GLOBAL economy is in doldrums, world economy is sitting on a time bomb, where there are periodical new revelations. Successive bailout packages are being announced, but how long a patient can survive on life saving mechanism.
It is being said that the economic activities are moving towards east, specially India and China. Developing countries are attracting funds flow from across the world. Indian Gross Domestic Product (GDP) is said to be poised for growth rate of around 8 to 10 per cent per annum. But in my opinion these growth rate predictions for our country are not correct and are presenting a false picture.
Though we have the potential of becoming an economic superpower but there can be no complacency on our part. We will have to take corrective steps at every level with determination and indomitable will, to achieve success. Factors that need our attentions are enumerated below:
Parameters for Gross Domestic Product (GDP) valuation
There is a large segment of Indian economy which does not form part of the GDP calculation. With the successive improvement in the collection and availability of statistical data, more and more unaccounted economic activity in the country will get accounted for in the GDP calculations, e.g. services in the unorganised sector, rural economic and household domestic activities etc.
Secondly India has a large parallel economy. As we move towards a regime of low taxation and strong audit trail, the incentive to move to the main frame economy will increase. Further, with the implementation of VAT and GST, there will be a systematic synchronisation of all business data, slowly all these segments will start forming part of overall GDP figures. This clearly brings out a fact that, the actual current GDP figures, for India does not reflect its true picture. Indian economy is much larger than what it is being represented at present. As we move ahead, statistical figures will show growth automatically, but there will not be real growth in absolute terms at this rate.
The other basic problem in Indian context is of inclusive growth. India has seen widespread corruption throughout the country. The people in power, possessing resources make sure that all benefits get concentrated to a select few. This rampant manipulation is a fault line in our economic planning and is a major cause of concern. A recent glaring example is the IPL fiasco, where who’s who of the society is involved across party line. Unless the common man stands strongly against this menace of corruption nothing much regarding inclusive growth can be achieved in India. Everything is a mere lip service. Our countrymen need to rise to the concept of Tax Payer’s money, making every politician and bureaucrat answerable to its misuse.
Capital flows
There is a very strong pressure by the US on China to revalue Yuan. Yuan is pegged to US dollar at a fixed rate. If the Chinese currency appreciates, thereby depreciating US dollar there will be a major movement in the world currency markets, impacting funds flow to the emerging economies. India has seen large inflow of funds, causing bullish trends in the domestic markets. Considering high uncertainty of this hot money and its impact on our overall economy, Indian Government has set-up a committee under the chairmanship of Shri U K Sinha to gauge its impact on its usefulness or otherwise for our country. A very thought is required on the issue. Do we need foreign capital? What is the quantum that we need? And at what terms and at what cost?
Indian capital market
Indian markets over the past few months have seen an upward trend but in the last week this trend has been reversed. The impending news on the seriousness of the Greece debt crisis has shown its major impact on the world markets, including our markets. Although, European Union has come out with a second bailout package, amounting to 750 billion Euros, but there is an apprehension; whether this bailout package can contain this crisis as a long term solution? In addition, there is a widespread anxiety about the crisis, spreading to other European countries. Credit Rating Agency; like Moody’s have issued a warning regarding downgrading Portugal debt rating and further cut Greece rating to junk status. Question is how our domestic economy can be delinked and protected from the vagaries of the global financial meltdown?
In addition to this our market can get into a bear phase, thereby applying brakes to the future economic development. Some factors which points towards this scenario are; Firstly, there is a big queue of IPO’s lined-up. The total expected targeted collection figures, amounts to approximately Rs 2,00,000 crore. The huge influx of IPO at a hefty premium will suck excess liquidity from the system. Secondly, the current nifty is being traded around a Price Earning (PE) of 24, which is very high. The basis thumb rule for an investor is to exit markets whenever, the PE crosses 22, sitting on cash, and buy when the PE falls below 15. Therefore there can be a selling pressure in the markets. Thirdly, in the Mutual Fund segment, the April month has seen the net outflow of Rs 1,133 crore from the equity scheme, against a net outflow of Rs 196 crore in the corresponding month of the previous year. This is quite high and is contrarian to the market expectations. Usually April month should witness fresh inflows in the equity markets because of a start of new financial year, pointing towards a plight of capital from the market.
Inflation and rising commodity prices
Rising commodities prices is fuelling unprecedented inflation in the country, causing concern for the common man. The government does not seem to have any clue to contain this menace. On the one hand surplus food grains are rotting in the warehouses, citing inadequate and improper storage facilities, and on the other hand common men are suffering due to faulty and corrupt Public Distribution System (PDS). With the storage and warehousing facilities in the county in such a dire state, the farmers are ready with the new crop to be purchased by the government and are demanding higher Minimum Support Prices (MSP). Inflation in food items and mishandling of commodities has resulted in a strong nationwide protest by all Opposition parties. United opposition brought out a cut motion against the hike in the petroleum prices by the government in the Budget Session. The manner, in which the Government has been successful in overcoming this crisis, raises several questions about the functioning of some of the institutions in the country.
The way UPA government is handling economy leaves much to be desired, hope that they wake-up to the situation and take corrective steps before it is too late.
(Email: gopalagarwal@hotmail.com)
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