China Research

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The Dancing Baby Elephant : The Fall of Rupee & the Indian Economy

November 6, 2013

India, the largest secular democracy in the world, is home to 1.21 billion people (i.e. about 17.4 % of world population). In terms of economics, India accounts for 2.5% of world GDP in US dollar terms and 5.5 % in purchasing power parity (ppp) terms. India’s rich civilisation history dates back to over 10,000 years, going back to the Harrapan and Mohanjadaro periods having high appreciation for architectural layout of townships and structured lifestyles. In the last 5,000 years till the invasion by the Mughal and the British, India was referred as the Golden Bird with the highest possible respect for women and mankind. Texts and temples of these periods clearly reflect the richness in the society and the importance of gold in a common man’s life for the use of cloths, utensils and for consumption as part of food (which is re-emerging in modern India).

The currency regime in India (then Hindutav Raj / Bharat /Hindustan) goes back to about 1,000 BCE with the creation of coins in gold and hence forth in silver for long periods of reins much prior to the Chandragupta Maurya glorious period of 350 BCE. Chanakya’s (Kautilya) work “Arthashastra” is the first ever written text in economics – in 350 BCE (2362 years back), outlining: the way a kingdom is to be run ; the role of a King ; the functions, duties and role of his officials and the way civilian functions should work in the society. Kautilya’s teachings given in the Arthashastra (meaning economics in Sanskrit) holds very well in today’s time, though Adam Smith’s work of “Wealth of Nations” is no longer valid in today’s context. Hence, I always refer to Chanakya (more commonly known as Kautilya), a teacher, as the father of economics.

India has been one of the earliest issuers of coins (around the sixth century BCE). The first “rupee” is believed to have been introduced by Sher Shah Suri (1486–1545), based on a ratio of 40 copper pieces (paisa) per rupee. Among the earliest issues of paper rupees were those by the Bank of Hindustan (1770–1832), the General Bank of Bengal and Bihar (1773–75, established by Warren Hastings) and the Bengal Bank (1784–91), amongst others. Until 1815, the Madras Presidency also issued a currency based on the fanam, with 12 fanams equal to the rupee. Historically, the rupee, derived from the Sanskrit word raupya, which means silver, and it was a silver coin.

Over the years, the Indian Rupee (INR) has emerged as a strong currency having a strong base with good fundamentals. This is in special reference with the economic conditions in the West (U.S., Europe, Russia, Latin America and other regions), where they suffered from high inflation, low GDP, liquidity crunch and banking sluggishness. The following positive developments could be noted: Indian GDP growth has been stable around 6.9% for last three years and over 8.4% in the last eight years preceding these two years ; there has been control on inflation, which before had soared up to double digit and has been brought down to a sustainable level ; foreign exchange reserves hanged around US$ 290 million for the last four years ; FDI flow strengthened over the last year ; fiscal deficit was under control ; international confidence in Indian had been strong and building up; the economy was relatively self-sufficient ; flows of NRI remittances increased; the conservative banking system proved to be stable.

All these noted strengths show the true potential for the Indian currency (INR) to strengthen and attain the well-deserved level of Rs 35 – Rs. 40 against a US$ if it is allowed to float freely in the short run (next 8-10 months). The Reserve Bank of India (RBI) has always tried to keep a managed floating exchange rate since the early 1970s.

Numerous challenges-cum-opportunities lay before the Indian economy given the steep recent fall of the rupee and the trembling global economy. These challenges bring four serious concerns for the dancing baby elephant like

(a) a threat to India’s National Security and Indian’s tomorrow as an outfall of the rupee deprecation ; (b) challenges for the trade participants and the business in India ; (c) the appropriate mix of financial volatility, a relatively stable exchange rate and the conduction of a robust monetary policy ; (d) concerns about fiscal discipline and the role of the government ; (e) rising inflation and the costs for major parts of the population ; (f) the possible impact of the Fed’s and the ECB’s future policies.

National security implies a state or condition where our most cherished values and beliefs, our democratic way of life, our institutions of governance and our unity, welfare and well-being as a nation and people are permanently protected and continuously enhanced. The fundamental elements that lie at the core of national security, and therefore further amplifies our definition of national security, are a strong and stable currency; socio-political stability; territorial integrity; economic solidarity and strength; ecological balance; cultural cohesiveness; moral-spiritual consensus and external peace. The transition between great civilization and an economic power house is a slow process that is centered on the incumbent’s struggle to balance short-term national security demands and long-term economic interests. It is impossible to predict exactly what the future of the currency holds, it is impossible to also predict exactly the second and third order effects of a persistent currency collapse/fall.

However, such a persistent depreciation/fall in the value of the currency would have important consequences on the Nation’s continued reliance on deficit financing. The inflow of foreign financing would be dramatically, if not wholly, reduced as the value of the currency falls. Hence the country would have to pay higher interest rates to fund future debt to offset the increasing uncertainty about its future value which would place a restrictions on future government spending. Any hope of covering this spending shortfall by increasing revenue through taxation is also unlikely to succeed in the short-term because of potential impacts to the domestic economy (Everingham and Anderson, 2011). Such a crisis would force the Government to make immediate budget cuts (especially in defense and social security) due to the loss of international funding. Even modest reductions in government spending would affect funding support for the national security strategy, since the costs for the up-gradation/procurement of the latest technology defense equipment/aircrafts/missiles would impound up the need for foreign currency.

Some of the reasons which seem to have been driving the rupee to its low levels in past months have been (a) elections coming forth (having huge funds moving into the country to fund them) ; (b) the Fed’s guidance being sought which also should enable the U.S. economy to have a smooth comeback ; (c) RBI’s management of their balance sheet ; (d) the Ministry of Finance wanting to manage the fiscal deficit at the same level ; (e) the IPL Scam, where the investors and the Cricket Team Funding Organizations/Groups from overseas would be withdrawing their funds given the uncertainty of the IPP moving forward; (f) the exporters’ lobby who would like to bring their funds kept in US dollar or euros or other currencies back into India for their quarterly results to be shown as good ; (g) the non-implementation of the second phase of economic reforms ; (h) no focus and development of the agro sector, agro banking and the agro-based economic framework, where more than 70 percent of the population of this country is housed; (i) RBIs performance being tamed by the brilliant presence of strong political leaders like Shri P Chidambaram,  Manmohan Singh and Shri Pranab Mukherjee in a UPA Government during times of the world’s worst financial turmoil having its seeds in the West with oil bubble, natural and man-made tsunamis and NPA accumulation by banks between 2004-2007 bringing its heat further to the Asian region after 2008 until today.

In my opinion, there has been no valid reason for the rupee to fall. There are all necessary positive signs in India – given the recession that hit the global village – to enable the economic growth and the rupee to appreciate at new levels which have not been observed since the 1991 fall when the rupee was fluctuating between Rs. 11 – Rs 13 for one US dollar.

India at its independence in 1947 had an exchange rate of Rs. 0.50 for aUS$ (i.e. 2 USD for 1 rupee) when we were by 98 percent an importing country, had almost no industrial or economic growth and no strengths to match any developed nation. Statistically simulated empirical evidence shows that the recent single rupee fall means sending the nation, its people and economic developments clearly backward.

The Indian Rupee (INR) in the last 40 years has been slowly, steadily and strongly emerging as a reserve currency in various countries neighboring to India (in South Asia, in East Asia, in the Arabic region and in Africa). In the Arabic region, the INR was floated with a different colour of currency note in the 1970s. The new governor of the central bank, professor Raghuram Rajan, outlined on September 5, 2013, also highlights that the Indian INR ought to be recognized as an international currency.

The RBI has been able to curtail the Money Supply (M3) growth to 13 percent as against 17-22 percent (between 2005-2008). In the last one year the M3 has again gone up by 17 percent and hopefully given the new policy framework adopted by Governor Prof. Raghuram Rajan of having a multi-facet monetary targeting policy with special focus on an inflation target, would help the RBI bring the M3 back to a 13 percent level. The multi-objective and multi-instruments approach followed by the RBI in formulating the monetary policy has helped in interpreting developments in the financial system and taking prompt corrective action. Also the measures such as putting in place robust systems for reducing counterparty risk in OTC transactions through CCP arrangements and regulation of shadow banking institutions to address the interconnectedness issues have helped in containing the impact of the crisis.

The high savings rate of 33 percent has also been a positive anchor to the economic downturn and the threats of rising unemployment and large number of Indian workforce retrenched and returning back home between 1995 (from the U.S.); 1997-99 (from South East Asia), 2001-03 (from the U.S.), 2008-12 (from Europe and the U.S.). It should be kept in mind that India has a shadow economy as strong as the normal economy, which provides for a buffer for any kind of recession with actual savings rate and GDP growth being substantially higher than the official figures. The FDI flows in 2011-12 and 2012-13 have seen a big jolt due to the bleak economic scenario globally, however, given the trends observed in the increase in FX reserves it is expected to improve in 2013-14.

The Government of India needs to re-consider its FX reserve policy both from the perspective of putting the excessive reserve to productive use and by allowing the exchange rate to float freely and to appreciate – given strong currents of depreciation of the US dollar, the euro and the GBP, which are the major currencies in the basket of currencies in accordance with trade balances.

Governor Rajan having served as Advisor to the Prime Minister and as a Chief Economic Advisor to the government would entail smooth functioning. I strongly feel that the symbiotic relationship which Rajan has with President Shri Pranab Mukherjee, Prime Minister Manmohan Singh and Finance Minister Shri P Chadambaram is unique and would serve to be of advantage for the Indian Economy and international confidence inIndia.

References

  1. Agarwal, Aman, (2007), “Global Dis-Equilibrium, Growth and Europe”, Plenary Keynote Address at the Economia Reale Conference at Sala delle Colonne (Italian Parliament),19th September 2007. Audio of the Speech online at Italian Media Channels (Radio RadicaleItaly www.radioradicale.it/scheda/235385 and Sherpa TV Italy) & at IIF (www.iif.edu).
  2. Agarwal, Aman; (2003); “US Federal Reserve Policy, RBI Policy and Indian Economy” Lok Sabha TV (Parliament of India TV Channel) in Public Forum Program on Saturday, September 21st, 2013 at 7:00 PM – 8:00 PM.
  3. Agarwal, Aman; (2013); “Challenges before RBI Governor Raghuram Rajan” Lok Sabha TV (Parliament of India TV Channel) in Insight Program on Friday, September 6th, 2013 at 1:00 PM – 2:00 PM.
  4. Agarwal, J.D. and Aman Agarwal, (2004), “International Money Laundering in the Banking Sector, Finance India, Vol XVIII No 2, June 2004; Reprinted with permission in The ICFAI Journal of Banking Law, Vol. II No. 4, October 2004, the journal of ICFAI University, Hyderabad. Invited to deliver as the Keynote Address at the Asia Pacific Banker’s Congress 2004 inManila,PHILIPPINES on 26th March 2004. (25-26th March 2004)
  5. Agarwal, J.D. and Aman Agarwal; (2009);”Building Nations Future in times of Recession and Global Dis-Equilibriums“, Invited to be delivered as Plenary Keynote Address at the Parliament of Finland (EDUSKUNTA) at the Finland Parliament Committee of the Future’s Conference on “Future of Nation Building” at The Parliament, Helsinki, FINLAND (July 6th, 2009)
  6. Agarwal, J.D., (2004), “Volatility of International Financial Markets: Regulation and Financial Supervision” delivered as Keynote Address at the 4th International Conference in Finance organized by Faculty of Administration & Economics, University of Santiago de Chile, CHILE on 7th January 2004; Finance India Vol. XVIII No. 1, March 2004.
  7. Agarwal, J.D.; (2013); “The Indian Economy & the Rupee Depreciation”, Lok Sabha TV (Parliament ofIndia TV Channel) in Insight Program on August 2013 at 1:00 PM – 2:00 PM.
  8. Agarwal, J.D.; Manju Agarwal and Aman Agarwal; (2013); “Fall of Rupee & its Impact on Indian Economy: The Dancing Baby Elephant“, Invited to be delivered as Guest of Honour Plenary Address at the 2nd VDMA German Mechanical Engineering Summit 2013 at Taj Vivanta, Bangalore, India [30th September 2013]
  9. Bernanke, Ben S., (2008), “The Euro at Ten : Lessons and Challenges”, at the 5th ECB Central Banking Conference, Frankfurt, Germany, November 14th, 2008
  10. Everingham, Neil C.; and David A. Anderson; (2011); “The Dollar’s Vulnerability and the Threat to National Security”, Strategic Insights, Vol. 10, No. 1, Spring 2011
  11. Fromlet, Hubert, (2008), “Financial Literacy and its Benefits on a Household, Corporate and Macroeconomic Level“, Working Paper, Baltic Business School, Kalmar/Sweden, & Blekinge Institute of Technology, Ronneby/Sweden, April 2008.
  12. Kalam, Abdul A.P.J and A Sivathanu Pillai, (2004), “Envisioning an Empowered Nation : Technology for Societal Transformation”, Tata McGraw-Hill Publishing Company Ltd,Delhi
  13. Miller, Merton H., (1990), “Leverage”, Nobel Prize Lecture, December 7, 1990


 

 

 

 

 

 

 

Aman Agarwal
Professor of finance, vice chairman of the Indian Institute of Finance (IIF) and Executive Editor of “Finance India”, Delhi

 

 

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The BRICS Turmoil: Reality or Overshooting?

September 4, 2013

During summer, we have seen – and still see – quite some nervousness about the so-called BRIC countries in the emerging world – and some contagion to a couple of emerging market countries that also try to catch up, like Indonesia and Turkey. Three questions seem to be particularly interesting:

¤ Is the current nervousness about BRIC countries really motivated?

¤ Why do we have these contagion effects to several countries – to some extent similar to developments during the Asian crisis of 1997-98?

¤ Do we currently see the beginning of a real BRIC crisis which may turn much worse and which will also mean a notable downsizing of BRICS countries’ potential (trend) growth?

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BRIC is a term that has been coined in the beginning of the past decade by an economist from Goldman Sachs, a major American investment bank. BRIC –nowadays BRICS since South Africa joined the “club” a few years ago – are the initial letters of Brazil, Russia, India and China. I always considered the BRIC(S) thing mainly as a marketing instrument for asset allocation. In reality, these countries did not have enough in common to put all four eggs in one basket. Relatively good economic growth during a couple of years and a large population were simply not enough to “harmonize” analysis and investment strategies for these countries.

By the way, similar simplifications could be recognized already in the latter part of the 1990s when Eastern Europe Equity Funds and Asia Equity Funds were launched as attractive alternatives for investors. At that time, countries with different structural and institutional conditions were put in the same investment baskets, too. This proved to be wrong after some time. BRIC supporters from all over the world could have learnt from these examples.

Many experts see the main reason for the current “BRICS problems” in the expectations of – right or wrong – forthcoming cautiously rising interest rates in the traditional industrial world, especially in the U.S. Such a development could (probably) lead to (further) substantial capital outflows from BRIC countries to North America (the U.S.) and (parts of) Europe, according to the BRICS pessimists.

This explanation, however, is too fluffy. A deeper analysis of the BRICS problems is urgently needed. Are there fundamental reasons for the contagion? Or have we got a new example of overreacting financial markets?    

Let’s first look at possible common characteristics of the four BRIC countries – South Africa is excluded in this context – that may have caused negative feelings about the BRICs as a group.

¤  Portfolio shifts?  More financial inflows to the traditional OECD countries – at the expense of portfolio investments in emerging markets because of expected gradual, cautious monetary tightening by mainly the Fed  (with the assumption that the four above-mentioned, leading emerging markets are running the highest outflow risks)
–> could partly serve as an explanation because the four above-mentioned BRIC countries represent the economically four most important emerging economies.

¤  Substantial slowdown in GDP growth?   A rapid weakening of GDP could actually been noted in only two BRIC countries during the past year – in Russia and in India. Brazil even stands for growth improvements four quarters in a row after a couple of growth stimuli.

The last GDP-growth numbers for the BRIC countries look as follows:

Brazil:    2013, q2: 3.3%;    2012, q2: 0.5%         –> coming down from around 9% in early 2010

Russia:  2013, q2: 1.2%;     2012, q2: 4.3%        –> coming down from roughly 5% in early 2010

India:    2013, q2:  4.4%;    2012, q2: 5.3%         –> compared with about
9% in early 2010

China:   2013, q2:  7.5%;    2012, q2: 7.6           –> compared with about 10% in early 2010

Obviously, GDP growth has not developed simultaneously in all BRIC countries in the past few quarters – but more visibly on trend during the past 3-4 years. This is indeed true for all BRIC countries.  This development strengthens the view that more positive growth signals that currently come from the U.S., Japan and some European countries to a high extent more strongly triggered the worsening cyclical view of financial investors on BRIC countries than any other single factor. But looking at GDP-growth developments since 2010 gives also certain reasons to find structural components in the now more dampened growth outlook for BRIC. Thus, we have
–>  an obvious  cyclical BRIC phenomenon combined with certain negative structural components (like, for example, demand from Southern Europe) – and not a pure structural problem.

¤  Current account problems?   Current account deficits are frequently used explanations for the problems of the BRICs – and the need for foreign capital inflows for financing these deficits. But only India has a (somewhat) too high deficit ratio in relation to GDP (around -4.5-5% in 2013).  Brazil’s predicted deficit in the range of 3 ¼ – 3 ¾ % for 2013 is a little bit high but should not be as scaring as markets consider the entire BRIC situation. China and – probably – Russia should even continuously manage current account surpluses which takes us to the conclusion
–-> that current account problems should not really be considered as a major common problem for all the four major BRICS countries. From this point of view, the contagion effects that have been created by global financial markets, seem to be overdone. But they exist!

¤  Insufficient fiscal stability?  Public debt – annual and total – is, of course, an economic indicator that all country analysts watch very carefully. In this respect, Russia and – probably – Brazil seem to have their structural fiscal conditions roughly under control. China seems to be on the safe side for the time being – at least when official numbers are analyzed (about which, unfortunately, one may have serious doubts). India finally has been affected by negative fiscal developments since a long time ago. Thus, the question is
–> why well-known fiscal conditions – which are not really bad in all four BRIC countries – suddenly should lead to general worries on global financial markets. We probably can find psychological explanations in this respect. This urges for deeper analysis.

¤  Lagging structural reforms?  Sure, all emerging countries have more or less burdening structural or fundamental shortcomings. What concerns Brazil, one may mention, for example, insufficient productivity gains and declining international competitiveness, lagging education and pension systems, etc. Furthermore, Brazil is nowadays increasingly competing with – currently – a more reform-minded and economically improving Mexico. Russia suffers from a significant number of institutional deficits – the financial system and support of entrepreneurship included – a too large role for the government/state in the economy and a too high dependence on the energy sector.

India, on the other hand, has more obvious fiscal problems than Brazil, Russia and China and more growth-impeding infrastructural shortcomings which are – also according to my own micro experience from these countries – much more serious than in the three other large emerging countries. The same conclusion can be made about the Indian current account deficit. Last but not least China. Nobody questions that China’s economy has proceeded substantially in the past two decades or so. But we know also that China despite all economic progress still suffers from lots of structural shortcomings particularly when it comes to microeconomic and institutional conditions – unfortunately combined with worrying transparency shortcomings.

Putting together the reflections of the above-mentioned structural thoughts means that structural shortcomings exist in all four  BRIC countries  
–> but without strong logical correlation for motivating sudden distortions and disappointment for the BRIC region as a whole as we have seen in the past months.    

Conclusions                                                                 

In my opinion, the recent negative pressure from global financial markets on the artificial BRIC group – South Africa is excluded in this analysis – should not be considered as the result of a completely consistent and logical approach. Several factors point also at psychological overshooting. Common issues for all four BRIC countries are the insufficient demand for their exports, mainly caused by weak global demand – an issue that probably is characterized by both cyclical and structural dimensions – and the expected future monetary tightening in the U.S.

I have also found that several negative macroeconomic indicators do not point at the same degree of imbalance in all four BRIC countries (if at all).Consequently, it can be singled out that certain psychological overreactions are/were in place.

For this reason, I would argue that current developments have re-set the previously overdone BRIC enthusiasm – to some extent the result of artificial financial marketing – to a more justified stance of growth expectations (without considering the issue of the middle-income trap). This should induce some reduction of previously exaggerated expectations of BRIC countries’ potential GDP growth – but probably less dramatically than described in many recent analytical pieces. Again: Almost all countries have their own characteristics. This makes it most doubtful to put several “(emerging) country eggs” in one single analytical basket.

However, occasional negative contagion effects from one country to another will most probably be inevitable in the future as well. Here we have another example that clarifies the need for more research in behavioral finance.

Hubert Fromlet
Visiting Professor of International Economics, Linnaeus University
Editorial board

 

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India: The Present Economic Outlook

June 7, 2013

In the fiscal year ended March 2013, the Indian economy turned out its weakest economic growth in a long while. The provisional estimates released at the end of May 2013, reported that the economy grew by 5.0 per cent, terribly weak compared to even the crisis year 2008-09, when India managed to close the year with 6.7 per cent growth. An economy of more than 1.2 billion people, the majority of who are poor by any global benchmark and where tens of millions of youngsters are coming out of school and college each year in search for jobs and livelihoods, depressed growth is very bad news. The average annual rate of growth for the eight year period from 2003/04 to 2010/11 was 8.6 per cent. The average over the 20-year period 1992/93 to 2010/11 was 7.0 per cent.

In the two years immediately following the crisis year, namely in 2009/10 and 2010/11, the Indian economy grew by 8.6 and 9.3 per cent respectively. So why did growth slump to 6.2 per cent in 2011/12 and to 5.0 per cent in 2012/13? And what is the near-term outlook and prognosis for growth? Is a revival possible in 2013/14? These are questions that hang like a heavy cloud over both policy makers and economic analysts. For the magnitude of the slump in the second half of 2011/12 to 5.5 per cent was surprising, as was the persistence of slow growth in 2012/13.

Broadly the answer to the question of why the slump happened appears to lie in three separate elements. (1) The first is that the vigour of the recovery from the crisis year was underestimated in the preliminary estimates of economic growth. This led to some delay in adjusting the fiscal and monetary stimulus that had been rolled out to counteract the effects of the crisis in 2008/2009, which in turn allowed inflation to be pushed up to unacceptably high levels. This in conjunction with rising world commodity prices undermined profitability. The impact was compounded by a significant depreciation of the national currency. Companies saw their operating margins decline, and corporate profit growth was weak. (2) Plans for equity infusion had been deferred by many companies as the crisis unfolded. They had kept capital flowing into projects by taking on more leverage than originally envisaged. The shortage of equity has however persisted into present times. This combined with declining profitability has stretched balance sheets painfully. Hardly a condition that is favourable to business expansion and investment. (3) Beginning earlier, but becoming more painful since 2010, projects started to face numerous problems in securing clearances from administrative departments to carry forward their projects. These difficulties were complicated in the context of judicial decisions and guidance in some cases. All of this also had adverse impact on the quality of banking assets, as banks play a big role in funding projects in India.

Aside from soaring inflation, the deterioration of macro-economic conditions stemming from deterioration in fiscal conditions and the external payments situation, together with contentious domestic political climate and high level of rhetoric negatively impacted economic conditions. Compounding this was the malaise in the global economy. The generally depressed state of global business sentiment was reflected in weak business confidence within India.

In many ways this was a perfect storm. So many unrelated problems came together in a short span of a few years. The hubris that unfortunately arose from the successful negotiation of the global economic crisis certainly prepared the ground for a high-impact letdown.

Where do we stand today? The fiscal trajectory has been corrected. Politically difficult decisions in rationalization of fuel prices, re-prioritization of expenditures and some other steps to boost revenue, has seen the fiscal deficit undergo strong correction and in the current year 2013/14 will stick to target. Long-standing decision on permitting foreign direct investment into certain areas and other reforms did not come cheap. An important partner in the ruling coalition left the government in September 2012, and another went in early 2013. However, the government has persisted in the right direction and overall macroeconomic policy has undergone the necessary stabilization.

Important re-jigging of the way clearances are given to projects has been undertaken and a higher powered committee of the Cabinet has facilitated the clearance of a large number of large investment projects. The government is energetically pursuing every opportunity to push for the execution of investment and asset creation in the public sector and to encourage private business to expand and invest. Over time, possibly in the second half of 2013/14, these measures should result in renewed investment activity.

Notwithstanding the sharp decline in growth, investment and savings rates remains favourable. Gross domestic capital formation in 2011/12 and 2012/13 were at 35.5 per cent of GDP in both years. This was lower than what it had been in 2007/08 (38.0 per cent) and in 2010/11 (37.0 per cent), but are still reasonably high. On the basis of historical relationships in India between investment and growth, this level is capable of generating 7 to 8 per cent rates of growth. The proportion of GDP going to create fixed assets (fixed investment rate) was about 30 per cent in both 2011/12 and 2012/13. The domestic savings rate for 2011/12 was nearly 31 per cent and probably close to that in 2012/13. In short, the domestic investment and savings rate are still at levels that can produce much stronger growth than has been evident in both of the two previous fiscal years.

That it has not, is in part, on account of the delays that has inflicted projects in India on account of clearances, fuel availability and other delays. For example, there is at the moment, more than 10,000 megawatts of thermal power plant capacity that is wholly or largely idle on account of non-availability of natural gas and coal. Likewise there are many projects that have got delayed in their path to completion, even as billions of dollars of capital has been invested in them. It is the belief of government that actively pursuing reform in policy and administration and facilitating the completion of such projects, the invested capital will be able to generate considerable incremental current output, that is, economic growth. It is not as if there is no market in India for incremental supply. Indeed the converse is true. The shortage of infrastructure services – electricity, roads and the like – seriously constrain output in India.

The positive developments that have materialized in India over the past year are: (1) Stabilization of a range of macro policies; (2) Restoration of the trajectory towards fiscal consolidation; (3) A decline of wholesale price inflation from double digit levels to about 5 per cent, which is within our comfort zone. Manufacturing output remains depressed as also measures of business confidence. However, there is a strong possibility that hard numbers will begin to show improvements in coming months and that there will be some degree of recovery in the second half of the year, which in turn should lay the foundation for a stronger and more broad-based economic recovery in 2014.
June 4, 2013

 

 

 

 

Saumitra Chaudhuri
Member, Planning Commission & Member Advisory Council to the Prime Minister and the Government of India

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