P Chawla
INDIA’s economic landscape has changed for worse in the last one week along with the political situation turning murkier around the same time. Even before the DMK had pulled the plug on the UPA Government, the economic indicators were rather bleak.
Ironically, the expectations built around the mid-quarter credit policy review by the Reserve Bank of India released by Governor D Subbarao on March 19 were washed away firstly by the RBI itself and secondly by the DMK. Whatever steam was left went off when Samajwadi Party caught the Congress unaware on the issue of foot-in-mouth Steel Minister Beni Prasad calling Mulayam Singh what and what-not.
The stock market and the economic macro analysts were quick to gauge an unstable political environment in the middle of the crucial Budget session of Parliament. The Sensex has lost over 600 points in the last one week. Experts have been advising investors not to expect any positive trigger in the near future. To top it all, the CBI raid on M K Stalin was the height. Even a novice in politics would tell you how it would be read among the people.
Finance Minister P Chidambaram was at it immediately after the DMK supremo M Karunanidhi announced in Chennai about the party’s decision to part ways with the UPA. The Finance Minister, with his eyes on the falling sensex , took great pains to convey to the markets that all was well with the government and it was stable.
Yes, it was stable because nobody seems to be prepared for the elections right now. But those keeping a close watch on the Indian economy know what it means. It would be a lame duck- will remain in office for the sake of it while the economy would run on the auto-pilot. Who knows, the luck might even favour the country – the global woes may disappear and the Monsoon in the coming season may pour some good luck and the prices may moderate.
But then, chances of global slowdown going away look dim. The situation seems to be depleting further with Cyprus, though small economy, battling and about to default on international obligation. On the domestic turf, the government has miserably failed to understand and tame an animal called inflation.
C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council had almost said it that the country seems to be in the midst of stagflation. What it means in simple terms is a deadly combination of prices shooting up while the growth gets knocked down month on month and quarter on quarter. So much for the India story!
On its part, the RBI tried doing some damage control by reducing the policy interest rates by 0.25 percentage points. But it meant nothing- even bankers shot it down saying they cannot cut interest rates as there are not much of deposits in the market- a reflection of savings rate further declining.
Rather, the RBI made it worse for the government by making it clear that whatever it could do, it has done- there is no further elbow room and the ball lies squarely in the court of the government to get its act together in terms of fiscal discipline. Whatever the Finance Minister might preach for controlling the fiscal deficit, will he be able to do anything for a subsidy bill which will go for funding Congress President Sonia Gandhi’s pet project : the Food Security Bill – that too in an election year. In fact, the party wants to encash it in the coming elections.
The key fundamentals of the economy are slipping into problems. Corporate earnings for the March quarter are sure to be hit, automobile sales are down rock-bottom and investment is shrinking. The confidence of India Inc is touching new low with the likes of HDFC chief Deepak Parekh openly expressing disappointment with the way the government had handled one after the other issue. The reforms are certainly a casualty. Chances are the government will blame the opposition for the same.
Net-net, a little comfort that was sought to be given by the government to the global rating agencies after presentation of the Budget on February 29 is turning into a discomfort for them as even the turn of events seems to have taken even Chidambaram by surprise.
In the mean time, it is the auto-pilot for the economy as economists including Dr Manmohan Singh watch the situation helplessly.
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