"Invariably during elections, GDP growth, inflation and the rupee's value against the dollar become relevant. If the economy is doing well, the ruling party has a good chance of coming back to power. It is basically the state of the economy and the personal economic wellbeing of citizens that include having jobs, doing good business and giving their children a better future, that matter the most.
GDP projections for India vary. The latest by the Paris-based OECD is rather dismal at 3.4 per cent for 2013-14. The actual growth this year has not been so bad and was at 4.4 per cent in the second quarter of 2013. Of course if we compare the current growth rate with the previous high of 9 per cent, then the performance is rather poor.
Why is a reliable and prestigious think tank like the OECD projecting such low growth for India? According to its forecast, prolonged inflation and the rupee's sharp depreciation since May 2013 is putting pressure on India's public finances and its ability to maintain the fiscal deficit at the targeted 4.8 per cent is not certain. If the fiscal deficit target is overshot, the government would have to borrow more from the market which would raise inflationary pressures. Also the rupee's fall has led to problems with companies and banks having a high external debt.
In fact, the rupee's fall has not been without its benefits. From July to September exports have grown in double digits. The rupee depreciation has benefited exporters by making their products more competitive. But there is a risk ahead as the rupee is still not stable and there are frequent variations in its value against the dollar. In the longer term, if the rupee does not recover, the production costs of companies that use imported inputs would rise further. The Indian industry also uses power which comes from imported oil which, after the rupee's depreciation, is costing more and energy costs are going up.
That the economy has not recovered fully and certain industrial sectors are witnessing weak growth is now an acknowledged fact. Both the industrial sector and services are facing a slow growth in demand. The service sector especially IT, which was the main driver of GDP growth, has suddenly slowed down due to a fall in demand for IT services. It is supposed to grow at 6.1 per cent.
The NCAER, a leading think tank, also has projected GDP growth between 4.8 and 5.3 per cent for 2013-14. It says: "Though early to predict, indications are with growth likely to be significantly lower than projected in the Budget, it may be difficult to achieve the budgeted tax-GDP ratio of 10.9 per cent even with the budgeted tax buoyancy of 1.4 per cent during 2013-14."
Regarding inflation, the Wholesale Price Index has been pegged at 6.8 per cent. It seems a realistic estimate because the WPI hovers around 7 per cent. But the real problem is food inflation which refuses to come down. In order to rein in the high rate of food inflation and the Consumer Price Index, the RBI was forced to raise the repo rate recently. This will lead to a further delay in encouraging investment that industry badly needs. Reviving industrial growth is the main priority for the government in the months ahead. It will still be low around 2.9 per cent according to the NCAER. The recent closure of various industrial units (like in the forging industry) is bad news and people are being retrenched.
Agricultural growth, however, has been projected to grow at a higher rate of 3.9 per cent due to a better monsoon this year. Finance Minister P. Chidambaram expects GDP growth to be at 5.5 per cent. But right now there are quite a few uncertainties which have to be factored in.
One is the unpredictability of the US monetary easing policy under which US Federal Reserve buys $85 billion worth of US Treasury Bonds every month, thus increasing liquidity in the world economy. The new head of the Federal Reserve, Janet Yellen, has yet to take over from Ben Bernanke and whether she would continue with monetary easing for some more time is uncertain. But every time a favourable set of US data comes out like a fall in joblessness or increase in house purchases, the FIIs sell their stocks in the emerging markets and return home. Till the US monetary easing policy is stabilised, the volatility in the stock markets would continue. This will impact the value of the rupee and make decision-making for business expansion difficult.
More sops are also likely which will create a hole in the government's pocket and make the fiscal deficit more difficult to maintain. Already the government's fiscal deficit has touched 76 per cent of the budgeted estimate. In the NCAER's review, during April-September this year, the cumulative fiscal deficit stood at 3.7 per cent of GDP as against the budget estimate of 4.8 per cent of GDP for the entire fiscal year 2013-14.
A recent item of expenditure of the UPA government which can be regarded as a sop was the establishment of an all women's bank in Mumbai and seven other cities. Making access to loans easier in all banks for women would have been a much more appropriate step than making the symbolic gesture of creating an all women's banks. Financial inclusion of the poor, whether it is men or women, should be aimed at and facilitating credit access for rural women would have been much more appropriate as they are vulnerable to denials due to lack of a collateral.
The GDP growth projections do not mean much to the average citizen, though it is a barometer of how fast the country is becoming prosperous. Foreign investments also come to a country on the basis of GDP growth projections. But for the average individual, it is prices that matter the most as these cut into the budget for healthcare and education for children. Thus what will ultimately decide the outcome of the elections will be inflation and the government's inability to control it.
(The writer is a Senior Fellow at Observer Research Foundation, Delhi)
Courtesy: The Tribune, December 6, 2013
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