The stock markets tumbled yesterday by a massive 700+ points (4%). About Rs 2.25 lac crores of investor wealth got eroded. Of course, this fall was nothing specific to India US and Europe . The fact that the fall happened around the world makes us a little complacent. We feel that it’s not that bad that our markets have fallen. Most of us make the usual complaints and then wait for a better day. My belief is that our markets need not fall just because the world markets are falling. In fact, our markets can gain in strength every time world markets fall. But that’s only possible if we manage our affairs better….
People often use the poor global economic conditions to explain our slowing economic growth. But is this really true? Sure, our economy is now linked to the global economy and surely it cannot remain isolated from the fortunes of the global economy. But has the Indian economy really been hurt by the global conditions? Not really. The best indicator of this is the performance of our export sector which has boomed in the first 4-5 months of this year. The growth in exports has been a staggering 50% or so – no doubt aided by a falling Rupee. UnlikeChina – which has seen a slow-down in the growth of its exports, India
Of course there are headwinds coming from the external sector that do affect us. For eg., the rising prices of crude put pressure on the domestic costs of fuels – leading to a rise in inflation and a slow-down in some sectors like automobiles. Likewise, the poor stock market –India India
Why is it that our economic growth estimates continue to be lowered month after month? If it is not entirely on account of global factors, then what is it on account of? In my view, it’s because of the policy logjam – the deep freeze the government has gone into – that is to be blamed.
Take the new manufacturing policy as an example. A few days back, there was a story that the government would pass a new manufacturing policy that would revive industrial growth – bringing hope and confidence into the industrial sector. However Jayanti Natarajan was unconvinced and she put her foot down. Now we hear that the policy has been delayed. These days, everything in the country is getting delayed. The GST has no hopes of being passed ever going by the way relations are these days between the two biggest political parties. The Land Acquisition Bill is bound to face political hiccups – given the kind of impact it will have on UP elections. The new mining policy will likely be delayed given the controversies that surround the sector in any case. The FDI policy with respect to multi-brand retail – a move that can generate a lot of employment and help contain inflation at least partly – has similarly been stalled after weeks and months of being in circulation, again because of the political ramifications of the policy. There are numerous other examples. The fact is that the government has gone into a deep freeze – and that is affecting our economic growth.
Take inflation as another key variable that affects economic growth. I explained in my post of a few days back (The loud political message from agriculture…..and why RBI cannot control inflation – September 20th) that no matter how much the RBI increases rates, the inflation is bound to continue remaining high. The RBI’s rate increases affect mostly the manufacturing sector which takes loans from banks to fund its expansion and for working capital. By raising rates twelve times in the last 18 months, the government has severely dented profitability thus clamping down on industrial growth. No wonder then that that sector has started stuttering to a halt. But the inflation in manufactured goods is only 5.5%. How does it help to put the brakes on this sector? The problem of inflation is in agriculture – where the number is nearly 18%. Nothing the RBI does can affect inflation in agriculture in a big way. Agriculture is suffering because there has been no increase in yields. And that’s because every single government in the last 20 years has failed to act on agriculture. There is hardly any improvement in the irrigation facilities; the power conditions remain terrible; pesticides growth has stopped; and there is no push for Genetically Modified crops.
The focus of this note is not in establishing that the government has gone into a deep freeze. That’s well known. The focus of this note is to highlight that politics has so badly vitiated the environment today that it has destroyed economic activity. It’s impossible for the government to function. It’s not about the UPA or the NDA – it would be difficult for either of them to function. If the government goes with the recommendations of the regulator (free 2G spectrum as per TRAI’s recommendation), it is damned. If it had gone against, it would have been damned even more. If the government acts fast (Praful Patel, in ordering AirIndia
Unfortunately, nothing in the economic sphere is driven by economic logic today. Not one person is able to explain why petrol prices should not increase. The impact of petrol on WPI is not even 0.07%. The middle and upper classes certainly get affected, but if the government continued to subsidize petrol, the poor would get affected. Not one high priest of the economic world is able to justify the continuous rate increases by the RBI. And yet – to demonstrate its independence from the government – the RBI continues to do what it wants to do. There is complete economic consensus on the GST – and yet there is zero political consensus on it.
Politics has its place in a democracy. But there has to be a limit to it. Today, politics has become center-stage for us. It’s become the main activity of our lives. Every single issue has such a strong political impact that nothing else seems to matter. Every single day there is a demand for someone or the other’s resignation. Today it is Chidambaram’s turn. In the last few weeks and months, it has been the turn of Kapil Sibal, Sheila Dixit, Murli Deora and many others. The PM’s resignation is always in demand! How can any government function under such circumstances?
It’s time we bring back some balance. It’s time we decide what we want to do with our country. Take advantage of the global conditions and emerge stronger – or drift downwards with the rest of the world. I have no love for this particular government. If the people don’t like it, let them vote it out in 2014. Let’s get in another government then. But till the time the government is ruling, lets let it perform…..
The real truth is that the economy has taken a back seat as far as this government is concerned. But what else can we expect from a government that appears to be on the brink of extinction every single day. Is this a good thing for the country? Is this only about the Congress? Or would it have been no different had it been a BJP government at the center? It’s time we thought about all this…..
People often use the poor global economic conditions to explain our slowing economic growth. But is this really true? Sure, our economy is now linked to the global economy and surely it cannot remain isolated from the fortunes of the global economy. But has the Indian economy really been hurt by the global conditions? Not really. The best indicator of this is the performance of our export sector which has boomed in the first 4-5 months of this year. The growth in exports has been a staggering 50% or so – no doubt aided by a falling Rupee. Unlike
Of course there are headwinds coming from the external sector that do affect us. For eg., the rising prices of crude put pressure on the domestic costs of fuels – leading to a rise in inflation and a slow-down in some sectors like automobiles. Likewise, the poor stock market –
Why is it that our economic growth estimates continue to be lowered month after month? If it is not entirely on account of global factors, then what is it on account of? In my view, it’s because of the policy logjam – the deep freeze the government has gone into – that is to be blamed.
Take the new manufacturing policy as an example. A few days back, there was a story that the government would pass a new manufacturing policy that would revive industrial growth – bringing hope and confidence into the industrial sector. However Jayanti Natarajan was unconvinced and she put her foot down. Now we hear that the policy has been delayed. These days, everything in the country is getting delayed. The GST has no hopes of being passed ever going by the way relations are these days between the two biggest political parties. The Land Acquisition Bill is bound to face political hiccups – given the kind of impact it will have on UP elections. The new mining policy will likely be delayed given the controversies that surround the sector in any case. The FDI policy with respect to multi-brand retail – a move that can generate a lot of employment and help contain inflation at least partly – has similarly been stalled after weeks and months of being in circulation, again because of the political ramifications of the policy. There are numerous other examples. The fact is that the government has gone into a deep freeze – and that is affecting our economic growth.
Take inflation as another key variable that affects economic growth. I explained in my post of a few days back (The loud political message from agriculture…..and why RBI cannot control inflation – September 20th) that no matter how much the RBI increases rates, the inflation is bound to continue remaining high. The RBI’s rate increases affect mostly the manufacturing sector which takes loans from banks to fund its expansion and for working capital. By raising rates twelve times in the last 18 months, the government has severely dented profitability thus clamping down on industrial growth. No wonder then that that sector has started stuttering to a halt. But the inflation in manufactured goods is only 5.5%. How does it help to put the brakes on this sector? The problem of inflation is in agriculture – where the number is nearly 18%. Nothing the RBI does can affect inflation in agriculture in a big way. Agriculture is suffering because there has been no increase in yields. And that’s because every single government in the last 20 years has failed to act on agriculture. There is hardly any improvement in the irrigation facilities; the power conditions remain terrible; pesticides growth has stopped; and there is no push for Genetically Modified crops.
The focus of this note is not in establishing that the government has gone into a deep freeze. That’s well known. The focus of this note is to highlight that politics has so badly vitiated the environment today that it has destroyed economic activity. It’s impossible for the government to function. It’s not about the UPA or the NDA – it would be difficult for either of them to function. If the government goes with the recommendations of the regulator (free 2G spectrum as per TRAI’s recommendation), it is damned. If it had gone against, it would have been damned even more. If the government acts fast (Praful Patel, in ordering Air
Unfortunately, nothing in the economic sphere is driven by economic logic today. Not one person is able to explain why petrol prices should not increase. The impact of petrol on WPI is not even 0.07%. The middle and upper classes certainly get affected, but if the government continued to subsidize petrol, the poor would get affected. Not one high priest of the economic world is able to justify the continuous rate increases by the RBI. And yet – to demonstrate its independence from the government – the RBI continues to do what it wants to do. There is complete economic consensus on the GST – and yet there is zero political consensus on it.
Politics has its place in a democracy. But there has to be a limit to it. Today, politics has become center-stage for us. It’s become the main activity of our lives. Every single issue has such a strong political impact that nothing else seems to matter. Every single day there is a demand for someone or the other’s resignation. Today it is Chidambaram’s turn. In the last few weeks and months, it has been the turn of Kapil Sibal, Sheila Dixit, Murli Deora and many others. The PM’s resignation is always in demand! How can any government function under such circumstances?
It’s time we bring back some balance. It’s time we decide what we want to do with our country. Take advantage of the global conditions and emerge stronger – or drift downwards with the rest of the world. I have no love for this particular government. If the people don’t like it, let them vote it out in 2014. Let’s get in another government then. But till the time the government is ruling, lets let it perform…..
The real truth is that the economy has taken a back seat as far as this government is concerned. But what else can we expect from a government that appears to be on the brink of extinction every single day. Is this a good thing for the country? Is this only about the Congress? Or would it have been no different had it been a BJP government at the center? It’s time we thought about all this…..
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