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Some good, some bad news for the economy

| | in Agenda
Some good, some bad news for the economy

Rising oil prices and a falling rupee have hurt the country the most. But the silver lining is that the Indian economy is much stronger today. We just need to make the upward trajectory smoother

The world economy is in turmoil as crude oil prices touched a new-high since 2014 in the wake of America’s rejection of the Iran nuclear deal. Rupee suffered yet another blow to plunge a new low against a surging dollar — a phenomenon that has occurred for the 11th time since 1983. Inflation too is expected to rise further.

The only good news is that interest rates are expected to rise.  This will send cheers to depositors and the banking sector and in-turn boost savings, which touched a low of 29 per cent growth in 2016 from a peak of 38.3 per cent in 2007, just before the Lehman Brothers crisis ruined the banking sector. Malaysia and Pakistan too are witnessing a gradual increase in interest rates.

The rupee touched Rs 58.96 against dollar in May 2014 soon after the NDA Government took over. Today, it has hit a record low of Rs 67.43 against US dollar and is projected to fall further. The country is, therefore, faced with a politico-economic problem as twin rises — oil and dollar — have  disturbed businesses and the Government. This has led to a inflationary-like situation, created trouble for international commerce, disrupted trade balance and budgetary projections, and resulted in possible inequalities.

All of this is happening at a time with the launch of the UN’s Economic and Social Survey of Asia and Pacific 2018 (ESCAP) in Delhi and the International Monetary Fund’s (IMF) world economic outlook projecting low regional and world growth, both necessitating economic reorientation.

World bodies are worried at the the US’s attitude and economic roil. India is seeing yet another currency crisis like the one witnessed in September 2013, when rupee had almost touched Rs 68 to a dollar.

A fall in rupee makes crude oil more expensive, hits Indian homes the hardest and may also lead to a farm crisis as input costs, particularly irrigation, fertiliser and transport are bound to rise. Consequently, there may be problems for growth, job creation and development funding. In such a scenario, wage rise and readjustments are a must.

The IMF recently projected that India is expected to grow at 7.4 per cent this year and 7.8 per cent in 2019, up from 6.7 per cent in 2017; though advanced economies, including the US, are expected to grow at 2.9 per cent this year and 2.7 percent in 2019, both up by 0.2 percentage points. The euro zone will grow at 2.4 per cent this year before falling to two per cent next year.

ESCAP projected a relatively high economic growth rate of 0.4 per cent for the Asia-Pacific region, which has 53 member states, covering more than 60 per cent of the world’s population. Figures estimate economic growth across the region at 5.8 per cent in 2017 compared to 5.4 per cent in 2016. India and China were projected as the leaders of growth and the Russian Federation, having come out of recession on oil price recovery, could add to the cushion.

But according to ESCAP, in 2018, growth in the Asia-Pacific region is set to fall to 5.5 per cent as in half of the member countries, consumption of the bottom 40 per cent is expected to grow at a slower pace. As real wages are not rising with rising productivity, consumption would be led with debt and, hence, cause financial vulnerabilities.

Social inequalities are also set to rise with higher inflation as economies will be operating below their potential, hit by low wage and poor job growth. Though the e-commerce industry may meet its demand at lower costs, automation may further lower wages. The working classes in the Asia-Pacific region are in for real trouble. It may be an uphill task for the respective Governments to contain social discontent.

Trade barriers and harsh measures on the part of the US are likely to further disrupt cross-border production networks. This may affect not only trade but also long-term investments. Even short-term investments, like withdrawals by foreign portfolio investors from the Indian market, may cause forex problems which may be further fueled by rising import bills for crude and other goods. Export rise would be moderate and is unlikely to offset the forex.

A repeat of the 1997-98 Asian financial crisis has been forecasted. This may have an adverse impact on India’s Look East Policy as countries like Malaysia, Thailand, South Korea and China face financial vulnerability in the wake of rising private debt, resulting in asset price corrections, said ESCAP. It may also impact projected Indian investments in building roads in Myanmar and South-East Asia.

India was hedged as commercial lending rates were not lowered because of problems in the banking sector, said ESCAP. So, rising deposit rates would not be much of a problem for Indian businesses and would help individual savers.

While ESCAP stressed on further widening and increases of tax, it did not state how rising taxes will add to citizen’s woes as it will result in inflation and increase in Government expenditures. This leads to povertisation of the transitional, middle class, said Jaimini Bhagwati, RBI chair professor at the Indian Council for Research in International Economic Research and former joint secretary in the Finance Ministry. Head, ESCAP South and South-West Asia office, Rupa Chanda was of the view that tax increase measurers also leads to problem of attitudes (tax-terror) of tax officers.

If the Government wants deposits, that had fallen because of lowering of interest rates and taxing individual banks deposits, to rise, and to improve the health of the banking sector, it has to amend its policies and let deposits not be subjected to TDS.

This will boost banks, economy, reduce Government burden on avoidable costs, processes and litigation. Since the introduction of TDS on bank deposits, reviews and litigation have increased. If it is done away with, individual and bank liquidity will rise, Government finances will improve with higher consumption and tax realisation and lead to better ease of doing business.

Similarly, many unnecessary banking procedures have to be simplified. For a few rogues, all clients should not be punished. Tax procedures and the banking sector should create a friendly approach for the Government in the run up to 2019 poll.

ESCAP also suggested ‘macro-prudential’ measures to do away with financial (tax) excess. These, it says, will reduce systemic risks and safeguard stability of financial (banking and revenue) system and markets. Its oblique suggestion is not to hit the ‘micro’ individuals — citizens of institutions.

Another aspect that has to be taken care of is surging deficits of Indian State Governments. The Centre’s deficit, it finds, is controlled and overall debt is one of the lowest at 60 per cent, compared to Japan’s which is above 20 per cent.

It finds strengths in the Indian economy but calls for fine tuning to make the trajectory smoother and faster. The international situation — oil prices and dollar — will remain a problem but with some ease of methods and trust in citizens, India can remain the engine of world growth.

(The writer is a senior journalist)

 
 
 
 
 

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