ECONOMIC CHALLENGES FOR THE NEW INDIAN FEDERAL GOVERNMENT

Economic de-growth coupled with increasing unemployment, widening social and economic inequalities, high inflation, increasing corruption, low wages, etc., are generally the key factors that contribute to growing Social unrest in a society. Unfortunately, the country is gradually and steadily drawn to the brink of social and political unrest with some non economic issues as well with regional bandits and extortionists in the guise of politicians emptying public finances and resources through quid pro deals with shady business houses, demanding large protection moneys from business houses thereby poisoning business climate in the country, instigating social unrest for regional autonomy, injecting racial and seudo-secularistic venom among people, brazenly and overtly supporting (onion, pulses & sugar) hoarders, using autonomous government agencies to settle personal scores and so on.  The new Indian Federal government to be sworn in May or June 2014 inherits bountiful economic, political and social challenges from the inept & corrupt outgoing UPA2 government. Hence, contrary to the demands of investment and business communities for big bang reforms instantaneously after assuming office, the new federal government may not be in a great situation to prioritise the economic challenges ahead of existing political and social challenges.

The key economic challenges for the new government are reviving the economic growth cycle, Fiscal consolidation by boosting tax revenues coupled with sustained reduction of subsidies and non-revenue expenditure, sustaining the improvement in the current account deficit, complementing anti-inflation efforts, improve governance; infusing dynamism among bureaucrats, instil confidence in the government machinery, improving co-ordination among different ministries and government bodies, removing bottlenecks for foreign and domestic investments and credible measures to counter the much- feared impact of El Nino.

However, the new federal government may be in a piquant situation very often subsequent to assuming office, with state governments demanding higher share of revenues to subsidise their populist pre-poll promises as well they may oppose some key economic policy decisions (importantly, the Implementation of GST across the country) which may not auger very well for the revival of the economy. Moreover, if the government choose to expedite capital spending to orchestrate a cyclical turn in the Investment cycle and boost long-term growth, the short-term casualty will be the debt/Gross Domestic Product (GDP) ratio, which is a catch 22 situation for the Federal government.

It is widely speculated that most of the economic data furnished by the government agencies in the recent years is neither credible nor reliable due to possible sovereign rating (by rating agencies) down grading fears. Hence, in the highly optimistic scenario, India can achieve only a REAL growth rate of 4.6% in FY2014-15 and 5.4% in FY 2015-16, considering all the social, political, Economic and natures (El Nino) challenges.

EL NINO AND ITS IMPACT ON INDIAN ECONOMY

El Nino is a weather phenomenon arising from warming of sea-surface temperatures in the Pacific Ocean around the equator resulting in changes to wind patterns that can trigger floods and drought thereby curbing food supply. A majority of weather forecasting models indicate that chances of a strong El Nino developing around the middle of 2014 exceed 70 per cent.

A spike in Pacific Ocean sea temperatures in 2014 as compared to those seen in previous El Nino years and the rapid movement of warm water eastwards have increased concerns that an El Nino weather pattern this year could be one of the strongest in several decades, according to an Australian climate scientist Dr Wenju Cai. 

However, the UN World Meteorological Organization had indicated during mid April 2014, that it was too early to assess its likely strength. Meteorologists say the prospect of an El Nino will likely be firmed up in the next month or two, although forecasting the strength of such a weather event is hard to do.  Australia's weather bureau and Japan's meteorological agency are expected to issue their next El Nino outlook reports by mid May 2014. 

Incidentally, the worst El Nino on record in 1997-98 was blamed for massive flooding along China's Yangtze river that killed more than 1,500 people. A strong El Nino this year will increase fears that production of many key agricultural commodities in Asia and Australia will suffer. 

A good agricultural performance is a must for India to raise demand for services and industrial products. Also, about 30 per cent of the manufacturing sector is agriculture-based and a bumper crop ensures the supply of raw material for industry at relatively lower prices. About 60 per cent of net sown area of the country is rain-dependent. Hence, India is very much ill prepared to face a strong El Nino, especially when its gross domestic product (GDP) growth has hit the nadir of 5% in 2013 and every 1 percent deficiency in rainfall will result in reduction of India's GDP by 0.35 per cent.

However, Stanford scientists too have warned of a likelihood of a weak monsoon in India with significant changes in the patterns of extreme wet and dry spells during the monsoon which may increase the risk of drought and floods in central India, which is the core of the monsoon region and has extremely high population densities that depend on rain fed agriculture. According to Indian Meteorological Department, Wet and dry spells are defined as three or more consecutive days of extremely high or low rainfall, respectively and rainfall during the months of July and August, are considered as the peak of the South Asian summer monsoon. The South Asian summer monsoon is an annual wind-driven weather pattern that is responsible for 85 per cent of India's annual precipitation and is vital for the country's agricultural sector. Researchers, including two Indian origin-scientists, show that the intensity of extremely wet spells (short periods of very heavy rainfall can create humanitarian disasters) and the numbers of extremely dry spells during the South Asian Monsoon season (during critical crop growth stages, too many days without rain can reduce yields or lead to crop failure) have been increasing. Private weather forecaster Skymet expects 'below-normal' monsoon this year with a probability of 40 per cent. 

India is expected to see 'below-normal' monsoon this year with Met department (IMD) forecasting 95 per cent rainfall because of the El-Nino effect. According to an Assocham report, about five per cent deficit of rains due to possible El Nino factor could have a bearing on economic growth by 1.75 per cent in the 2014-15 fiscal (loss to the GDP of about 1.75 per cent is almost Rs 1,80,000 crores) affecting lakhs of unskilled jobs. Additionally, deficiency in rains and drought conditions could also increase food inflation, higher imports, widening of Current Account deficit, depreciation of Indian currency vis-a-vis other currencies thereby spooking up energy prices.

STEPS TO LIMIT EL NINO EFFECT:

  Assocham submitted a report to the Government highlighting the strategy to be implemented immediately to minimise the El Nino effect on Indian economy. The strategy is as follows:

1. The government must expand the farm insurance cover and advise financial institutions to settle crop insurance claims in drought-hit areas without delay.
2. High quality seeds of alternate crops should be distributed among farmers in the drought-affected areas.
3. The minimum support price (MSP) of alternative crops to be cultivated in drought-hit areas should be kept attractive.
4. The government should realistically assess the situation in order to estimate the shortfall of oilseeds and pulses and help the traders with market intelligence.
5. The government shall bring down the cereal inflation by liquidating the extra stock that the government is keeping over and above the buffer requirements.
6. Scrapping of the APMC Act
7. Free flow of agricultural goods across states to bridge demand- supply gap
8. Prevent hoarding
9. Create relief employment programmes
10. Prepare alternative cropping plan and fuel subsidy to farmers to protect standing crops.

PERILS OF UNITED STATES QUANTITATIVE EASING PROGRAMMES ON WORLD ECONOMIES

Since the fall of 2008, many of the sovereign economies across the world faced their worst economic crisis in 70 years due to the RECESSION triggered by collapse of massive financial institutions in US.

Federal Reserve (The US central bank) Chairman Ben Bernanke had to take some extraordinary steps to calm financial markets.  Easy fix, he adopted, was to print money and slash short-term interest rates to zero (termed Quantitative Easing or QE), as way out of trouble, which was then praised by the Economists as an aggressive response.

Ben Bernanke made his first step on the Quantitative Easing (QE) ladder in an effort to accelerate the economic activity (increase lending, create more jobs, lower the unemployment rate) and higher home prices. Hence, QE1 was initiated in November 2008 and ran until March 2010. During that time, the Federal Reserve snapped up $2.1 trillion worth of mortgage-backed securities and Treasury bills to push down interest rates, spur the economy, re-finance the cash strapped banks and calm financial markets.

However, contrary to expectations, mortgage rates tumbled and the economy never showed signs of expected recovery.

Hence, Bernanke enacted QE2 and the Federal Reserve printed an additional $600 billion between November 2010 and June 2011. Despite pumping in additional money, the US economy did not respond to these extraordinary steps.

Further, in September 2012, QE3 was announced, and this time, it’s open-ended, which was sarcastically named QE Eternity. Federal Reserve continues to hold interest rates near zero and print an additional $85.0 billion each month to prop up the U.S. economy, which includes $40.0 billion a month to purchase mortgage-backed securities and the rest for swapping short-term securities for longer-term securities.

The US dollar remained the dominant global currency despite its economic travails, thereby resulting in American exports getting costlier and thus further widening US fiscal deficit. The generosity of Federal Reserve’s easy monitory policy for American banks and financial institutions resulted in rally in stock, bond and commodity markets worldwide, stoking higher inflation at the expense of economic growth. At the same time, the easy money from US found its way in to other developed and emerging economies, as short term capital funds which can quickly turn around, thus creating higher interdependencies of the subject central banks with Federal Reserve’s monitory policies. Consequently, the probability of the end of quantitative easing by the Federal Reserve has recently resulted in huge outflows of dollars from stock and bond markets of “Twin deficit” economies (viz, India, Indonesia, Brazil, South Africa etc), thus weakening their currencies and destabilizing the structural stability of subject economies. However, “Surplus” economies like China are greatly unaffected by easy monitory policy stance of Federal Reserve. However, China being the energy and commodity starving country which imports majority of commodities will stand to gain if the commodity prices are normalized due to tightening of easy monitory policy by Federal Reserve (by raising interest rates and tapering Quantitative Easing program).

Hence, during the era of globalization, it became clear that the easy monitory policy of Federal Reserve was ineffective as it could not percolate and remedy the REAL economic health, but in effect, it has only created more structural and cyclical economic bubbles in its economy as well as other inter dependent economies.

 

IS ECONOMIC BUBBLE BURST IMPENDING?

Surprisingly, the financial markets, the central banks and Governments of many emerging and developing economies rejoiced on the outcome of Federal Reserve meeting held on September 17^th and 18^th for not tapering their Quantitative Easing Program, as widely anticipated.

Manish Chokani, CEO of Axis Capital, rightly says “what we are all celebrating is that someone is printing money at a trillion dollars a year in order to achieve a gross domestic product (GDP) growth of USD 300 billion a year. Because that GDP isn’t lifting off they continue to print 3 times the amount of money just to get that one unit of turnover. While financial markets and commodity celebrate that the trillion does not go into the real world and it spills over into commodities or into financial assets. We can’t be celebrating that until the world actually recovers. Therefore, how this whole thing ends is going to be quite ugly.”

Reserve Bank of India (RBI), the India’s Central bank, Governor Raghuram Rajan, summing up the perils of QE programmes, says “There is a danger of bubbles forming around the globe, due to easy monetary policy implemented to steer the world back into a more robust growth path. We seem to be in a situation where we are doomed to inflate bubbles elsewhere. We should wonder whether lower and lower interest rates are in fact part of the problem, I say I don't know. We need to think of the dangers of over stimulation. We need to think of the sustainability of growth created by stimulus measures."

IS FISCAL POLICY, THE RIGHT MANTRA?

According to Raghuram Rajan, right fiscal policy might work better than interest rates to get growth back to a sustainable path.

However, the mute point in question is finding and implementing the right fiscal policies in place could be very difficult, if not impossible, especially in countries like India, where populist measures are pursued by Governments for electoral gains, at the expense of long term growth and structural stability of the economy.

FITCH RATINGS: NEGATIVE OUTLOOK FOR MAJOR ECONOMIES IN 2013

There is a high probability of Major economies including US, UK and France to be downgraded in 2013, unless the twin deficits of their respective economies are narrowed.

 

Disclaimer: Shared this video, available in PUBLIC DOMAIN, in public interest.

INDIA'S ECONOMIC JOURNEY SINCE INDEPENDENCE

Indian economy was largely directionless till early 1990’s due to domestic political compulsions and bi-polar global politics. The GDP growth, from the Nehruvian economic model, was hovering around 2% on an average till India faced a Macro-economic crisis during the late 1980’s and early 1990’s.

However, Indian governments in the early 1990's realised the importance of pursuing a growth oriented model and in all earnest pursued following economic policies:
 Increased Private sector funding and participation in all sectors
 Impetus on Infrastructure growth and development
 Rationalisation of direct and indirect taxes, import and export duties, tax holidays etc.
 Liberalisation of foreign direct investment norms in to various sectors, foreign exchange regulation
 Sops for exporters and IT sectors
 Partial convertibility of Rupee etc.

This resulted in
 Country’s GDP growth touching 9%
 Reduced gap between imports and exports through increased exports
 Increased foreign exchange reserves
 Increased spending by the government
 Improved infrastructure in the country thus resulting in improved living standards
 Increased job opportunities
 Increased Per capita income
 Global integration of businesses and people
 Reduced dependency on the World Bank, Asian Development Bank and other agency for loans and financial support (As was the case till 2000)
 Growth of the country as a possible economic super power and it’s ability to avoid arm twisting by the economic super powers

All the governments since early 1990's whether it is a NDA government or a UPA government are pursuing growth oriented economic policies which is augering well for the Country's development. However, there is still more room for improvement. It is high time we do away with populist and vote bank oriented economic policies like subsidies and loan waivers which will furthur help in India becoming one of the leading world's economic super power. Ofcourse, onus lies on respective state governments too, in areas of Fiscal responsibility, prudent spending, emphasis on state subjects viz., education, prudent utilisations of water resources, strengthening of rural institutions etc.