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Economy Dec 22, 2012

The economy in 2012-13: More than 50 shades of grey

By Madan Sabnavis

How does one evaluate the Indian economy this year? It has been quite tumultuous on account of not just the performance numbers but also the myriad emotions that have been expressed during the course of the year. It all began with the budget being announced on what even appeared then as ambitious targets, but it still managed to pass through. But overstretching the same to try and garner foreign funds through retrospective taxation and the General Anti Avoidance Rules (GAAR) made investors beat a hasty retreat.

The government then had to reconsider these moves and the rupee went on being beaten in the market. The GDP growth number came in at 6.5 percent in 2011-12 (FY12), and the assumption of 7.5 percent plus growth for the coming year looked too optimistic. Various official agencies had targets going up to 8.5 percent at that time.

The Reserve Bank of India (RBI) continued to maintain its stance on interest rates and while it relented in April with a repo cut and followed up subsequently with some cash reserve ratio (CRR) reductions, it continued to focus on inflation. Critics felt that the RBI was not exactly sure on which inflation number to look at. At times it was headline WPI (Wholesale Price Index). It moved to core inflation and food inflation and, in a more recent policy statement, it spoke of CPI (Consumer Price Index) inflation. The clue we got was that all inflation was bad, and they would 'all' have to move downwards to placate the RBI.

Last, the policy actions taken so far evokes mixed feelings. A lot is being attempted to show that the government is keen to make a difference. Reuters

Meanwhile, the government got into various political upheavals with controversies surfacing on various subjects of impropriety relating to natural resources. While nothing has been proved or disproved with the Comptroller and Auditor General (CAG) and opposition making various noises, the consequence was policy inaction. Those with the touch for the dramatic termed it 'policy paralysis' - to the extent that it became a clich. There were so many issues like diesel price hike or infrastructure clearances, which did not require Parliament to approve and could be passed. Why was the government not doing anything?

Then came the ubiquitous rating agencies who revelled in threatening a downgrade for the country. We still held our heads high and were in a state of denial. After all, notwithstanding the so-called depressed conditions, at 5 percent plus growth, we were better than others. Other nations in the west were in the dumps and even the big Chinese walls had developed cracks. Were we just overreacting?

Around September, the government struck back with a series of policy announcements, some of which could be implemented, while others have yet to go through Parliament. The paralysis had been sorted out, while the government has bravely fought the battles in parliament over FDI in retail, banking reforms and land reforms. These were the tough nuts to crack. There was also a fierce fiscal statement made by the FM on the back of another Kelkar Committee Report to rein in the fiscal deficit and create a roadmap for future.

As usual there was no corresponding plan on how it would be achieved, which is what all long or medium term plans have turned out to be. Somewhere in-between, the Planning Commission has lowered the GDP growth target for the 12th Plan to 8.2 percent per annum. But, can this happen given what is likely to happen in the first year of the plan?

Against this background, how can we view the economic performance? First, the good part of the story.

While one can argue for and against high interest rates with the coexistence of inflation, the fact that the RBI has not retracted is admirable. It was a display of character from the RBI to not succumb to pressures and to hold on to its policy stance. After all, high inflation makes one spend less on comforts and luxuries, which affects demand. And unless inflation comes down, easing rates, which leads to excess demand, can be inflationary. Constancy in stance should be commended.

Next, the rupee has come back within a range on the back of strong foreign investment flows which came in after the government went back on GAAR and retrospective taxation. While the rupee still is relatively weak, the fact that these investment flows have addressed the current account balance is something worth mentioning.

Third, the capital markets have been fairly buoyant with the Sensex also operating at the level of 18,000 for most of the time, with a plus or minus of 1,000 points. This is significant because the market is the best indicator of the pulse, which though beating unsteadily, had found favour with foreign investors in particular, which has helped to restore equilibrium.

On the perverse side, several worries still remain. Growth will be lower at around 5.5 percent this year and here too there are no signs of any sectors shining. Industrial growth is down and achieving a growth rate of 2-3 percent will be a challenge for the year, with virtually no investment taking place as the government has stopped spending and the private sector is not investing. Corporate profits are down and banks have an issue of rising non-performing assets (NPAs) in this kind of an environment. Restructured debt is increasing, which creates skepticism on whether this is a cover for NPAs.

The government is struggling to meet its fiscal deficit target of 5.3 percent, and some economists believe this figure should be moved to 5.8 percent. There is a huge disinvestment and spectrum sale programme to work out for Rs 70,000 crore and a slowdown in the economy will affect the tax collections because if industry does not grow, then customs, excise and corporate tax collections will be impacted.

While some moves have been made to reduce subsidies on fuel, there will still be some slippage. Drought relief and NREGA would probably add to expenditure, and the fear is that in a bid to control the deficit, the government may just cut back on capital spending, which could be between Rs 20,000-30,000 crore. This will only add to the gloom.

On the external front, the current account deficit still poses a problem, given that the trade deficit is widening due to negative growth in exports in a global market. While the balance of payments has been largely under control, external debt has crossed the $350 billion mark and with forex reserves remaining below $300 billion, after a long time there is a mismatch in this ratio. While not really an immediate problem, it means that we may have to go slow on external commercial borrowings (ECBs) which are attractive today, given the interest rate differential between India and the rest of the world.

Are there any shades of grey in the economy? The agricultural scene is quite ambivalent. While the kharif crop is to be lower, there is hope that the rabi crop may be better, which will compensate for this loss. However, the pricing policy of the government relating to minimum support prices (MSPs) continues to be an area of concern from the point of view of inflation as the announced prices are still between 10-20 percent higher for most crops, which only exacerbate the pressure on prices.

Inflation has been largely under control during the year, which is good, but nothing actually has been done to address it, which is a concern. It has been more like a high base or low base affecting the final inflation numbers with little effort to really bring down prices.

Last, the policy actions taken so far evokes mixed feelings. A lot is being attempted to show that the government is keen to make a difference. There are battles being fought to have bills passed, which will help to uplift business sentiment. But it will take time before they result in actual investment taking place, which really means that the impact, when it happens, will tend to be more in the next financial year. Till then one must hope that we manage to get through this year with a mediocre performance, which will be, as the clich goes, getting through by the skin of the teeth.

The author is Chief Economist, CARE. These views are personal

by Madan Sabnavis

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