The Indian economy shows signs of recovery. Exports are picking up. Import of gold is under control. The Current Account Deficit has ceased to be the problem it was some time back.
However, there is no certainty that the fiscal deficit will be contained at levels estimated in the budget. There is also no let up in inflationary pressures. While agricultural production is likely to be good this year, depressed levels of industrial production continues to be a matter of concern. The exchange rate of the Rupee seems to have stabilized.
Thus positive as well as negative signals characterize the Indian economic scene. The greatest achievement of the government has been in tackling the current account deficit. While the decline in exchange rate of the Rupee provided a stimulus to export growth, restrictions imposed on import of gold has kept gold imports under control. As per the latest estimates CAD is expected to be contained within a limit of $ 60 billion as against the earlier estimate of $ 70 billion. At this level of CAD, India will not be required to draw down on its reserves during the current financial year. Having achieved control over CAD stability has returned to the value of the Rupee.
Growth estimates for the Indian economy are being projected at about 4.5 to 5.0 percent during the current financial year. This is a reasonable estimate to make. But what is the potential for growth for the Indian economy during the years to come. Growth prospects can improve to about 6 percent but anything more than that would be difficult to realize. The expectations of 8 to 10 per cent annual growth rates over long periods may never ever be realized in practice. Had we adopted the right economic policies at the right time in the past we might have achieved such spectacular growth rates for some period in the past. But now the time for such rapid growth seems to have passed.
Inflation is still ruling at high levels and is driven primarily by food prices. There has been no significant fall in agricultural production. So why are prices of food articles still continuing to rise despite of continued efforts of RBI to tame inflation. The factor that is driving up food prices is increasing demand for food items. There is occurring a shift in food consumption towards food articles such as fruits and vegetables; milk and other animal products. Inflation is largely concentrated in these items.
The higher price level achieved for these food articles mark a secular shift and are not likely to come down any time in the future. It is futile to expect that increase in prices of these food items is a temporary phenomenon and they will come down sometime soon. Level of prices in food articles in India, have reached a new plateau and they are there to stay whatever efforts are made and whichever government comes to power. For instance prices of about Rs60 to Rs80 for onions can be taken as a given for all time in the future below which they will not fall – they can only escalate further up.
Increasing food prices should not be seen as entirely a negative indicator. While it pinches the food pockets of the poor consumers, it is also a reflection of increasing incomes and purchasing power of the people including the poor. It is a question of demand overstepping supplies not as a temporary phenomenon but a secular structural shift. There is no remedy to this problem since there is no means of expanding supplies dramatically (which in inelastic) while, at the same time, increasing purchasing power with the poor and in rural areas is a matter to be reckoned with.
We rejoice when we observe decline in poverty levels and increase in rural wages. Food prices in the country, rising to a higher plateau, is a direct consequence of declining poverty rates and increasing rural wages and incomes. Increase in rural demand is not only driving up food prices; it is also responsible for whatever support industry is receiving for increasing production. When one tries to understand why the monetary policy of the RBI has failed to contain inflation the answer lies in increasing per capita income of the people, increasing purchasing power of the population and growing demand from rural consumers.
There is a popular perception that increase in food prices is due to hoarding by speculators. Hoarding is a clever imaginary activity manufactured by governments of the day to cover up for the blame put on them for increase in prices. The public readily believes what the governments say due to their deeply ingrained mistrust for traders. The truth is that food prices can be increased by hoarding, if at all, only for a short period. Ultimately all hoarded commodities have to be released and when released in the markets prices will fall. If hoarding is done on a huge scale, prices will crash when the hoarded commodities are released. Any price rise that can possibly occur due to hoarding can only be short lived and cannot be held responsible for increase in prices in perpetuity.
The RBI has been accused of neglecting economic growth. RBI in turn wants the government to first put the fiscal matrix in control before it liberalizes its monetary policy. The Finance Minister is doing his level best to contain the fiscal deficit by compressing government expenditure and he wants to shift the burden of current year’s subsidy bill partially to the next year’s budget. With such window dressing the current year’s fiscal deficit may be contained at the budgeted level of 4.8 percent. But instead of window dressing what is prudentially required is to increase petroleum prices as per recommendations of the Kirit Parikh Committee. Implementing the recommendations of this Committee, we should remember, will be essential if we are to face the threat of FED tapering with any amount of confidence whenever it comes about.
