IS INDIA TOO HEADED FOR ECONOMIC SLOWDOWN?

-      Nupur Goel

WHAT TRIGGERED THIS CONCERN?

Tipped as a major force of “BRIC”, India was always referred to as an “Emerging Economy” and a “steadily developing nation”. Especially after 2009, when the global economic meltdown didn’t hamper India’s growth story, the entire world has been looking at India.

·         However, alarm bells started ringing when India’s Industrial Output contracted by 5.1% in October 2011, the lowest since 2009.

·         GDP growth, which was estimated optimistically at 9% in the beginning of 2011, later revised to 7.25%, has infact dipped to 6.9% in the second quarter of 2011-12

·         Inflation has been running at an all-time high of above 9%, since Dec’2010.

·         Rupee has slumped almost 15% against the dollar.

ANALYSING THE REASON FOR THE DRASTIC FALL IN OUTPUT

·         The fall hasn’t happened overnight. The industrial output was 1.9% in September and a consistent drop has resulted in the figures of October’2011.

·         Worst hit sectors: mining, manufacturing and capital goods.

Let’s look at these sectors a little more closely.

·         Mining: The fall in mining is a fallout of delayed monsoon, strike at Coal India, mining ban in parts of Karnataka and mining halted in Andhra Pradesh due to Telangana agitation.

·         Manufacture: Accounts for 3/4^th of the index. Major strike at automaker Maruti Suzuki plant at Manesar and holidays in the festive season and low demand due to high prices were seen as the main factors causing the fall.

·         Capital goods: Witnessed a shocking 25.5% drop in output. In simple terms it means that companies are reluctant to expand their production capacities. This is a major cause of concern because capital goods signify investment. Thus any fall in capital goods production implies a future fall in production as well.(A detailed analysis of this shall be done in later part of the article)

IMMEDIATE REPURCUSSIONS

Ä      BSE Sensex fell by 343 points (1.2%) to below 16000 level.

Ä      BSE’s 30-share benchmark lost over 1000 points (3 lakh crore loss to investors)

Ä      Nifty lost 102.10 points.

Ä      “CII warning that further contraction would have serious consequences on employment and livelihood.”

ARE WE ALONE?

The silver lining is: No, we are not alone.

Þ    The entire globe is under the grip of deteriorating economic performance.

Þ    China is witnessing its lowest GDP since 2009.

Þ    Euro zone countries are likely to enter recessionary phase due to the on-going sovereign debt crisis

Þ    Global markets have been hitting all-time lows due to poor performance cues from all over the world.

WHAT FACTORS HAVE LEAD TO THIS?

An understanding of the factors, to which this downslide can be attributed to, is important. It is important, in order to reverse or at least control this trend at the earliest. Any country’s economy is heavily dependent on a variety of factors-both internal and external. External factors are mostly beyond our control. However, internal factors can mostly be influenced by sound policy making and other measures of the government. And a course correction in these areas is vital to enable the economy revive or grow.

       I.            EXTERNAL FACTORS:

v  One of the major factors, which have affected our GDP growth adversely, is- the widening current account deficit. In lay-man’s language, it means the difference between imports and exports of the country.

Exports have been falling because majority of the countries to which India exports, are in economic turmoil. To add to our woes,cost of imports is on the rise. This is thanks to the weaker rupee in the international market and the sky high commodity prices in domestic markets. This huge deficit is difficult to bridge and its impact is clearly evident on GDP.

v  The European debt crisis is bringing gloom for the global economy. All the major stock markets in Asia-pacific have been plummeting. In fact, some major credit rating agencies which have already downgraded the ratings of various debt engulfed European countries are also slashing their growth estimates for Asian countries.

    II.            INTERNAL FACTORS:

As discussed above, the steep decline in Industrial output is a major cause of concern. And as we have already discussed, a major chunk of it is capital goods. Since new investments are not taking place, capital goods production is witnessing a downfall.

But the question is: why is there a slump in fresh investment? To understand this, look at the following closely:

v  RBI & INFLATION:

RBI’s policies for the last two years have been primarily to combat inflation, which has severely crippled consumers’ purchasing ability. It has been doing so, by constantly raising the interest rates. Interest rates have been hiked nearly 13 times since March 2010. This attempt was successful early on, but has not yielded the desired results. As we all know, favourable interest rates are a must for new investments to flow in. Hence due to high borrowing cost, new investments have greatly reduced, directly affecting capital goods.

v  GOVERNMENT  APATHY:

    Apart from this, RBI is virtually the lone crusader in this battle against inflation and other issues such as depreciating rupee, global economic issues and tight capacity are mounting on it. On the part of the government, there has been a virtual policy paralysis. It has failed to bring the confidence of the economy back. Entangled in a political quagmire, fettered by constraints of coalition politics and its image dented by corruption allegations, it has failed to bring about any path breaking legislation or any measure to give the economy a much needed boost.

v  FII’s pulling out of the country.

v  Sectors such as power, aviation and commercial real estate in trouble; not much done for their revival.

SO IS IT DOOM FOR US?

No, my dear friends! Absolutely not. We haven’t lost much yet and if we show resilience and take the right steps, we can come out of this situation.

ü  Our banking system is extremely strong and unlike other countries, we don’t need to worry on that front.

ü  RBI has decided to shift focus from curbing inflation to taking measures to enhance industrial growth.

ü  Finance minister said that in view of the softening food inflation, he was hopeful that inflation could fall to around 6%-7% mark.

ü  Also as “The Economic Times” reported on 19^th December 2011, coal, electricity and infrastructure sector have already shown signs of improvement in November. The industrial output of the core sector comprising of petroleum, coal, electricity and steel, has expanded over 4.5% in November.

ü  The PSUs are performing well.

ü  The government too seems to be pulling up its socks and seems in a mood to introduce new legislations in the winter session.

ü Major companies have chalked out large recruitment plans for Jan-Mar 2012.

ü Government has started working in the right direction to simplify FDI procedures to usher in fresh FDI in different sectors.

WHAT IS THE WAY AHEAD?

ü  Wait for the global economic scenario to cool down

ü  End the phase of policy paralysis by introducing legislations to revive the economy.

ü  Restore the confidence of FII’s by convincing them that India has an environment conducive for growth.

ü  Properly investigate and bring to book the culprits of the recent corporate frauds and scams to restore the faith of the corporates in the law and order system.

ü  Ease the interest rates, to pump in new investments; find other means to tackle inflation.

ü  Rolling out of schemes such as NREGA, Food security etc. is important. However, it should be in keeping with the burden the exchequer can bear.

ü  Investors and stock traders should not panic and should take informed decisions to bring stability to the stock markets.

Posted in: Economy