Economy Not So Bleak, But Needs Balancing Act by Sushma Ramachandran SignUp
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Economy Not So Bleak, But Needs Balancing Act
by Sushma Ramachandran Bookmark and Share
 


The economy seems to be looking up since last week with some positive gains for stock markets and moderation in inflation, giving the Reserve Bank of India (RBI) sufficient confidence to take more steps to infuse liquidity into the system.

The cuts in the cash reserve ratio and the statutory liquidity ratio are expected to bring about an additional Rs.1,200 billion (around $25 billion) into the market. Hopefully this should pep up commercial banks to reduce lending rates and give a spur to demand growth.

In addition, the rupee seems to have begun stabilizing against the dollar after having crashed precipitously in the last few weeks. It remains under the Rs.50 barrier though foreign exchange analysts had been expecting it to breach this level and reach Rs.52 or Rs.53 to the US dollar. In other words, the bad news on the economy has finally stemmed its flow, at least for the time being.

But the outlook is certainly not rosy since the impact of events in the global economy will continue to impinge on this country. First, of course, is the question of exports. The rupee depreciation against the dollar will make Indian goods more competitive in world markets, but the more pressing question is whether order books will shrink as a result of the global meltdown? 

Reports have already come in about loss of jobs in major handicrafts exports centers like Moradabad, but this has been a result of recessionary trends in global markets which had set in about three or four months ago. It has not occurred due to the worldwide financial crisis. 

In any case, the fact is that the US, the world's biggest market, has gone into a recession and so export-oriented industries are likely to face an uphill task to find buyers. Exporters are also pointing out that the impact of the rupee's fall will be felt only in the next few months as the depreciation has only taken place in the last few weeks.

Second, the country's economic growth has slowed down even though it still remains high by international standards. A dip from the expected 9-9.5 percent to around seven percent is now generally being expected for the current fiscal, 2008-09. This is relatively high compared to the rest of the world. 

But for India, it means that the economy will not grow as fast as expected, which also means that the benefits of growth will trickle down even more slowly to the poorest of the poor. Slower growth will hit employment and that is probably going to become a big worry especially for a government that is due to face general elections within the next eight or nine months. 

As has already been pointed out, jobs will be lost in export-oriented industries. This covers a wide range - from the artisans in the handicrafts sectors to IT professionals in the software industry. In addition, the growth of BPOs which had emerged as huge job centers in both big and small cities is going to slow down as these once again are linked to corporates in the US and Europe.

Third, inflation is still at double digit levels. It may have come down but it still remains at an extremely high level of around 11 percent. This is causing hardship to the common man and could well spell the death knell for the present UPA government. The cost of basic food staples has risen steeply and this has more of an impact on the millions below the poverty line in this country than any swings in the stock markets. 

In fact, it was clearly this worry that made the government and the RBI move slowly when the initial impact of the global crisis made itself felt in the stock markets and on the banking system. And it was no doubt the moderation in inflation levels that gave sufficient confidence to the RBI to move ahead boldly in the last few days to carry out further cuts in both cash reserve ratio (CRR) and statutory liquidity ratio (SLR). The consequence of this should be a cut in retail lending rates by the banks, but even for this the government will have to give a gentle push as banks are clearly not in a mood to take any measures in this direction.

As for the solutions, Prime Minister Manmohan Singh has wisely decided to focus on infrastructure development which would yield jobs as well as improve the country's investment climate. This is an area where government spending will have to play a bigger role as private corporates are likely to shy away from big investments at this stage.

Tackling inflation, however, will depend largely on the global scenario as prices had begun their upward spiral along with the rise in world crude oil prices. These have now fallen drastically, despite the efforts of the global oil exporting cartel to shore up prices by cutting output. The dip in fuel prices should help keep inflation in check.

If, as is being speculated, the government cuts fuel prices, there should be an even greater relief for the consumer. Of course the rationale for the price cut is more political than economic as Indian Oil Corp (IOC), the country's largest cooking and transport fuel retailer has actually run into huge losses for the last quarter of the current fiscal owing to prices of oil products having been kept at artificially low levels.

The economic scenario is no longer looking as bleak as it was about two weeks ago. But the government has to do a delicate balancing act to ensure that growth does not suffer while keeping inflation under check and trying to push up employment. Surely a tough job for a government that has to face elections in the not too distant future.

(Sushma Ramachandran is an economic and corporate analyst. She can be reached at sushma.ramachandran@gmail.com)

4-Nov-2008
More by :  Sushma Ramachandran
 
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