More Hiccups Ahead On The Road To Economic Recovery

Himanshu Shekhar

Chandigarh’s Gurinder Singh Guraya is a lawyer by profession. In 2010, when his younger brother Rajvinder Singh, gained admission in an engineering course in Australia, the family cut down their expenses so as to meet the cost of his course abroad. Gurinder says that he sends about $1200 to Rajvinder every month. At the time of admission, the value of $1 was Rs 45, so the expenditure amounted to Rs 54,000. But with the recent freefall of the rupee against the dollar, the financial burden on the family has increased considerably.

In the first week of October, the quarterly report of the Confederation of Indian Industry, CII-Excon added to the worries of sections already distraught by a slowdown in the economy. Based on an industrial survey, the report that was released for the second quarter (July-September) of the financial year 2013-14 stated that there was no possibility of the economy recovering from the slowdown any time soon. The recent report of the Asian Development Bank (ADB) is no less disappointing as it cuts the country’s economic growth forecast for 2013-14 to 4.7 percent, way below its earlier projection of 6 percent. Global credit rating agencies have also predicted an economic slowdown.

A few months ago, those running the economy had claimed that no economic crisis would hit India. Some believed that since India was not affected too much by the global recession of 2008-09, it would be safe this time as well. However, with even the common man feeling the pinch now, this might have turned out to be a false claim. In fact, our foreign exchange reserves are depleting and foreign investment is reducing. The growth rate is on a constant decline and recently, the rupee plunged to a record low. The share market is also witnessing a downward trend. Industrial production is minimal and banks are escalating their interest rates. Fuel prices are continuously rising, threatening inflation. Forget about job creation, companies are resorting to retrenchment once again.

All these combined factors have started to affect the common man’s life. Gurvinder says, “The same $1200 that worked out to Rs 54,000 earlier, now works out to about Rs 78,000. This has disturbed the entire household budget. We have had to cut down other expenses and put several important projects on hold.” He adds that the fall of the rupee has hit them in two ways. “On one hand we have to pay more money for my brother’s education while on the other hand, the inflation has made life difficult. Our income has not increased in proportion to the inflation. If we want Rajvinder to complete his course, we will have to take additional loans, as we’re already in debt with our relatives,” he says.

This is hardly the story of just Gurvinder’s family; every family who has at least one member studying abroad is in a similar situation. It is estimated that every year, around 80,000 students go abroad for further studies. A study conducted by ASSOCHAM says that Indians spend $15bn annually on studies abroad, which is a whopping sum when converted to rupees.

After Raghuram Rajan’s ascension as RBI Governor, the rupee did recover a little bit. But experts like Arvind Virmani, former chief economic adviser to the finance minister, believe that the depreciation of the rupee will continue to hurt the economy. He says it would not be surprising if the rupee sank further, in the days ahead.

A weak rupee amounts to expensive imports. With the price of imported items on the rise, electronic items are bound to get costlier and it is likely that no discounts will be offered this Diwali. Canon and Samsung raised prices by 5 percent in the first week of September. The sliding rupee has also taken its toll on the automobile sector, already battered by the slowdown. Since the companies use imported components, the input costs have gone up. With Maruti hiking its prices twice in the last three months, this festive season, there will hardly be any discounts available on automobiles either.

The rupee’s fall has impacted the cost of fuel the most, as the country imports crude oil in large quantities. Fuel being directly connected with the cost of transportation, the price of goods being transported from one part of the country to another, such as food, is bound to rise. Onion and other vegetables are also getting costlier. As 55 percent of the cooking oil used in the country is imported, the household budget suffers a direct adverse impact. Also, costlier import of medicines will lead to costlier medical treatment.

With transport becoming more expensive now, aviation companies and the railways are pitching for a fare hike. Although scaling railway fares would be a tough decision for the government in the wake of the upcoming assembly and Lok Sabha elections, it looks inevitable as otherwise, the railways will face a deficit. An increase in public transportation fares has also been proposed and the Delhi Metro is considering a price hike. With CNG getting costlier as well, auto-drivers are demanding an increase in fares too.

In the coming days, soaps, detergents and shampoos are set to cost more as the oil used in their manufacture is imported. A rise in the cost of pulses will also be witnessed because a large amount is imported. Since the import of paper has also got costlier, books, newspapers and magazines are also going to cost more. As the country imports coal for power generation, the cost of power production is likely to escalate and consumers will have to bear the brunt as electricity will become expensive.

Clearly, with a fall in the rupee, the common man is face-to-face with several problems. According to a study released by the government, consumer goods for which a family paid Rs 5,000 in 2004, costs Rs 12,500 now. A study conducted by the United Nations Population Fund in India found that 71 percent of people between 60-80 years of age are forced to work in order to fulfil their basic economic needs. Economic and political analyst Paranjoy Guha Thakurta says, “The price of food items has gone up. Ordinary life has been the worst hit. While those belonging to the upper class have not been affected much, a price hike in food items directly affects the common man. This is going to widen the gap between higher and lower classes and increase inequality.”

Since the common man has to spend more from his pocket, his purchasing power has also gone down. As a result, new houses and vehicles will not be sold and the purchase of electronic items will be less. A dearth of demand will in turn bring down the industrial output and job creation in these sectors. Commenting upon the downturn in purchasing power, prominent economist Dr Kamal Nayan Kabra says, “An object that cost 19 paise in 1991 costs Rs 1 now. This gives an idea about how much the purchasing power has gone down. In the coming days, it will further decline since plans weaved in 1991 for improving the health of the country’s economy have failed.”

Senior BJP leader and former finance minister Yashwant Sinha has flayed the ruling UPA government for the current economic situation. He says, “It is a crisis of government’s inaction. It is a crisis of confidence.” Economist Arvind Virmani says, “The economic state is alarming. If the policies are not revised, prices will keep on scaling and inflation will rise to 9 percent.”

The fact that the Prime Minister is a renowned economist has not kept the country from turning into an economic mess. Those holding responsible positions have cited global reasons for the crisis as the problems keep mounting and the situation in all economic sectors turns grim. The growth rate estimated by the government in August for the first quarter of the current financial year is 4.4 percent. In January-March, it was 4.8 percent. Speculations are that in July-September it will slip to 4 percent. For the entire financial year, the average GDP may even go lower than 4 percent.

Although experts believe that GDP is a poor index of growth, it is widely used to gauge economic performance around the world. A rise or fall in GDP is directly linked to economic activity. A low GDP indicates economic slowdown, indicating low investment, which in turn suggests low productivity. Low productivity stems from less demand in the market. It means no new jobs are being created and those who are already employed may even lose their jobs. In ordinary terms, a low GDP means a reduced money transaction among people.

India’s fiscal deficit during the April-July period in the current financial year was Rs 3.41 lakh crore which works out to 62.8 per cent of the budget estimate for the entire fiscal. The government had planned to bring down the fiscal deficit to 4.8 percent of the GDP. But it seems impossible as the government has exceeded 63 per cent of the budgeted fiscal deficit target set for 2013-14 in a span of just four months. India’s current account deficit (CAD) rose to 6 percent of the GDP, which the finance minister has assured to bring down to 3.7 percent by the end of this financial year. CAD occurs when a country’s total import of capital is greater than the country’s total export of capital.

An increase in fiscal deficit will force the government to become stingy on welfare and development plans. Its effects will be seen not only on development, but also on the job market. The government may even cut down subsidies provided to the public in order to reduce its fiscal deficit. Also, in order to help the GDP recover, the government may put on hold new industrial projects and appointments.

Blaming the current government for India’s economic problems, renowned economist Arvind Subramanian writes in an article, “The current government, which took office in 2004, has made two fundamental errors. First, it assumed that growth was on autopilot (as GDP was impressive under the previous government) and failed to address serious structural problems. Second, flush with revenues, it began major redistribution programs, neglecting their consequences: higher fiscal and trade deficits.”
An increase in the current account deficit will lead the international community to be wary of our economy as they might find India incapable of paying for goods and services. As such, the global rating agencies may reduce India’s ratings forcing not only investment to go down, but foreign investors to pull out. The investor exodus will widen current account deficits. The government will be forced to step in with strong policies to tackle the situation at the home front and the common man will again be the worst affected. Thakurta says, “The PM is constantly assuring that everything will be alright. But the truth is that India is caught in a quagmire of economic troubles where one problem is leading to another and so on. There seems to be no end to this.”

Let us look at the country’s industrial production and the problems it is facing. In the first quarter of the current financial year, a decrease of 1.1 percent was recorded in industrial production, hinting at the deplorable state of the manufacturing sector. An emphasis on the service sector may have earned India accolades from across the world, but it left the industrial sector largely ignored. Experts believe that if India had learnt how to produce low-cost goods, it could take on China. Today, Indian companies like Micromax and Lava are getting their phones manufactured from China and selling them in the Indian market.

In Subramanian’s words, “Structural problems were inherent in India’s unusual model of economic development, which relied on a limited pool of skilled labor rather than an abundant supply of cheap, unskilled, semi-literate labor. This meant that India specialised in call centres, writing software for European companies and providing back-office services for American health insurers and law firms and the like, rather than in a manufacturing model. Other economies that have developed successfully — Taiwan, Singapore, South Korea and China — relied in their early years on manufacturing, which provided more jobs for the poor. During China’s three-decade boom (1978-2010), manufacturing accounted for about 34 percent of its economy. In India, this number peaked at 17 percent in 1995 and is now around 14 percent.”

The spectre of an economic crisis looms over several other sectors. A low ebb has hit the investment tide as investors cannot be lured to invest in a risky economy. Not only are foreign investors fleeing the market, local investors are also investing elsewhere. Indian corporate bigwigs invested $21 billion abroad between April-July this year. This is 38 percent more than the investment for the same period made in the previous year, which goes on to show the lack of trust of Indian businessmen in the country’s economy. Kiran Majumdar Shaw’s company, Biocon is going to invest $2 billion in Malaysia. Appollo Tyres has turned to the US and China. Sipla is investing in Algeria and Morocco while the Aditya-Birla Group is planning to invest $1 billion in the USA.

Local investors are wary of investing in the stock market as well. Money flow from the share market into the commodity market has resulted in an increase in betting. This is going to further cause inflation. The common man cannot invest in gold anymore since the government, in an attempt to reduce CAD, increased the duty on gold import several times. Experts believe that a better option for the government would be to introduce gold price linked bonds. It would have encouraged people to invest in gold and helped investors gain from the global rise in gold prices.

However, the low ebb of the investment tide is not limited to India. Even the US seems to be suffering from it. When an economic crisis hit the US in 2008-09, the Federal Bank pumped about $85 billion a month in the economy as part of a stimulus package. They are now planning to scale this down. This change of policy will affect the influx of capital into India. It will give rise to a two-fold scenario where on one hand investment in India goes down and investors pull out of India, as they are lured back to the US economy where growth is recovering. In the recent G20 summit, the geopolitical clout of India, Brazil and Indonesia among others, argued against this monetary policy shift but it is unlikely that the US will comply.

Commenting upon the negative attitude building around investment in the country, Thakurta says, “The government had given a green signal to FDI in retail in December last year but brands like Walmart and Tesco have not yet announced their investment policies.” He adds, “In July, the government announced its decision to expand foreign investment to other areas but no foreign companies have so far shown an interest in investing here.”

After Raghuram Rajan was ushered in as the new RBI governor, the share market may have improved, but it is still edgy. The share market is the daily measure of the health of a country’s economy. If foreign investors pull out of India due to the US economy’s improving condition, the Sensex will dip which will in turn force Indian investors to invest abroad, plunging the Sensex down further. In such a scenario, even if private companies do not pull out, they would be wary of making new investments and the government would be forced to consider offering concessions to the corporate sector. Consequences of this will be seen on the fiscal deficit, which will again take a toll on the common man.

When the bearish streak of the market began in 2008, many people were left bankrupt, especially local investors. There were reports of several investors committing suicide across the country. If the fears expressed about the economy are proved right, then the situation is bound to worsen. Economic expert Ramesh Duggad says, “Since the Sensex directly affects the economic mechanism, the common man is indirectly affected by it too. Frankly, the Sensex is a little like betting, in which rich men never lose. In the coming days, major investors will control volatility of the market, so small scale investors must try to stay away from it.”

Due to the fall in rupee and foreign investors pulling out from the country, India’s foreign exchange reserves dipped to a 39-month low of $275 bn and may depreciate even lower in future. Yashwant Sinha noted that the total external debt for the Government of India at the end of the year 2012-13 was $390 billion. The short term debt was $172.3 billion. He pointed out that the government says they would renegotiate the debt. However, experts say that if we do not get a minimum balance of $25 billion in our current account, we will have a crisis of balance of payment.

How is the depreciation in foreign exchange reserves going to affect ordinary life? A crisis of payment means that the government gets busy in paying off the debt to save its image on a global stage. This affects schemes run for the public as the government cuts down subsidies. With the rupee weakening, imports getting expensive and foreign investment stalling, foreign exchange reserves have also dipped. The situation is even more worrying, as 60 percent of the foreign exchange reserves available now will be spent in the payment of short-term debt by March. As the rupee tumbles, paying off the debt will be a challenge for the government. Both development plans and investment will be hit by this. The government will either be unable to disinvest or incur losses in the process. There is an imbalance in the dollar-rupee ratio of inflowing capital as against the outflow. It means export has reduced, which has affected manufacturing. This in turn affects the job market.

The economic system is an intrinsically woven structure where different factors are mutually connected. If any one aspect is affected the entire system is disturbed. In an economic slowdown, the private sector cuts its expansion plans. It means the prospect of job creation is curbed. When this doesn’t help, the sector resorts to a retrenchment policy. The process has started in India as well and is only expected to speed up. A few days ago, FICCI president Naina Lal Kidwai said, “Companies have started retrenching contract employees and soon this policy will be extended to regular employees.” IBM has also retrenched employees. Now, Maruti has sent 650 contract employees on an indefinite leave and Mahindra has fired 500 of them. Siemens, a leading company in electronics, has also fired 200 employees and is planning to retrench 400 more.

The companies are under a double pressure. A price hike in products and services is inevitable but the competition in the market renders this as a drawback as it may turn away customers decreasing demand in the market. So instead of shifting the entire burden to the consumers, companies try to reduce their own production cost. This includes resorting to retrenchment among other things. The festive season is not likely to be very buoyant this Diwali. In a study of 2500 big and small enterprises, ASSOCHAM found that companies are planning to cut down bonus by 40 percent. Apart from this, it is speculated that employees of the private sector will be denied a pay raise in April next year.

The economic crisis has also affected the farmers. Fifty-seven percent of the population in India relies on agriculture for livelihood. The share of agriculture in the country’s GDP may only be 14 percent, but the poor health of the economy is affecting the sector directly in many ways. This has an impact on production too. The government had set the growth rate for the agricultural sector at 4 percent, but due to recession, the investment needed for this growth has reduced. It is feared that the growth rate of farming will remain between 2-3 percent. With inflation and a reduction in the subsidy on fertilisers, the cost of farming has shot up. But farmers are not profiting from their produce. Ironically, as prices of agricultural products soar, consumers pay more, but the money does not trickle down to the farmers with middle-men on the scene.

There is trouble brewing for the country as the economic situation worsens. Speculations are that the banks may skimp on loans owing to the crisis. It means it would be difficult for them to meet the government’s target to grant loans of Rs 70 trillion to farmers. Agricultural expert Devendra Sharma claims that loans meant for farmers do not even reach them. “Documents leaked from the finance ministry reveal that only 6 percent of the loans meant for farmers reach them. The rest of the money goes to people running businesses in the name of agriculture. If the government wants to improve the condition of the economy, RBI governor Raghuram Rajan will have to ensure that the farmers receive their share of money,” he says. Or else, they might once again turn to moneylenders and other expensive alternatives which will increase the cost of production and may lead to a rise in the incidents of farmer suicides. Sharma says, “The current year witnessed a good monsoon. So the crop will also be good. Companies dealing in consumer goods are turning to villages now. Suzuki, Honda, Mahindra & Mahindra, Videocon, LG and leading telecom companies like Vodafone, Bharti and Idea are focussing on rural India. The reason is that the rural market has seen a rise of 10-14 percent”. It is a ray of hope for him.

He adds, “Agriculture and farmers have the power to pull the Indian economy from this economic crisis. The government must pay special attention to this sector. This is also the reason why companies are heading to villages. But these companies will introduce the EMI culture in villages just like cities, further aggravating the situation of farmers already caught in a vicious cycle of debt. If the government wants to improve the economy, the farmers must be facilitated. It isn’t fair that corporate families receive a loan for no interest while the common man has to pay an interest of 24 percent annually. Recently, the government gave a loan of Rs 1250 crore on 0 percent interest to Lakshmi Mittal for setting up a refinery in Punjab. On the other hand, in order to purchase a goat, the MFI gives a common woman a loan on the interest rate of 24 percent. If the woman is given a loan on 0 percent interest, she might be able to purchase a car and her demand for other products might also increase. If the government adopts this policy, the economy can recover.”

Dr Kamal Nayan Kabra says, “The problem is that the dreamers of 1991 are policy makers of today. In order to prove themselves right, they are worsening the economic situation further, instead of admitting and correcting their mistakes. This stubbornness will eventually take its toll on the common man.”

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