By S. Sethuraman
Heading into mid-year, we see more dark clouds on the horizon as against a slow but steady recovery for the global economy led principally by Asian majors like China and India, postulated at the start of 2012. Electoral politics has taken over much of economic space all over. It is doing grave harm to India’s economy at a critical juncture.
In the United States, the Obama Administration remains embattled in pushing for jobs and toning up recovery while Congressional Republicans are out to deny any advantage for the Democrat President campaigning vigorously for his second term, in the November elections. Even as Washington has so far failed to produce a balanced debt reduction strategy without hurting growth in the post-crisis decade, the Euro-zone with its sovereign debt crisis is mired in recession this year, and politically explosive trends threaten euro-zone stability once again.
The austerity drives imposed on indebted peripheral countries by the Zone leadership (Germans in command) as price for bail-outs have enraged citizens in Greece and other peripheral countries. Risks from the sovereign debt crisis and a deleveraging by European banks have intensified in the aftermath of the elections in France and Greece where voters sent out strong signals against punishing austerity drives forced as bail-out terms.
The new French President M. Francois Hollande, who succeeds Mr Nicolas Sarkozy on May 15, is committed to revising the austerity agenda, thus setting a challenge for German Chancellor Merkel. French voters could again come out strongly in the parliamentary elections in June. Greeks unable to form a new post-election government may also opt for another poll. Overall Euro-zone’s stability as a single monetary union (euro) is under serious threat.
Equally uncomfortable is the economic scene in Asia’s two power-houses China and India, both operating below potential due to internal stresses and highly unfavourable global conditions. Subdued growth at 8.2 per cent and 7 per cent is projected for them. Though China’s current surplus declined in 2011, its investment-led economy is yet to begin rebalancing for domestic consumption-led growth, as called upon by G-20 in order to reduce global imbalances.
India’s economic agenda is in a state of paralysis when one looks at the frustrated moves of UPA Government to put through some of the financial sector bills, the coal muddle severely affecting power plants and posing risks for the planned mega projects, reflecting mismanagement at the highest levels of government in a vital energy sector, as well as the unresolved problems of land acquisition and mining rights and regulations.
UPA wants 9 per cent growth but what would make for that ambition to fructify seems beyond its ken. All that goes for its governance is to make pious policy declarations and remit issues to GOMs and Task Forces in what seems an endless process while reforms aired with a gusto for the moment get shelved oftener under resistance from power-sharing allies, notably TMC leader and West Bengal Chief Minister Ms. Mamata Banerjee, who never lowers her banner of revolt against New Delhi for her own political ends.
But more destructive for the Congress-led UPA is the role of BJP, the major opposition in the country, in Parliament, which has drifted from issues to scandals in the hope of returning to power after a decade. Expectations of the Government succeeding in building broad political consensus on reforms through legislation or in regard to fiscal measures like deregulating diesel and other oil product prices to cut subsidies, as targeted in the Budget, must be laid to rest. GST, with states’ reservations, may again become a non-starter in 2013, the pre-election year.
A crisis-like situation surrounds the growth slowdown due mainly to industrial slippages with manufacturing down to below 3 per cent (9 per cent in 2010-11), loss of export momentum raising trade deficit to 185 billion dollars, and growing strains on the balance of payments front. External debt also increased significantly in fiscal 12. India’s trumpeted resilience to overcome risks from global uncertainty and assertions of strong economic fundamentals do not show up, even ignoring three years of high inflation. RBI in sole charge of controlling inflation has now additionally required to intervene in the foreign exchange market to contain excessive volatility of the rupee.
With a current account deficit peaking at 4 per cent of GDP in 2011-12, Indiais facing vulnerability not only in capital flows but also in holding the exchange rate, at a time the foreign exchange reserves are stagnating below 295 billion dollars for weeks on end. RBI interventions have failed so far in stabilising the rupee which was quoted above Rs. 53 on May 11. Meanwhile, RBI directed exporters to convert half of their foreign-currency earnings into rupees within two weeks to increase dollar availability and stem further rise of the rupee. The central bank had earlier raised the interest rate ceiling on onshore foreign currency deposits for NRIs to attract more foreign inflows.
RBI is trying to provide “as much stability (to the rupee) as we can by ensuring that pressures that come from speculative channels are minimized if not eliminated completely,” according to Deputy Governor Mr. Subir Gokarn. But, he pointed out, inflation remains the main focus while being sensitive to other risks and pressures facing the economy. After the sizeable cut in the key lending rate on April 17, the pace and size of further reduction would depend on growth and inflation, he noted.
The latest industrial data present a gloomy picture and the central bank would be under renewed pressure to act despite the Finance Ministry’s own inability to move in the direction of cutting down subsidy outgoes. Whether in bringing down inflation or helping to stabilise rupee, Government is almost immobile. An economy, which is substantially domestic demand-led, needs more home-grown solutions, not scary search for foreign inflows. These relate to expeditious procedural and field actions in supply management, especially minerals, which have contributed more to industrial downtrend than “global uncertainty”.
There are no quick fixes to get back to the average 8.5 per cent growth of pre-crisis years 2003-08 and subsequent strong recovery of 2009-11. Much of the good times, for all nations, had to do with the boom in the world economy and easy liquidity till the bust in the financial markets in 2008 turned into a global crisis and triggered the Great Recession. The world is still in peril, as Mr Mukherjee rightly notes.
The Finance Minister piloted the Finance Bill “successfully” through the Lok Sabha -not without some tactical retreats on a few controversial tax provisions affecting foreign investors. But this in no way transforms the outlook for capital inflows or helps maintain India’s image as an attractive investment destination. Major challenges for the rest of the year lay in making headway with planned subsidy cuts for fiscal consolidation and reviving investments for the imperiled economy to turn around.
What Mr Mukherjee has done is to defer GAAR till the next fiscal year beginning April 1, 2013, when the Direct Tax Code is supposed to come into force, and smoothened a few other irritants. The retro-active tax policy, which has aroused global investor concerns, remains intact and Government is determined to wrest dues from Vodafone which benefitted when the Supreme Court disallowed the tax claim on the company. Mr Mukherjee has let it be known to the world that India cannot be a tax haven for foreign investors but that they would not override bilateral tax treaties. He cannot ignore the more negative soundings abroad for India when it badly needs more non-debt flows for productive investments and for external balancing and strengthening the payments position. (IPA Service)