India Dimming

In the fourth quarter of financial year 2011-12, India’s growth rate dipped to 5.3%, the lowest rate since 2003. On June 22, 2012, rupee depreciated to a record low of INR 57.15 against US dollar. In the same month, food inflation was at 10.81 percent. A country that was termed as the next global super-power suddenly seems to be in a mess. Was India’s success story just a flash in the pan? 

Since 2004, when United Progressive Alliance (UPA) gained power, India has been in a condition of policy paralysis. In order to keep all factions satisfied in a coalition government, only populist legislation is tabled and strong economic reforms are left to posterity. The previous coalition government of National Democratic Alliance (NDA) implemented reforms despite balancing diverse interests of its numerous member parties. 

India’s economic reforms of 1991 pushed the nation towards liberalization, privatization, and made it a hub for outsourcing and trade. The NDA government which came to power in 1998, took the reforms to another level. It implemented privatisation by disinvestment of PSUs and liberalisation by relaxing constrictive, convoluted regulations. This deregulation ushered in a prosperous environment for India Inc. and was the reason behind the telecom revolution. The NDA government was pro-globalisation. It built strong international partnerships with foreign governments, ushered in NRI capital and opened up many sectors for Foreign Direct Investment (FDI). FDI grew from $2.46 billion during 1998-99 to $4.66 billion during 2002-03. Though India’s FDI continues to grow, the current administration is reaping the fruits of the previous governments and stalling further reforms. 

Credit: Trading Economics 

To continue its success story, India’s corporate sector needs a hospitable environment built on SEBI revamp and tax structure revision. The tax policy propositions are muddled: First direct tax code (DTC), then goods and services tax (GST), and lately general anti-avoidance rules (GAAR). Though the government has steadily freed more sectors for FDI, inflows will not increase if India loses its rank in the investors’ preferred destination list. In June 2012, Standard and Poor (S&P) indicated that India could be the first BRIC country to lose investment-grade rating. In April 2012, S&P relegated India’s status from stable to negative citing the reason as India’s large fiscal deficit and expectations of only modest progress on reforms given political constraints, battering stocks, bonds and the rupee. 

The erratic dollar-rupee exchange rate also makes institutional investors jittery. On 3 February, it hit a high of INR 48.80 to 1USD while on June 22, it was the lowest at INR 57.15 to 1USD. The current conversion rate of INR 55.44 to 1USD shows the depreciation of value of rupee. The Reserve Bank of India (RBI) is expected to exercise control over exchange rates. However its monetary policy tools have not been very effective yet. The internal situation is also fraught because of high inflation. In June, food inflation was 10.81 percent while headline inflation was 7.25 percent. All these factors have contributed to tarnishing India’s growth story. 

Credit: Trading Economics 

IMF revised its World Economic Outlook and reduced the expected growth rate of India from 6.8% to 6.1% in July, 2012. One of the main functions of the central bank is to be banker to the government. The fiscal deficit of India has not come down despite the government’s emphasis on the implementation of the Fiscal Responsibility and Budget Management Act, 2003. Showing populist democracy behaviour, there are large budget allocations every year to appease different factions. In order to fund these outlays, RBI has to issue government bonds. Too many bonds in the market will ultimately reduce their value and credibility. RBI’s regulatory policies and actions were exalted as the saviour and solution to the global economic crisis of 2008 but its hands are tied now. It cannot lower interest rates to boost the growth rate when the country has no economic reforms, where it needs to keep issuing bonds to cover government debt and where food inflation steadily remains high. 

Food inflation would not be helped by the proposed food security bill. Many reports have said that India’s food problem is no longer about production; rather it is about loss in storage and distribution. The current condition in June 2012 is such that food ministry officials estimate that grain worth at least $1.5 billion could perish due to rodent infestation and spoilage. Analysts say the losses could be far higher because more than 19 million tons of grain was lying in the open, exposed to searing summer heat and monsoon rains. The government purchases this grain from the farmers at minimum support price. But instead of reaching the poor through the public distribution system, it gets spoilt or wasted in granaries. This wastage is shocking in a country where the child malnutrition rate is almost twice as bad as that of sub-Saharan Africa according to a World Bank estimate. 

Economists are debating that with these cards in hand, should India focus on high GDP growth through economic reforms or curb food inflation and insecurity. Economic reforms are indubitably the demand of the day. Food insecurity and inflation problem does not require another green revolution. It just needs better storage, management and distribution of the grain produced. Efficient distribution of food products will have a direct positive effect on lowering food inflation. 

The India, that could be a super-power, is sinking in the bog of its own inefficiency. The government needs to engage in policy reforms and take strong, decisive actions. This can be done by spreading decision-making within the Cabinet and Parliament and rather than concentrating it within a few hands. Government partnership with private agencies and development organisations can help it formulate, debate, and implement the reforms speedily. Instead if the status quo is maintained, ‘India Shining’ would be a lost time period that children read about in history books. 

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