Wednesday, July 4, 2012

The troubled Indian economy

India has become synonymous with land of missed opportunities. Between 1984-1991, 1991-96, 2009-12 India has missed opportunity one after another to set its economy and infrastructure right. During these years while China opened up and went aggressive with its growth agenda, India stood behind caught up in political mess. Forget going into what happened during these years. Of concern is the last 2009-12. UPA II has ceased to exist making decisions. No major policy reform, no major legislation passed. Caught in its own trap of corruption, coalition politics, Manmohan Singh Govt is probably the worst India has seen in years. Look at media everywhere (national and international). From New York Times to Times of India everyone is talking about Narashimha Rao and Vajpayee about economic growth. No one wants to talk about Manmohan Singh as PM. One of the sheer problems is indecisive, leaderless leadership.

Recently there was a cartoon published all over internet where Manmohan Singh is taken to a dentist and the dentist says - "Atleast here please open your mouth". This is such a sarcastic reality that the PM doesn't speak. He doesn't express toughness. He doesn't take any bold moves. He is an epitome of softness that only is weakening India day by day, minute by minute.

The current state of economy is such that India's growth story is torn apart and there is no confidence in its political set up. In the past 2 years the government instead of taking any concrete measures in land legislation, tax reforms, FDI in retail has moved all the investors away. Indian currency is the worst Asian currency in the  past 2 years. India's growth is the worst amongst the growing BIRC (Brazil, India, Russia, China) economies. At a point where even China's growth slipped, India did not make any use of this opportunity.

Let's look at the numbers although numbers purely don't describe much, but give a sense of where the country stands.

  1. Rating agencies such as Fitch, S&P have downgraded India's economy from stable to negative
  2. Rupee has depreciated to its worst levels in history and to the worst levels in Asian currency. Imports are more and capital inflow is so less the rupee has to depreciate to keep the country's forex reserves to an optimum level. (See this image below got from this article)

  1. The last quarter India's growth slipped to 5.3% from 8-9% seen from 2004-09.
  2. Fiscal deficit of 9% (Amount of money spent than earned is huge and is in billions). Simply, Sonia Gandhi doesn't realize and she still wants to give away hard earned money to the poor people in an unorganized manner. She has no interest in creating opportunity for the poor, but only keep feeding them. She just doesn't want any economic reforms. She only wants that the poor continue to get food and money and keep voting Congress back. The country simply doesn't have that much money to spend.
  3. Current Account deficit is 4.9% (amount of imports more than exports). We don't have a tendency to increase the number of goods that can go as exports, but keep increasing number of imported goods. Only when the government can create a market allowing exports to grow like tax reforms, policies that would drive small businesses to thrive - will this reduce.
  4. Despite global economic crisis, India rose between 2007-09 simply because of domestic demand and huge savings of its population. However, now domestic consumption has slipped due to high inflation, high interest rates on borrowing anything - car, home, land etc.
  5. Extremely shameful industrial growth of 1.9% - lowest seen in decades. Cost of land is so high, cost of rent is so high, no uniform and fast mechanism of acquiring land, unwanted environmental clearance bureaucracy has made new industries to struggle.
  6. Growth in ports, trade, hotels, transport, communications fell to its lowest since 2005 (drop from 7.7% to 5.5%)
  7. Infrastructure growth dipped to 4.2% from 6.5% last year.
  8. Agricultural growth dipped to 1.7% from 2%.
India's economic growth rate slows
Image courtesy: Planning Commission, India
The numbers courtesy: Business Today


The BASIC CONCLUSION IS ALL THESE ARE SELF-INFLICTED PROBLEMS than Euro zone problems. 

If India doesn't take steps to bring in capital how will the economy and its own domestic industry survive? India needs huge capital brought into the market so that it can invest further. This money was hugely available between 2000-2008 because country was growing at a rapid pace, its infrastructure (roads, power, water supply projects) was booming. The confidence inspired money to be brought from outside. Now, it is not so. Everyone is worried to invest in India. The RUPEE has fallen because of this. 

For this India needs to 
  1. Open up retail investment - this as explained in my previous article
  2. Implement the GST (Goods and services tax) as soon as possible - so that there is a uniform tax market in the country making easy for an investor to invest anywhere.
  3. Cut down interest rates so that rate of borrowing is low amidst high inflation.
  4. Reduce subsidy billion which runs in 2.5 lakh crore - kerosene and diesel. Free up diesel prices.
  5. Implement Land Acquisition Bill which eases the provisions under which land can be acquired and adequate compensation be given to the land owner.
Here is a graph that best explains India and China in terms of doing business:(source)
For all of this we need a sound government. The best economic brains in the Government have proved to be of no value and the PM appears totally out of control. 

All is not bad in our economy, but if we don't act we slip further and simply we don't have time for this.

Can the government show any action? I really doubt. Either this government has to go or Manmohan Singh has to show animal spirit (which he himself admitted that the country must grow with)


1 comment:

Adney Abram said...

Nice sharing. I really like your post. Thanks and keep updating.

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