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.

RBI MONETARY POLICY EASING DEMANDS: ARE THEY JUSTIFIED?

Analysts at leading Indian and foreign brokerages and Stock market traders expect the Indian monetary authority, RBI (Reserve Bank of India) to slash the repo or short-term lending rate and CRR (cash reserve ratio) in its policy review on March 19, 2013. Similar sentiments are echoed by Indian Finance Minister Mr. P.Chidambaram, at a time when Annual CPI (Consumer Price Index) inflation is hovering around 11% month on month. Surprisingly, proponents of rate cuts point out that the inflationary pressure are due to supply side constraints. Contrarily, RBI governor admitted that the inflationary pressures are due to both supply side and demand constraints. Demand constraints are a result of excess liquidity and it generally increases commodity (crude & gold which is the case) imports, which further widens Current Account Deficit. 

Although, rate cuts were affected in Repo rate and CRR during 2012 and in January 2013, reluctantly at times by RBI governor Duvvuri Subba Rao, the outcome is far from the desired and anticipated path of fuelling India’s GDP growth, job creation and reducing trade deficit gap. Loose monetary policy was intended to reduce Industry and consumer borrowing costs, Capex of Industries, accelerate consumption and enhanced investments in infrastructure & revenue generating avenues, thus propelling GDP growth and new jobs creation. Instead, the excessive liquidity in the market, most of the FDI (Foreign Direct Investment) inflows and increased government borrowing was channelled in to non productive (increased gold imports and sky high stock markets which are otherwise in a fundamentally regressive phase with weak earnings) and non growth sectors (Subsidies, irrational social spending) thus spiralling inflation and increased fiscal deficit.  
Effectively, the earlier rate cuts has diminished the value of Indian middle class people’s savings in Fixed deposits, government securities and bonds as the yields are less than 9% pre-tax vis-a-vis CPI inflation of over 10%.

Let us take an example of a middle income person with a tax bracket of 33%:

Amount saved (say): Rs 100,000 in a Fixed deposit with 9% interest.

Returns after one year post tax on interest: 100,000+ 9000*(1-0.33) = Rs. 106,000 (Approximately)

Nett value of capital post inflation (Inflation @11%): 106,000*(1-0.11) = Rs.94,340

Hence the capital is getting depreciated by 5.66% due to high inflation, low yields on government backed securities and high tax rates on such returns.

Hence, the Indian middle class has become highly disillusioned with saving instruments which are subjected to higher taxes and found a refuge in GOLD and real estate which are a natural hedge against inflation.

The diversion of domestic investments in to non-productive and unaccountable areas is apparent from the increased Gold imports and sky rocketing property prices. Less public deposits have led to increased cost of funds for banks and hence, their inability to pass on the rate cut benefits to Industries and consumers. Also the increased Gold imports led to India’s increased trade deficit, thus further widening country’s Current Account deficit as well as Fiscal deficit. This led to devaluation of Indian currency, which is further escalating Indian macro economic weakness.

Let me admit that I have highest regard for hard working, highly focussed and growth centric Finance Minister Mr.Chidambaram. He rightfully acknowledged that "Indian promoters are RICH, but their promoted companies are POOR". This summarises where all the fiscal & monetary loosening is leading to. However, he appears to be deviating from addressing core issues of supply side constraints that are fuelling inflation, increasing effectiveness of savings in government securities, bonds and fixed deposits thus reducing demand for Gold, effective channelizing and implementation of government spending and programmes respectively. Instead he appears to be championing for further monetary policy easing, which may satisfy FII’s, brokerage houses and rating agencies but neither the Indian middle class citizen nor the macro health of the economy.

Considering the dichotomy of growth and CPI inflation, it is the CPI inflation which needs to be addressed immediately, as its reach and implications are vast and varied in the short term, especially during an election year when lots of unaccounted BLACK MONEY penetrates in to the Indian economic system, which can have detrimental effects on Inflation. Hence, considering the high current account deficit which stood at 4.65 in the first half of this fiscal, which will likely remain elevated in the near term along the CPI inflation, it is prudent for the central bank to overpower all the external pressures to not to affect rate cuts.

ADDENDUM: RBI Governor Duvvuri Subba Rao expressed his desire of seeing inflation between 4 to 6% and sees monetary stance as the front end tool to control inflation, which is a positive apolitical view. He also feels that the GDP growth can be accelerated through a string of logical economic & social reforms by federal government instead of relying on Monetary policy measures.  

NOURIEL ROUBINI: 'PERFECT STORM' COMING FOR GLOBAL ECONOMY IN 2013

Nouriel Roubini is an eminent economist, who predicted the 2007-2008 Recession that shook the world.



Definitely, the world is not in an economic comfort zone. Discretion in speculative investments and spending is paramount for individual investors, in 2013 & 2014.
Control of TWIN DEFICITS; Current Account & Fiscal deficits will be necessary for all developed and emerging economies, for the long term health of their economies, which translates to higher taxes and less spending by sovereign governments. The world economies are highly coupled than ever before and effects of isolated economic tectonics, will be felt by other economics.
This scenario can, in a way, dent the GDP growth prospects and elevate the unemployment levels for many world economies including India.

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

ANTI-INDUSTRY TIRADES IN INDIA

Indian growth story  of late is seriously faltered by unrestrained population explosion, lack of education and skill levels to majority of its citizens, limited natural resources and short sighted vote bank as well as highly divisive politics by the politicos. Unfortunately, genuine efforts have been far and few to rein in these impediments of Indian growth story both at the macro level as well as micro level.

Indian financial health could be maintained satisfactorily in the last decade due to the twin factors of growth of its GDP at the rate of 7 to 9% and high savings rate of its Citizens, despite constricted tax net and heavy non-revenue expenditure that includes heavy subsidies and fuel imports. Largely visible and populist Subsidy route was pursued by government, instead of more reliable techno-community farming, to prop up agricultural sector though it has been contributing a measly 1 to 2% of GDP growth.

Unfortunately, some of the ideologues and the citizens ridiculously failed to realize the importance of Industrial growth and the associated socio-economic benefits, both tangible and intangible, to be accrued to them in their regions. Despite being direct beneficiaries’ of governments subsidies as well as welfare schemes and the same time being tax-exclusives, some sleazy people and their leaders have been vehemently protesting against setting up of Major industries in their regions, for some irrational and self-centered reasons best known to them.

States like Andhra Pradesh, Orissa, West Bengal and Tamil Nadu are highly debt ridden and Electrical power hungry states where growth is paramount for uplifting their poor. However, violent protests in Nandigram and Singur of West Bengal had resulted in shelving of Major investments in that region thus robbing themselves of some great long term opportunities like employment, infrastructure development, improvement in living standards apart from a host of indirect benefits. Similar protests are continuing in Kakrapalli and Nellore in Andhra Pradesh, Koodankulam in Tamil Nadu against Green field thermal and nuclear power projects. Similar protests have become the order of day in some regions of Orissa and Andhra Pradesh against Mining and setting up of new Industrial establishments.

Unjustifiable nature of the protests against power projects can be gauged by reviewing at the electric power demand for the year 2010-2011. According to the 17th electric power survey of India report, India's industrial demand accounted for 35% of electrical power requirement, domestic household use accounted for 28%, agriculture 21%, commercial 9%, public lighting and other miscellaneous applications accounted for the rest. Agricultural demand is a whopping 21%, and the electrical power is supplied free of cost to farmers in states like Andhra Pradesh, already grappling with crippling blackouts lasting several hours; where populist schemes are unabatedly and blatantly pampered by ruling class at the expense of the common man. The protestors and their instigators should realize that the electricity blackouts and power shedding is not only interrupting manufacturing sector but irrigation too across the country.
Indian citizen will be embarrassed to know that India imports marginal amounts of electricity from our smaller neighbors; Bhutan, Nepal and Bangladesh despite having the obligatory resources and skills.

It is the state and central government’s obligation to immediately resolve the land acquisition issues, accelerate the governments mandatory approvals and environmental clearances, speed up the infrastructure development and enable training of skilled manpower (to prevent talent shortages for operating latest technology plants and mitigate unemployment) to facilitate a reasonable business climate in the country. Since, land acquisition results in loss of useful agricultural lands and wetlands, governments shall endeavor to reclaim the lost agricultural lands by converting barren lands to new water bodies, leading to more green pastures and cultivable lands around them. It may be noted that governments schemes such as drought areas programme and Integrated Watershed Development Programme have resulted in barren lands converting to more green pastures and cultivable lands, in the past.

Most importantly, state and central government shall regulate and monitor the Environmental balance of the regions due to new industries to ensure that no resistance or opposition is likely to arise from any category of stake-holders including the local population.

TIME TO BE CAUTIOUS WITH PERSONAL FINANCIAL INVESTMENTS

The overseas investors turned bearish in April 2012 and pulled out Rs 777 crore, according to the data available with the market regulator SEBI, attributed to a host of factors, including the government's anti-tax avoidance rule (GAAR) proposal announced in the Union Budget and S&P lowering India's credit outlook to negative from stable.

The negative outlook is a consequence of India’s penchant for populism laced vote bank politics as well as extraneous factors which are out of its control. India’s government finances have failed to improve despite high economic growth in the past decade due to unrestrained non-revenue expenditures, small tax net, increased subsidies, unfavorable inflationary pressures due to supply side constraints, Credit & European economic crisis to name a few. These factors have led to deterioration of India’s macroeconomic factors viz., widening of fiscal deficit, moderation of economic growth, slackening in investments, dwindling foreign exchange reserves, and sustained devaluation of Indian currency. These coupled with the governments’ inaction or economic policy paralysis due to coalition politics, RBI’s fiscal policy of high interest rates to tame inflation, Infrastructure issues, persisting inflationary pressures due to supply side constraints and governments’ inability to tackle the commodities supply side constraints have been dampening investment climate and foreign fund inflows.

Undeniably, the Indian economic scenario does not give a feel good factor either for an investor or for an Indian citizen, unless, India returns to a robust growth, healthy government finances and low inflationary environment. It is imperative for Indian policy makers to persistently pursue policy efforts to shrink long term governments’ expenditure; reduce subsidies and expand the tax net to make it more inclusive; address the Infrastructure and commodity supply side issues; and give impetus to the GDP growth.

Deutsche Bank along other global business houses recommend getting more defensive on Indian stocks until investors see more certainty on economic indicators and policy, a more stable rupee and improvements in corporate confidence. Given the uncertain economic scenario ahead for the country as well as the other regions, pecuniary awareness and prudence are keys to personal financial investments.