Steady damage has already been done
Aug 23 2013
Will just talking about ‘structural’ issues set things right?
The decline has been rapid over the past few weeks, nay days: the rupee lost 15.5 per cent of its value and the stock market lost over 1,000 points in a matter of days. This, I dare say, is the result of a long economic rot that set in long ago and was not corrected.
This view, of course, goes against the grain of what the talking heads within the government and without, have been telling us, the lay people, to not harbour an excessively pessimistic or negative sentiment.
Let’s take the current account deficit (CAD). Finance minister P Chidambaram expects to cut it to $70 billion by next March from $88.2 billion last March. The man who guides the country’s economy wants us to believe that he can do it, when the prime minister’s economic advisory council says CAD will top $100 billion by the end of the current year. Chidambaram is also confident that he has the wherewithal to ‘safely’ and ‘fully’ finance this deficit, much of which arises from the widening trade deficit. This needs closer scrutiny.
Since the Emergency, whoever held the finance portfolio in every Congress government at the centre, managed to have both a current account deficit and a fiscal deficit. After 1978, the first time India saw a current account surplus (of $22 billion) was when the government was led by Atal Behari Vajpayee.
When UPA returned to power in 2005, it inherited a treasury with a current account surplus of $13.5 billion. Since then, not only could a surplus not be achieved, even a compression of the deficit was not possible. The huge CAD of $88.2 billion in 2012-13 was admittedly the highest in all the nine years of UPA. It boils down to one thing: the UPA government spent forex not only beyond its means, but also beyond the revenue exports brought in.
Back-of-envelope calculations by economists indicate that the widening CAD was a key cause that deflected India from a double-digit growth path. And this happened when India’s best known economic thinkers have been at the helm. Data indicate that in 2007-08, CAD ate away 0.8 per cent our GDP, by 2012-13 the erosion was a high 3.9 per cent. Clearly, somewhere down the line, fiscal consolidation and financial prudence have been given the go by.
Till last week, it was only onions selling at Rs 100 a kg or tomatoes at Rs 60 a kg that brought tears in the eye of the middle class and the poor. But, with banks deciding to charge higher interest rates, the pain and suffering of the salaried class has only increased since then.
Most banks, including ICICI Bank and HDFC Bank, have raised interest rates, making home and auto loans costlier. This has also curtailed fixed-income earners’ holidays and eating out. It means the malaise in economy has spread far beyond large companies, which were the first to be affected and put off their investment plans, rolled over debt. And banks reported a surge in non-performing assets.
Given the spread of the gloom, one is not sure about what Chidambaram means when he says ‘structural measures’ will be explored to set things right. If coal production is a ‘structural issue’, then it won’t go away in a hurry. Increasing coal production overnight is not possible. Hence coal import will continue, doing no good to our forex reserves.
If resuming iron ore exports is another ‘structural issue’, even that can’t be addressed quickly enough; as Chidambaram himself admits, resuming iron ore exports overnight from Goa and Karnataka fully may not be possible. This is because the matter is now before the Supreme Court. It was this government that imposed restrictive duties on iron ore to discourage exports and divert the ore to India’s own steel plants. Until the Supreme Court takes a decision, the ‘issue’ will remain unresolved.
If domestic fertiliser production is an issue, it can be increased, imports cut, and foreign exchange thus saved. But for 25 years, pricing issues have stymied the fertiliser industry. Nor was the industry allowed to freely sell fertilisers in open market with a 16 per cent rate of return on par with other industries like power. Can this government set this ‘issue’ right overnight? Clearly, no. As former finance secretary S Narayan put it, the government needs to first clearly state what the ‘structural’ measures it talks about are.
Another moot point: if ‘structural’ issues are being talked about even now, when exactly will the government get down to doing things?
One positive takeaway from the Chidambaram’s interaction with newsmen on Thursday is the assurance that there is no move to impose capital controls or restrict repatriation of profits by foreign investors. This is what they wanted to hear. The good cheer from this statement alone was enough to give the equity market a leg up.
If this alone can correct the economic malaise is still to be seen. But, to repeat the opening point, the damage has already been done over the nine years of UPA rule.