Saturday, September 6, 2008

India Which Direction!!

Since mid-2007, the global economy has been unravelling in disconcerting fashion. That has taken governments and `aam aadmi' by surprise in most countries. The nature and speed of this `unravelling' has been discomfiting. It affects everyone: i.e. individuals, poor, middle-income, or rich, multinational and domestic firms, academics, governments or regulators.
Global turbulence is certainly affecting India. We can see that in sudden changes in our inflation rate, growth rate, exchange rate, and in our capital markets. "We can see it in the stresses and strains it is putting on fiscal, monetary and social policy"-as said by Prayag Ved. But, by and large, the impact of global ructions has so far been less on India than on other energy importing countries. The continental dimensions of the Indian domestic market are now generating a powerful internal growth dynamic with rising domestic incomes. That provides India with some shelter from this global storm.
Energy exporters are, of course, booming. They cannot absorb the huge surge of funds that are flooding into their small economies. "Energy exporters in the Middle East have built up incremental reserves of over $3 trillion in just the last five years"-as said in Business Standard. This huge imbalance in global financial flows and in rapidly accumulating financial stocks represents both a cost and an opportunity for India. But we risk exacerbating the cost and blowing the opportunity.
India is not as dependent as China is on the US and EU for manufactured exports. But that gives us little comfort. Our service exports are facing headwinds. Remittances may fall if the US and EU go into recession. But that may be offset by remittances from Gulf countries. Yet, paradoxically, India will weather this storm with less damage than the US, EU or Japan; and most developing or transition countries.
Regardless of what is happening in the world, we are building up many problems of our own by default. We do not seem to have either the political consensus or the administrative capacity to address simultaneously that large number of urgent issues that confront us.
Our deficit on merchandise trade is approaching 10% of GDP. Despite export income from services and remittances we now have a current account deficit of 2.5 to 3% of GDP. We have a `real' fiscal deficit approaching if not exceeding 10% of GDP taking all off-budget items into account. These are not good signs; especially in an external environment that is not benign.
We now have significantly lower growth than we thought we would -- from 9% to 7%. It is a reflection of how far we have come in the last five years that not just government and industry, but even common man the bhala manush, is now concerned about GDP growth falling to 7%. We face much greater economic and financial uncertainty. Our stock markets have lost 40% of their value in just six months. No one knows when we will get back to January 2008 levels.
Our inflation rate seems to have gone from 5% to 12.5% almost overnight! That seems to have come upon us suddenly and caught us all by surprise. We seem to be in denial about the extent to which our growth rate might be hit in the next 18 months.
Such discontinuities will be presented as we cant create a perfect market where the FII is more than the Economic strength.

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