The End of Indian Growth Euphoria? What went wrong

               

RBI’s decision to leave CRR and repo unchanged sent negative vibes into the market.   RBI took bold step ignoring finance ministers hints to lower the interest rate to induce growth.  RBI believed injecting liquidity into market in the current scenario can deteriorate health of Indian economy further. With high inflation, policy paralysis, downgrade of sovereign bonds status to BBB -, global uncertainty in place many are prophesying that the Indian growth story is over. Is it?

                 

          Year 1991 stands tall in the economic history of India .The economic constitution was rewritten to save India, which was on verge of collapse. The reforms carried out changed the face of India. Past Decade India’s GDP growth has broken the intuition of ‘Hindu growth’. The world believed Indian will emerge as an economic super and will take over America by year 2025.Indian successfully steered through the global melt down even when the super powers struggled. So what went wrong? Why are credit rating agencies shrieking India may lose its investment grade for its sovereign bonds?

              

          The root cause for this crisis is set of intertwined complicated issues which are very complex to address. Here are few major issues which led India into this crisis 

1. Policy paralysis

2. Soaring Inflation.

3. Euro Crisis.

4. Depreciating rupee.

5. Huge fiscal deficit.

 Policy paralysis

               

Non cooperation from Allies and frequent stalling of parliament by oppositions for political mileage prevented government to pass crucial bills. The government could not allow increase in multi brand FDI Retail .with stiff opposition from parliament it had to roll back decision. It has great potential to create jobs, cold supply chain.  A series of scams, protests from civil societies made government to be more cautious on the decisions it take. Complex procedures to get clearances for setting up Industries delayed several huge projects like POSCO.  Red tapissim , rampant corruption led to the paralysis of government.

                To reform the current scenario we have to start it from here. Government has to get rid of all non cooperating allies and look for new friends. Opposition also should act more responsibly and let parliament function. The complex procedure to setup industries should be simplified. This will also trim of corruption and red tapissim .

Soaring Inflation

                With a soaring inflation growth slowed down . RBI had no option left other than to suck liquidity from market. Growth is always coupled with inflation.  So to prevent further spiraling  for  past two years RBI has significantly increased the repo rate hoping to tame Inflation. But the strategy misfired with a decline of growth rate. As a breather RBI has cut CRR to inject liquidity into market. But to its surprise the Recent IIP data revealed  stagnation in industrial growth.

                This situation cannot be fixed by RBI alone. It needs a helping hand from government . There are supply side bottle necks due to poor infrastructure. As part of reforms Indian railways has launched a new complete air-conditioned goods train from Surat to Delhi to ferry fruits and vegetables with less post harvest losses. Government has to come out of policy paralysis and invest hugely on these kinds of projects to get rid of supply chain bottle necks.

 Another reason for failure of RBI’s medicines to heal inflation due to existence of parallel economy. Parallel economy is combination of black money and counterfeit currency notes. When designing economic policy RBI always considers the money which is officially in circulation. Existence of mammoth parallel economy is making RBI recovery mechanisms ineffective .Parallel economy has many other repercussions also, so it’s high time that RBI issues new currency notes to get rid of this parallel economy.

A miscalculation now can spiral India into hyperinflation. A combined effort from government, RBI India can pull down the inflation pressure and put us back on the growth track.

Euro Crisis

 Many European nations are sick with contagious sovereign Debt crisis issue.  It started with Greece and spread to other nations. Failure of these Nations has slowed down investment. Now Investors prefer United States of America (U.S.A) sovereign bonds over other nations. A huge Chunk of Foreign is pulled out from India trouble shoot their domestic crisis or to invest in U.S sovereign bonds.

  

This crisis has slowed down growth in Europe. Some states are even experiencing negative growth. Europe is the one of the largest export market for India. With decline in demand for goods and services in Europe the Indian export market is finding tough to survive. With decline of exports and stable imports the trade deficit ballooned

With current uncertainty in global economy and recent downgrading of Indian sovereign bonds is making investors looking for stable markets. With non-conductive atmosphere in the country India Firms are also diverting their investments abroad. Last year a sum equivalent to 60% of total FDI inflows into the country were invested across globe from India. Projections are that in the current year inflow of FDI will be balanced by outflow. So RBI is reluctant to reduce interest Rates as this can deplete the foreign reserves further and may push us back to Balance of payment crisis.

            

              India which steered efficiently through turbulent waters of Melt down. Started giving in to Euro Crisis. This issue can be resolved by promoting exports and instill confidence in investors. This can happen only if inflation is in under control with no policy paralysis.

Depreciating Rupee

                The rupee has reached all time low. This phenomenon is a direct impact of strong dollar. As mentioned above due to change of preference in investor back to U.S sovereign bonds the dollar is emerging strong against the world currencies.  Depreciated rupee is a blessing for export industry .But India is not able to exploit as there is a decline in external growth. The Huge Trade deficit and FDI movement out of nation has further pressurized rupee to decline.

                This issue can be resolved by opening up more sectors for FDI and liberalizing FDI inflow. Tobin tax also can be imposed to prevent instability in FDI.  The government also concentrates on bilateral agreements to boost exports so that BOP can be lowered.

Huge Fiscal deficit

               

IMF extended support to India on the condition that India would curtail its populist schemes and reduce its expenditure in non productive areas. But government is back to populist subsidy schemes. Subsidies are main reason for the ballooned fiscal deficit.  Diversion of funds into non productive schemes made government handicapped to invest in infrastructure.

                It’s high time for government to cull all the non productive schemes and reduce the fiscal deficit and use other funds to boost growth. In short government should believe in inclusive growth than subsidizing. Inclusive growth will improve purchasing power of people

               

                It’s evident that all the above issues are interrelated and can are very complex. These issues are critical in nature but can have solutions to put India back on growth spree. Lets hope government acts responsibly and steers us out like how it did during melt down.