Friday, June 1, 2012

All thats wrong with our economy is not economic!!!

Till about a year ago, India along with China was one of the bright spots of the world economy. Our economy seemed to be doing reasonably well with GDP growth in the 7-7.5% range when the western powers were going through their worst time post the Great Depression.

Things have changed. A lot.

The latest economic numbers are dismal enough to send shivers down each and every Indian spine. Both the Q4 as well as annual growth figures are at their 9 year low. The thought that we are doing much worse than how we were doing at the peak of the 2009-11 recession is indeed a scary one. The repercussions are deep enough with this article in the Economist ( sounding out the possibility of social unrest as a long term result.

While I believe that the above article, like most external opinions is overly pessimistic, a brief analysis does seem to suggest that we are in some sort of a downward spiral. The most straightforward option for any establishment to break the shackles of slow economic growth, of course is monetary easing, or lowering the interest rates and printing more currency. Not a very viable option, in the current situation, though. More money in the hands of the people will lead to a) higher inflation which will in turn result in b) the Rupee deteriorating further.Monetary action in this situation seems to be a recipe for sure-shot stagflation.

The other route available to the economic policy makers is the fiscal one. Which means that the government needs to invest more in building infrastructure and support systems for businesses. While fiscal measures take some time to yield results, the effects are also long term due to the multiplier effect that they generate. Of course, this is not as easily done as said. Why? Because of yet another demon of high fiscal deficit. Put in simplest of terms, the government does not earn enough from our taxes to spend on infrastructure. Definitely, we need other sources to pump in money into our economy because a widening fiscal deficit would again lead to high inflation and we are yet again caught in the same stagflation loop.

But, why do we all of a sudden find ourselves in such a mess? Precisely, because the 'other sources' which were supposed to pump in the cash to fill our fiscal deficit and fuel our growth have dried up. Yes, foreign investments is what we need to bring ourselves back on the growth trajectory that we wish for. And that is where our economic problems cease to be economic and become more political in nature. We simply need a fresh bout of reforms along with consistency of regulation/ public intervention to boost investor confidence. I do believe that most people in our establishment understand this simple fact, but are bound by their political compulsions.

The kind of policy paralysis that we have observed in the last couple of years is truly beyond what any of us conceived. When I posted this ( 3 years ago, I was hoping that the exit of the left front from the national arena will let the UPA unleash a series of reforms. Alas, little did I know that the alternative (read M-A-M-A-T-A) would turn out to be 'lefter than the left'! Of course, the lack of political will power from the PM and his leadership team is also of the highest stature. One would believe that this would be the ideal scenario for the opposition to stake a strong claim about their eligibility to run the show. Well, to that I just have one 3 letter word to say - BJP!! Times like this make you realize how a strong opposition can transform things in a democracy, or, how a weak one can let the government be as lethargic as it wants to be.

To sum it up, with the Presidential and then the Parliamentary elections looming large, things do not look likely to change much on the political front. In that case, monetary and fiscal actions (without the accompanying reforms) will have to be taken and we may be moving closer towards a stagflation or at least, a sustained slowdown. 

Yet, at some level, I believe that this is not the complete story yet. Life in the country does not seem to be as badly hit as the economic numbers seem to suggest. Something tells me that things are going to change much faster than we believe and for the better. In the end, its just a question of one bold political move somewhere coupled with some patience. May be it is just the fact that I have been fed on 'the India story' all my conscious life, but I do believe that that one bold step will be taken (if not by those in the power, then by those against them) pretty soon. 1991 is history and I hope it will remain that way.