Indian economy: towards 2020 or 1991

Indian economy: Are we on track towards our 2020 aspirations? Risk of turn towards 1991!

The journey so far into FY13 is rough and bumpy. The health of the economy reflects in the exchange rate; rupee is down and weak, highly undervalued despite various measures (and actions) from RBI and most importantly, there is lack of confidence on rupee getting into bullish reversal soon. The expectation on the economy (by most stake holders) is negative: downtrend in GDP growth momentum into 6%; slippage in fiscal deficit into 6% and elevated current account deficit around 4% of GDP. The comfort is from moderation in headline inflation around 6% supported by administered prices on fuel and huge cost subsidisation on food and fertilisers. These expectations obviously do not reflect optimism into the rest of FY13. The monetary dynamics has not yet turned supportive to growth despite 50 bps rate cut and tremendous infusion of liquidity through 125 bps CRR cut and aggressive OMO bond purchases. The system is short of liquidity by around Rs.1 Trillion and money market rates continue to stay at elevated levels; in short, the impact of monetary actions (to support growth) has been ineffective. Why? All the good has been undone through aggressive dollar sales by RBI to defend rupee; shift of credit demand from foreign currency to rupee driven by weak rupee and negative Balance of payment (in the absence of robust capital account flows) resulting in flight of domestic capital. The factors that provide strong headwinds to economic growth (and prosperity) are increasing in the absence of strong remedial measures to provide course correction. There are no positive factors at this stage to act as strong tailwinds; other than the strong India story, termed as giant elephant!

It is not that “powers that be” are not aware of remedial actions. The priority at this stage is on economic reforms to pull off-share investments; cut cost subsidisation to release pressure on fiscal deficit; shift system liquidity from deficit to surplus mode to attract domestic investments (and to release pressure on interest rates) and cut non-essential imports to release pressure on current account deficit (and balance of payments). These four priority actions will address all other woes of the economy to drive optimism into the future. The system is in a stage where it is easier than done. The political structure is weak to roll-out economic reforms and to cut cost subsidisation. Efforts to cut non-essential imports have been reversed in quick time. It is difficult to shift system liquidity to surplus mode till rupee is under pressure. Where we go from here? Is it dead end? The current political structure will stay till 2014. There is no guarantee that people of India will deliver decisive mandate to a political party which can go aggressive on reforms and bite the bullet on cost subsidisation. But, it is a long way to wait for revival; damage by then would be severe and recovery time will be an extended one into 2020. I recollect the dreams that we had in 2000 of turning India into an economic super power by 2020 and now I am afraid we travel back to 1991 where we began the economic liberalisation story. It is scary but not unrealistic and it is high time that “powers that be” take serious note of consequences and deliver remedial actions soon. The Government on its part need to do whatever that is required to attract foreign capital (and liquidity) and address fiscal consolidation through cost reduction. RBI needs to get into aggressive growth supportive monetary stance (may be at the cost of inflation) to drive the system liquidity to surplus mode. These actions are considered essentials to arrest strong bearish set up on asset markets and to revive the optimism on India growth story.

Moses Harding