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.

MARCH 2013 CREDIT POLICY: A DOVISH STANCE BY RBI

RBI has cut REPO rate by 25 bps to 7.5% from 7.75% and left CRR (Cash Reserve Ratio) unchanged at 4% in its March 2013 Monetary policy review (19.03.2013), which clearly indicates a dovish stance to negate the external pressures on India’s Central Bank, especially when it’s front end macro-economic indicators like Current Account Deficit and Inflation are at alarming levels.
Appropriately, the RBI plans to infuse liquidity in to the system through OMO’s (open market operations) and obviate the necessity of a CRR cut, which is a step in the right direction, as liquidity crunch is expected to ease in April 2013.
RBI Governor has indicated that there is limited head room in future for monetary policy easing to spur growth due to hawkish economic environment, expected to last longer than anticipated by Government and some economists. Moreover, RBI must be sensing that the Current Account Deficit may not narrow, as expected, as Government may not be able to take firm steps in reducing subsidy burden as envisioned in the 2013 budget, due to current political compulsions and developments. Diesel price increase which was widely expected during mid March, 2013, was surprisingly with held raising doubts about Federal Governments commitment and firmness in implementation of tough policy measures to reduce the Current Account Deficit.
Many top bankers are comprehending that this rate cut is not going to percolate to end consumers through a reduction in bank loan rates since the quantum of bank deposits are precariously low and cost of funds for banks are getting higher and higher. Perhaps, this policy stance may be a step to boost the sentiments of stock market domestic and foreign investors rather than to actually prop up the growth of Indian economy.

BUBBLE SIGNALS IN GOLD INVESTMENTS

The price of Gold has been rising uniformly in the past decade and has returned an average of about 17% annually during that time. However, hedge funds and HNI’s (high net-worth investors) have been cutting down their investments in gold over the past few months. It is estimated that roughly $4.5 billion had been disinvested by hedge funds and HNI’s due to which gold prices have been very volatile of-late. Let us check out some of the signals, what hedge fund managers & HNI’s have been wary of.

Increased strength of US Dollar

Federal Reserve’s discontinuation of Quantitative Easing (Infusion of excess liquidity in to the economy) and improved US macro-economic indicators indicates a swift recovery of US economy. US economy’s strength coupled with debt crisis in European Union, slowing down of economies in developing countries and recession fears in other developed nations has been strengthening US dollar. Many investors who used gold as an effective hedging instrument against weak dollar when US economy was struggling, have started showing confidence in US Dollar and US economy  by switching over to dollar investments from gold.

Low Inflation and high interest rates

Inflation across developing nations is showing signs of moderation to more acceptable levels due to slowing down of economic growth in majority of developing and developed economies. Debt crisis and stopping of quantitative easing has resulted in high interest rate environments in many countries. Investors and fund managers, who used gold as a hedge against inflation, have started switching to debt instruments and US Dollar.

High level of speculation in Yellow metal and wider interest in street

The speculative investment patterns, large investor base, trading volumes and volatility in gold prices can suggest the formation of gold price bubbles. Unprecedented and wider interest in any instrument is a big sign that the price has peaked and may be set for a major slide. There are lessons from the recent past regarding the fallout of high speculative investments viz., bursting of the technology bubble a decade ago and stock market capitulation in 2007 & early 2008.

Abstract

There are strong signs that the gold has peaked and might even crash in the near future. It is impractical to predict the time frame for the burst of the Gold bubble. Hence, if you are planning a new investment in gold, think twice about buying it now; if you do own gold, then review your investment strategies at the earliest.BUBBLE SIGNALS IN GOLD INVESTMENTS

NEED OF THE HOUR FOR INDIAN ECONOMY - INFLATION ADJUSTED BONDS/ SECURITIES

Indian house-holds fascination for GOLD for its ornamental value is comprehensible as it is a part of Indian culture and tradition. However, of late, Indians have started buying GOLD as a hedge against inflation, thus enormously increasing the physical gold imports causing a huge trade deficit which is resulting in ever increasing India’s fiscal deficit. Gold imports are next only to Crude oil imports and if this import component is not reduced, it will have a wide ranging direct and indirect impact on both macro and micro levels of economy.

Gold demand and imports can be reduced partly, if Government issues Inflation indexed bonds/ securities akin to the instruments in place in the developed economies viz., US, UK, France, Italy, Canada etc,. It can be a good instrument to hedge against inflation for investors.