How an economist PM led India to a colossal economic mess

How an economist PM led India to a colossal economic mess

September 7, 2013

The GDP data announced on August 30 this year has confirmed the deep rooted slowdown in the economy. Despite higher than expected data, India's GDP growth languished around its lowest in three years, offering no respite for a minority government reeling under a series of political scandals that have paralysed the economic agenda.

India is now growing at the slowest pace since 2009. The difference this time is that the slowdown is largely due to domestic factors, whereas the 2009 slowdown was precipitated by developments abroad.

Here are some glaring facts about the mess the Indian economy is in.

Recently released figures for growth (measured as GDP) show GDP falling to 4.4% for the quarter April-June 2013, the lowest in four years, and half the rate seen during the 2003-08 boom. Consumer-price inflation remains stubborn at 10%.

According to CII Director General Chandrajit Banerjee, "The GDP figures for first quarter clearly show that the economy continues to be in the throes of a slowdown… A coordinated effort from the government and the RBI is required to ensure that this vicious cycle is broken."

India has a huge current account deficit (CAD), swelling to 90$ billion from $8 billion in 2007, that is, India imports $90 billion worth more of goods than it is exporting. On the other hand, India’s foreign exchange (forex) reserves have taken a plunge, from $300 billion to $275 billion in 2013. Hence, the forex reserves, which pays for the imports, can cover the CAD only 3.33 times, from 37.5 times in 2007 (forex/CAD).

A current account deficit occurs when a country’s imports exceeds the country’s exports. Many of the countries that export goods to India only accept payment in foreign currencies (mainly the US dollar). But with the stockpile of forex decreasing, there would be trouble paying for the imports. PM Manmohan Singh, in his speech on the economy to parliament on August 30, tried to reassure the country that unlike 1991, when India had forex reserves to pay for only 15 days of imports, now it was for seven months. But seven months is not really a comforting thought.

Five years after the 2008 crisis, the US economy is looking up, which means interest rates are increasing. Hence, more investments are going to flow to the US economy, which means less to the Indian economy (stock markets), and consequently, the forex reserves would continue to decrease.

CAD is not necessarily a bad thing. Growing economies, like that of India, need more imports to fuel growth. Experts say that a CAD which is 2.5% of a country's GDP is sustainable. However, India's CAD stood at 4.9% of the GDP in calendar year 2013, which the third highest in the world in terms of absolute numbers, according to a report by Morgan Stanley.

External borrowing relative to GDP has not risen by much – the ratio stands at 21% today. External debt must be paid in the currency in which it is borrowed, which might entail selling and exporting more goods to the lending country, which would have put a huge pressure on India’s beleaguered industrial sector. However, India has more short-term debts now, which is riskier. Because, they have to be repaid within a year, and with the current scenario, there will be difficulty in achieving that.

According to the 2013 Index of Economic Freedom, compiled by The Heritage Foundation, India’s economic freedom score is 55.2, below the world average, making its economy the 119th freest in the 2013 Index, or a lowly 23rd out of 41 countries in the Asia-Pacific region.

According to the report, “India’s institutional shortcomings continue to undermine the foundations for long-term economic development. In the absence of a well-functioning legal and regulatory framework, corruption throughout the economy is becoming a more serious drag on the emergence of a more dynamic private sector. The state’s presence in the economy remains extensive through state-owned enterprises and wasteful subsidy programs that result in chronically high budget deficits. Progress in structural reform has been uneven and often stalled. Plans to open up key service sectors have been reversed, and no significant reforms have been implemented effectively in recent years.”

Even the outgoing governor of the Reserve Bank of India - D Subbarao squarely blamed the government for the domestic currency's travails, which he attributed to domestic structural factors. He also said the loose fiscal policy adopted by the government between 2009-2012 had constrained the RBI's monetary policy. He lambasted the finance ministry's attempts to impinge on the RBI's autonomy through the Financial Stability and Development Council. The governor also came down strongly on the attempt by government to attribute volatility to 'misbehaving markets' and which he compared with God.

In Bengal, in June 2012, a task force was set up by the Chief Minister of West Bengal to rein in inflated prices in the market. The task force was headed by the Secretary, Agriculture, and it included people from agri, horti, vendors, retailers, working together to check the sharply rising prices of essential vegetables. Even last month, when onion prices crossed Rs 60 a kg in Kolkata, the West Bengal government decided to sell onions through its mobile fair price shops across the city at Rs 35 a kg. That is perhaps the lowest price any state government is offering its people. The government has further decided to sell ginger clubbed with onions as the price of ginger is on the rise too.

Parting thought

India is currently led by an economist PM who had once saved the nation from a grave economic crisis. It is ironical that the same man has now presided over policy paralysis as never seen before, and an economic mess unheard of in recent times. As the Chief Minister of West Bengal rightly shared on a social networking site, “Economy in red (alert), People are unfed and UPA is dead”.

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Comments (1)
Niraj Reply
September 06, 2013
We need leaders not economists to become PM.
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