Trouble brewing on economic front as India heads into New Year

Prime Minister Manmohan Singh is considered to be one of the best economists in the world. And one hopes his expertise will come in handy, for trouble is brewing on the economic front as the country heads into the New Year.

The government has already scaled down the GDP growth target to 7.5 per cent for the current financial year from the 9 per cent fixed in February. But with industrial production contracting in October for the first time in over two years, even this may be difficult to achieve. India Inc wants the government to get its act together and fast track economic reforms and clearances for large projects to revive the growth momentum. "The GDP growth rate can easily go up to 9 per cent if the government implements the economic reforms package," Godrej Group chairman Adi Godrej says. The Reserve Bank of India , he adds, should have intervened much earlier to halt the depreciation of the rupee .

Policymakers have been struggling to fight the twin evils of inflation and a slowing economy. Food inflation has come down because of the seasonal flow of vegetables and bumper harvests of wheat and paddy, but the prices of manufactured goods are still rising.

Tidings are bad across sectors.

The aviation industry is seeing red. "The paradox of India's airline sector is that it serves one of the world's fastest growing economies and is posting double-digit traffic growth, yet we estimate that Indian carriers will make a combined loss of $2.5 billion in the 12 months ending March 31, 2012," reports industry think-tank Centre for Asia Pacific Aviation.

The real estate sector also faces turbulent times. The Land Acquisition Bill, farmers' protests and mounting debt on books have rattled developers; home prices have touched a record high during the year even as sales volumes hit new lows. The mood was further dampened because of the global economic crisis and the RBI's tight money policy. Buyers will have to continue waiting in 2012 till there is a rational correction in home prices.

Prices could come down though because of rising interest rates and piling up of unsold inventories. The auto industry, too, has seen potential buyers stay away because of high interest rates and soaring petrol prices. With over 50 new models slated for next year, the market will remain competitive and margins will get thinner.

Manufacturing output shrunk by 6 per cent in October as the RBI's move to control inflation through a tight money policy led to a sharp increase in interest rates. This choked demand as consumers cannot afford to take loans to buy cars, refrigerators and TVs. Corporates, as a result, have been forced to reduce output because the demand for goods has fallen. They have also curtailed their investment plans as interest rates on loans are too high.

The RBI has gone for as many as 13 successive interest rate hikes since March, forcing commercial banks to raise interest rates by over 4 per cent. The pause button has finally been pressed now, but the industry wants it to start slashing interest rates to rev up demand.Finance minister Pranab Mukherjee says the economy has run into headwinds because of uncertainties in the global markets.

The sovereign debt crisis in Europe and the faltering recovery of the US economy have adversely impacted exports. Imports, on the other hand, have shot up due to rising international prices of crude oil, fertilisers and edible oils. The trade deficit, which reflects the gap between exports and imports, shot up to a threeyear high of $117 billion during April-November this year.

Commerce and industry minister Anand Sharma sounds helpless. "The trade deficit is not because of want of effort but due to the global economic situation," he says. The high trade deficit is further weakening the rupee, which has tumbled to an all-time low of around Rs 53 vis--vis the dollar as foreign investors have been pulling out of volatile stock markets and the demand for dollars to finance costly imports has gone up.

The value of the rupee has depreciated by close to 20 per cent since July. Foreign travel for Indians, as a result, has become more expensive and corporates will have to shell out more to repay dollar loans. The performance of the economy is turning out to be worse than expected as the scam-battered UPA government is confronted by an aggressive Opposition stalling economic reforms. The government's fiscal deficit has shot up as tax collections have gone down because of the economic slowdown; the subsidy Bill on petroleum products, fertilisers and food has soared.

The captains of industry believe the solution to all ills lies in economic reforms. "I hope our politicians sit together and the government works out with the Opposition the implementation of reforms," says Godrej. But the Opposition is in no mood to play ball with a helpless government.

With inputs from Sanjay Singh and Anuradha Shukla

Courtesy: Mail Today