Economy in distress: Is there a way out?
'It’s only when the tide goes out that you realise who’s been swimming naked,' billionaire investor Warren Buffett once famously said. That could be said of the Indian economy today. With crude oil prices rising, the rupee in free fall, inflation creeping up, the investment rate on the slide and financial markets in a funk, the tide is definitely ebbing. And it has caught many bankers, industrialists and government officials in the buff.
The Modi government didn’t exactly inherit an economy in a shambles in 2014. According to revised GDP calculations adopted in 2015, GDP growth under the UPA stood at 6.9 per cent in 2014, and recorded a 10-year average of 8.1 per cent.
When the Modi government assumed office in May 2014, the crude oil price was $106 per barrel, declining steadily till it hit rock bottom at $28.08 in January 2016. In the UPA-II years (2009-2014), the average oil price was $93 per barrel as compared to the corresponding $53 during NDA rule. This was a Goldilocks moment for the economy under the Modi government during which all external factors were in its favour.
Now these are fast becoming a nightmare.
India’s single largest foreign exchange outflow is on account of crude oil — it was $88 billion in 2017. Crude oil prices have surged by 24 per cent in just six months between April and October, from $68 a barrel to $84 a barrel. Every dollar increase in global crude oil prices impacts India’s import bill by Rs 823 crore. This explains the widening current account deficit—from 1.8 per cent of the GDP last financial year to 2.4 in the first quarter of this financial year. The falling rupee has only made it worse.
Sadly, the devalued rupee has not seen any increase in exports, as would be expected. Instead, there has been a 2.15 per cent decline in India’s merchandise exports this September. In fact, we import many products we shouldn’t, especially agricultural items. The rising oil prices have also stoked fears of inflation, and the RBI has limited scope for reducing interest rates which encourage consumption and investment. There is now anxiety in the markets that the central bank may raise interest rates at the next opportunity.
The other global factors adding to apprehensions in the Indian economy are the rising interest rates in the US and the protectionist trend around the world. India’ s stock market has seen an outflow of over $12.33 billion (Rs 90,746 crore) this calendar year, the highest in a calendar year since 2002.
As if external factors were not enough, there are perilous developments on the domestic front too. The woes of the banking sector continue to mount. State-owned banks wrote off Rs 3.1 lakh crore of loans and are struggling under a mountain of over Rs 10 lakh crore worth of bad loans.
They are clearly not in a position to fund businesses. The lack of funding, coupled with shortage of raw material and unfavourable market conditions, have stymied new projects. Announcements of new projects are down 41 per cent over the previous quarter. The biggest casualty is investment which fell to 30.8 per cent of the GDP in March 2018, even lower than the 29.6 per cent in March 2017 following demonetisation. It was at an all-time high of 41.2 per cent in 2011. The recent collapse of infrastructure financing giant IL&FS with a Rs 93,000 crore debt has rattled financial markets.
Adding to these woes is the rural distress across the country. According to a Crisil report, 2018 is going to be another year of low farmer income because mandi prices are trailing minimum support prices. Poor agricultural income means low demand for consumer goods with all its implications downstream.
One should not forget that demonetisation and the sloppy implementation of GST have dealt two enormous body blows to the Indian economy during the Modi regime, the repercussions of which are still being felt. Besides, many of the Modi government’s signature schemes such as Make in India have fallen far short of their promise. The number of jobs created is debatable, but is by all accounts insufficient, considering the 12 million job-seekers in the market currently.
Also, judicial intervention and confused government policies have made several key industries languish.
All these factors point to an economy in distress. Our Executive Editor MG Arun and Senior Editor Shweta Punj assess the state of the economy and look at the way forward. We also have a panel of eminent economists voicing their views on critical challenges facing the Indian economy. As the economists tell us, the government is still in defensive mode — reacting to events rather than framing policies. These are clearly not good signs.
The Indian economy has often been classified as a tiger because of its vast potential. In spite of blundering governments and stifling bureaucracy, it still clocks in as one of the fastest growing economies of the world. I would still say we are a tiger but a wounded one in need of urgent attention of the right kind.
(India Today Editor-in-Chief's note for cover story, The Economy: Distress Signals; for October 29, 2018)