Hardly six weeks ago a sense of grim crisis pervaded India’s economic policy-making circles and much of the public at large. The underlying causes are well known: the post-2011 collapse of growth and investor confidence, major problems in the infrastructure and energy sectors, persistently high inflation, shrinking job opportunities, and large fiscal and external account deficits. The alarm bell that had most strongly signalled (and reflected) the onset of economic crisis was the plummeting value of the rupee, which had dropped from 53-54 to the US dollar in May to nearly 69 by end-August. The rupee’s free fall had occurred despite a wide range of measures to reduce gold imports, restrict external payments and drastically tighten monetary policy.
As the currency and financial markets recovered, the sense of crisis and urgency dissipated swiftly. By early October senior government officials were reportedly exuding confidence. Let us consider the realism of these official macroeconomic expectations.
A significant question is: how much has this decline in gold imports through official channels been substituted by an increase in smuggled gold? Another major imponderable is the impact of the ongoing US government shutdown and possible failure to raise the debt ceiling. On the one hand, such uncertainties are likely to prolong current levels of QE and, thus, ease the financing of India’s current account deficit. On the other, a significant setback to US and global economic activity could damp exports of goods and services and reignite global financial turmoil. It is impossible to assess the net effects on India’s external accounts at this stage.
The government’s expectation of 5.5 per cent growth this year looks decidedly optimistic. Aside from a good, monsoon-propelled performance in agriculture (which accounts for only 15 per cent of India’s GDP) and a modest recent uptick in some core sectors (from depressed levels) and some exports, it is hard to locate signs of a significant resurgence in economic activity.
The most implausible element in the finance ministry’s present confident/complacent macro expectations pertains to the fiscal deficit target of 4.8 per cent of GDP. In sum, the fiscal deficit could be overshot by a significant margin by the time the fiscal year ends. In the first five months of 2013-14, the Centre’s fiscal deficit ratio has been running at a whopping 8.7 per cent of GDP. Bringing it down to 4.8 per cent in the remaining seven months looks impossibly difficult, without recourse to seriously creative accounting ploys.
In any case, it is worth pointing out that a deficit that stays high through most of the year imposes the associated costs of higher inflation, higher interest rates, more crowding out of private investment and greater pressure on the current account deficit during the period, even if “miraculously” corrected in the final months. It is also worth emphasising that if the months unfold without any serious policies to correct the deficit, there is a growing risk of negative external perceptions (including a possible credit rating downgrade), which could have serious adverse consequences for external financing of the current account deficit and for currency markets.
In other words, India’s macroeconomic condition remains quite shaky and certainly does not warrant an iota of complacency. This is doubly true if one considers the available patchy data on employment trends, which point to miserable job prospects for the country’s burgeoning youth population.
(Source: Extracts from an Article by Mr. Shankar Acharya in the Business Standard dated 09.10.2013)
