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India’s economic decline

, July 29, 2013, 0 Comments


The Indian economy is on the decline. Industrial production is down. The Rupee has crashed. The Current Account Deficit (CAD) is very high. Exports show no sign of recovery. Food inflation is very high. There is overall gloom in the economy. Dr Manmohan Singh started as a Finance Minister about two decades back introducing economic reforms and salvaging India from the clutches of an economic crisis. Today as Prime Minister his government still pursues reformist policies – but the economy seems to be sliding into a crisis of the same sort from which he rescued it about two decades back. His second term as PM is coming to an end and this may well be his last. Will he end up at the same stage of the economic cycle where he started?

Pranab Mukherjee’s last term as FM was a disaster. He left the FM seat leaving the economy in a mess. The fiscal deficit was high and his last budget had introduced a number of taxation proposals which was nothing short of a disaster. The retrospective tax proposals brought in by Mr. Mukherjee led to loss of confidence in foreign investors regarding stability of economic policy making in India. P Chidambaram, the new FM took over with a promise that he will reign in the fiscal deficit and make amends to his predecessor’s retrospective tax proposals.

So far he has been successful in tackling the former menace but not the latter. While the fiscal deficit has been reduced there is still no success in undoing the damage caused by retrospective tax proposals.

A new problem emerged during the term of the new FM which was not so severe earlier. This was the ballooning of the Current Account Deficit. Factors leading to high CAD  included huge import of gold and crude oil. To some extent the severity of high CAD can be reduced by curbing gold and crude oil imports and reducing import of commodities such as coal by increasing domestic production. The world economic prospects not being so good prospects for increasing exports does not seem to be promising.

The position as regards our external debt is also not very comfortable. This is because the proportion of short term debt in our external debt has gone up in recent times increasing the country’s vulnerability to a foreign exchange crisis. Our weakness on the external sector front led to a steep decline in the value of the Rupee when the US Federal Reserve announced curbs on quantitative easing. Though this action of the American Central Bank adversely affected most emerging market economies the impact on the Indian economy was particularly severe due to the weakness in our external fundamentals.

While industrial production and capital investment in the industrial sector show no sign of picking up, the inflationary situation also provides little comfort. Even though wholesale price inflation has moderated, the level of food inflation and consumer price inflation continues to be high. The Indian industry had been looking forward to monetary easing by the RBI to provide a boost to industrial investment and growth. But with the Indian Rupee under pressure, CAD continuing to reign high, and inflationary pressures not abating there seems to be little prospect of a rate cut in the forthcoming monetary policy review by the RBI. In the run up to the policy review, if the Rupee shows further tendency to weaken, even a small increase in policy rates cannot be ruled out.