that specialise in body shopping from India. However, for those who have a stake in the well-being and prosperity of the Indian consumer, the decline of the Rupee is bad news. It means higher fuel prices, higher prices of imports (which, sooner rather than later, will also come to include foodstuff) and high inflation. Corporates who wisely availed of the low interest rates on Dollar borrowing may find that their budgetary estimates are likely to go awry by the free fall of the Rupee.

There is a clear writing on the wall that suggests the Indian economy is in for a choppy journey in the coming months. The rating agencies have already downgraded the shares of State Bank of India because of a problem with equity infusion. But anyone who is attentive to the market will know that the warning is not directed at the minority shareholders of SBI but aimed at the majority stakeholder—the Government of India.

Prime Minister Manmohan Singh may well think that life is good this Diwali—and this assessment is certainly true if you believe India is made up of babus and others with inflation-protected incomes. However, there are strong reasons to believe that like the US, India is on the cusp of a ratings downgrade which will damage it more seriously than it did the US.

“We believe India’s policy mix is worsening with a much tighter-than-expected monetary policy and looser-than expected fiscal policy”, wrote the Asia economics analysts of Goldman Sachs in the October 21 bulletin. In less abstruse language it means that those entrusted with managing India’s economy are making a complete dog’s breakfast of their responsibilities.

The signs of the mess are staring people in the face. The GDP growth has already been estimated to fall below 8 per cent, and the question that should be in everyone’s mind is whether the growth rate remains above 7 per cent for both this and the coming year. Secondly, with both food inflation crossing 10 per cent and general inflation also nearing double figures, it is clear that the RBI’s aggressive hiking of interest rates—yet another one is due as the RBI’s Diwali gift to a beleaguered India—will only serve to erode the competitiveness of Indian industry more. Thirdly, the Government’s monetary profligacy is calculated to raise the fiscal deficit from the budgeted 4.6 per cent of GDP to around 5.8 per of GDP. The mismatch between the Budget proclamation and the grim reality suggests that the Government had absolutely no intention of adhering to responsible spending. Like the socialists in Greece, this Government too believes that in the event of a crisis someone is always there to take care of the sick patient.

It should be clear to anyone with an elementary awareness of household finances that individuals and institutions should not, by and large, spend more than they earn. They should also know that borrowing from the market to meet current expenditure means incurring outstanding debts that have to be serviced. Of course, these are basic rules governing individuals with common sense—they aren’t the rules for economists who run and advise governments.

When normal people run short of money, either because they earned less or spent more, they do the next best thing—they tighten their belts and reduce unnecessary expenditure. Confronted by a problem of a mismatch between revenue and expenditure, what does the UPA Government do? Blessed with superior knowledge of economics it proceeds to increase expenditure more and borrowing more from the market.

It is astonishing, for example, that the Government, aided and abetted by a slavish Planning Commission, is unfazed by the fact that the ambitious Food Security Bill will raise the outlay on food subsidies by 66 per cent from Rs 60,000 crore to Rs 1,00,000 crore. Creating an ambitiously elaborate welfare net on the lines of Europe may be warranted if the Government revenues are continuously swelling on account of increased economic activity. But, as the Goldman Sachs report warns, tax revenues are expected to grow by 14.8 per cent this fiscal year as opposed to the 18.5 per cent growth projected in the Budget. At the same time, expenditure growth is expected to grow by 9 per cent, compared with 3.4 per cent stated in the Budget.

The message is clear: India is living well beyond its means and the burden of this profligacy is going to haunt the country for the foreseeable future. What compounds matters further is that measures such as the Land Acquisition Bill (stipulating payment of four times the market value to rural land purchases) will cripple the growth of manufacturing and benefit China. No wonder corporate houses are investing enthusiastically overseas than in India.

That India is sleep-walking into an economic crisis is evident to most people who have a stake in India’s future. But it is something that appears to leave the political class unmoved. The message that “It’s the economy, stupid” has been lost on a country that is wallowing in delusion. 


Sunday Pioneer, October 23, 2011