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Five things wrong with India’s economy

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Five things wrong with India’s economy

By: Alam Srinivas

1. Low Growth

After several official predictions that India would grow by 7-8% in 2011-12, the finance minister finally admitted in his Budget 2012 speech that the growth would be 6.9%.

The actual figure may be lower at 6.5%, thanks to the statistical error in sugar production, which dragged down January’s industrial production growth figure from 6.8% to 1.1%.

Although ratings agency Standard and Poor’s estimate for 2012-13 is 5% or above, Indian economists feel they won’t be surprised if the economy grows by just 4%.

“If things remain the way they are, in terms of policy decisions, investments and sentiments, I would go to the extent that the figure may be 3%,” says a senior economist with a leading business association.

2. High Inflation

Wholesale price inflation, which is under 7%, could increase to 9-10% over the next few months.

Food inflation is still high at double-digit levels, and any hike in fuel (petrol and diesel) prices in the near future will spur inflation.

A combination of low growth and high inflation, or near-stagflation, would be India’s worst economic nightmare come true.

3. Looming Fiscal and Trade Deficits

In 2011-12, the fiscal deficit zoomed from a projected 4.6% of GDP to 5.9%. Although Budget 2012 predicted it would come down to 5.1% in 2012-13, most economists remain sceptical.

Low growth rates, lower-than-estimated government revenues, and higher-than-expected expenditures, especially on welfare schemes for rural employment and the right to food, may force the deficit to go up in 2012-13, as happened in the previous financial year.

Although exports grew by 20% in 2011-12, imports rose at a faster pace, and the trade deficit went up to $185 billion, the highest ever in the country’s history.

Since August 2011, foreign exchange reserves have dipped from $322bn to $293bn due to the higher trade deficit and other foreign exchange outflows.

4. Policy Paralysis and Delayed Reforms

Coalition compulsions, a united opposition and corruption allegations have forced the government to backtrack on key economic reforms, including foreign direct investment (FDI) in multi-brand organised retail.

The finance ministry’s chief economic advisor, Kaushik Basu, recently made a statement in the US that the government cannot pursue reforms until the 2014 general elections. Later, he clarified that this was taken out of context from his overall speech.

However, there is a growing conviction within India Inc, political parties and economists that the government will only pursue reforms that are palatable to its political partners.

Standard and Poor’s outlook stated that it would be more comfortable if the government raised retail petroleum prices and reduced energy subsidies as it has promised, and rolled out the goods and services tax (GST) this year.

5. Negative Investment Sentiments

In 2011-12, the domestic private sector was wary of huge investment commitments; many firms delayed or postponed plans to invest in expansion or building new factories.

An April 2012 overview of the Reserve Bank of India (RBI) stated that “consultations with industry and banks suggest that new project investment continue to be sluggish”.

The central bank concluded that economic growth is unlikely to pick up soon as “depleted investment pipeline and depressed new investment may keep the pace of recovery low”.

FDI inflows were strong in 2011-12, but there are fears that the Budget 2012 provision to tax individuals and companies retrospectively on deals routed through global tax havens such as Mauritius may scare away foreign investors.

Recently, George Osborne, the British Chancellor of the Exchequer, raised this issue with the Indian finance minister.

Earlier, global business organisations, including the Confederation of British Industry and the US Council for International Business wrote a joint letter to the Indian prime minister and finance minister that “if the law changes are made, they should not apply retrospectively”.

High interest rates over the past two years, although there was a slight decline recently, have further dented corporate demand for bank credit and forced urban consumers to delay their purchases of cars, homes and other products.

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  1. Sam
    Sam 14 September, 2012, 13:41

    Considering the fact that diesel is the backbone of the transportation sector and any hike in the diesel prices will increase the prices of the necessary goods, the hike faced criticism from many sections of the society. Know more about this on http://www.indian-economy.ibef.org/

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