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Friday, June 15, 2012

Indian Economy – Leaderless, Rudderless

Going through the newspapers that carried the observations of Narayana Murthy, the mentor of Infosys —“There was a lot of confidence that India would indeed do whatever was necessary because the person who was the face of economic reforms in 1991 is our current prime minister … Over the past 3-4 months, India’s image seems to have suffered … I feel very sad that we have come to this stage”—and that of Azim Premji, the Chairman of Wipro—“We are working without a leader as a country”—one gets reminded of the impassionate appeal that Oliver Cromwell, Member of Parliament, made way back in 1653: “You have sat for too long here for any good you have been doing. Depart, I say and let us have done with you. In the name of God, go!” 

Indeed, it is not Narayana Murthy or Premji who are the first to make such critical observations, for the global rating agency, Standard & Poor, had earlier warned India in its report, “Will India be the first BRIC fallen angel,” thus: “Slowing of GDP growth and political roadblocks to economic policy making could put India at the risk of losing its investment grade rating.” The report is categorical in its identification of the underlying reason for the current economic impasse, which in its view is the division of roles between the politically ‘powerful’ Congress President and an ‘appointed’ Prime Minister that has “weakened the framework for making policy....” 

Of course, one may, in his/her xenophobic enthusiasm, brush it off as a shallow judgment; might even recommend to the policy makers to ignore it just as the Obama administration ignored the downgrading of their sovereign borrowing status by S&P. But the reality is: rating agencies’  verdict matters to the international investor community, more so in the case of emerging economies.  

That said, let us take a critical and dispassionate look at our economic performance. It is consequently for the fifth month in a row that our industrial growth rate has remained below 5.3%, revealing that something is drastically wrong with the very industrial production in the country. Nor is the investment activity encouraging: capital goods production growth has averaged -9.2% right from the last July quarter.

Still, as the Finance Minister preferred, one might love to ignore S&P’s warning, for the 6.5% growth rate that we could register during 2011-12 is pretty encouraging, particularly in the face of the decelerating economic growth all around the globe.  

But the Finance Minister had the guts to dub the factory output growth of 0.1% recorded for the month of April as “disappointing” and also felt the need to take steps that “give positive signals” to investors. At the same time, he wondered if the government, “with practically no headroom for running a proactive fiscal policy,” could launch any measures that could catalyze economic growth. 

Over it, the data on exports released on June 14, 2012 indicates a fall of 4.16% which is of course attributed to the slump in global demand. The latest to comment on the status of Indian economy is Moody’s when it said that “India’s economy is in stagflation, with notably weaker growth but inflation still stubbornly high.” 

That aside, India Inc. is obviously clamoring for interest rate cuts. But one should remember that monetary policy is not a magic wand that can revive investments. Secondly, one cannot afford to ignore the fact that inflation continues to be high, with the wholesale price index at 7.5% in May, which is more likely to go up with the supply constraints being what they are. Over it, the volume of open market operations that the RBI has to undertake to meet the government’s need for funds to fill its deficit being pretty high, rate cut might hardly help attract fresh investments.     

That being the impasse in which our economy finds itself today, all due to our own mishandling, the need of the hour is political gumption to reverse the decline in investments by speedy decisions and clarity on policy—policy to contain fiscal deficit by cutting fuel subsidies—to check inflation, reduce current account deficit, launch fresh reforms that change the mood of the investors, speed up infrastructure projects, and particularly curb corruption.  

For this to happen, the Congress President should metamorphose herself into the Narasimha Rao of 1991—who, in the words of Rangarajan, stood solidly behind the then Finance Minister, extending all political support needed for putting India on the right economic course—to empower the Prime Minister to do all that is warranted to put India’s growth prospects back on rails. Or, she should take over the reins of the country and lead the nation towards growth with conviction. 

Else, the nation would have to pay a heavy price in terms of social costs for years to come, with no jobs for the growing numbers of young. In the process, even the Congress party, who knows, may have to pay a huge price in terms of losing the right to rule the country after the next elections, of course if the electorate is wise enough.

Any doubt?    


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