Posted in Finance Articles, Total Reads: 1927
, Published on 21 February 2013
Analysts, Economists, Politicians, Researchers and Scholars are in a strong consensus and skepticism that Indian will be a super power by 2030. But if we see the present conditions and its implications then it envisions a grim look on where the economy is heading and what is the future for India?
Global economy has been witnessing a downturn for quite some time and India being a developing country has been hit hard due to which the economic growth has worsened and the major hurdles for this are corruption, high interest rates, weak policy reforms, weak economics and weaker corporate governance. The pace with which economy is growing is slow and the economics replicate the big picture.
To revamp the situation, the UPA government which is in its second innings is trying hard to revive the economy and to capture the strong hold, it has made some agile decisions like FDI in retail, FDI in aviation, restructuring the broadcasting and media sector so as to attract more foreign investment, reshuffling the cabinet by giving younger ministers more responsibility and authority by deploying them in major roles, planning a short term fiscal consolidation and growth stimulus plans.
The UPA government has fairly done a good job by taking agile decisions but it has not yet implemented the major reforms which are DTC, GAAR and GST. DTC which is the Direct Tax Code that will help the government increase tax revenue and keep an eye on tax avoiders. GAAR is General Anti- Avoidance Rules which is aimed at retrospection tax and this became more prominent after Vodafone Case. GST is the Goods and Service Tax aimed at collating different state tax regimes into a single tax regime.
When it comes to working out economic indicators, India is finding tough to adapt to certain valuation methods. For example, when majority of the countries in the world are using CPI method to calculate the core inflation, India is still using the age-old WPI method. Recently, it adopted CPI but is not yet fully adopted and still relies on WPI for projections and decision making. Even our other indicators like GDP, Inflation, IIP, Trade balance are all lagging indicators but not leading indicators. Due to this, it becomes tough for the policy makers to take further decisions. These indicators help us to understand the trajectory of the economy and its implications on our life.
Some of the economic indicators include GDP, Trade Balance and Balance of Payments, IIP, Current Account Deficit (CAD), Fiscal Deficit (FD), Inflation and PMI.
India’s GDP was 9% for the year 2010-11 and 5.3% for the year 2011-12and 5.5% for the first half of year 2012-13. India’s GDP constitute roughly 2.98% of world economy. This clearly indicates that the country has to do some catch to reach the 9% mark so as to be considered as one of the powerful nation and also help it to contest the race to become Asia’s biggest economy.
Trade Balance of the country is calculated by subtracting exports and imports and we see that our country has a trade deficit but not trade surplus. We still have more imports than exports and the trade deficit is at 18 billion US dollars for September 2012. We can also a decrease in foreign exchange reserves for India which stands at around 255 billion USD.
Index of Industrial Production which addresses the production side is showing a grim look. The August IIP is at 2.3% while July IIP was 0.2% and it was 3.4% y-o-y. The better numbers in this month’s IIP is due to the better growth in consumer growth. The growth of core sectors stood at -2.1% due to negative growth in crude oil and natural gas. IIP figures for the period October 2012-March 2013 are expected to grow better as government has stepped in and has announced major policy reforms.
This term has been a part of every citizen’s day-to-day life. It is pinching the common man in every possible manner. Government and Central Bank (RBI) are trying to tame this by their own deeds but yet not able to achieve it. To tame this RBI has increased the key policy rates 10 times during April 2010 and May 2012. CPI Inflation which is the new method of measuring inflation adopted by India is hovering at 9.73% for September compared to 10.03% for August. Before this India use to follow WPI method to calculate inflation which has become obsolete.
Current Account Deficit and Fiscal Deficit
India’s Current Account Deficit (CAD) is 16.2 billion USD for the Q2 of 2012 and this has been a peril to the nation. In order to reduce this, the government has been trying to quickly amend the policies and reduce the subsidies. The first step to reach the target was to open the gates for FDI in India and the government has decided to do so by allowing FDI in Retail and Aviation and increasing the same for broadcasting. India ballooned to an all-time high of CAD in March 2012 which was 21.70 billion USD or 4.5% of GDP.
When it comes to Fiscal Deficit (FD), India’s fiscal deficit is hovering at 5.8% of GDP.
PMI stands for Purchasing Managers Index which helps to analyze both manufacturing and service sector. HSBC Markit PMI for India stood at 55 which show expansion. PMI for manufacturing sector stood at 52.8 while service sector at 55.8. So it is good news for the nation. If PMI is below 50 then it indicates contraction and if it is equal to 50 then it indicates neutral. So, we can see the reflection in IIP.
Much to everyone’s surprise India’s BoP position has managed to improve to US$ 5.7bn for the fourth quarter of 2012 from US$ 12.8bn in the third quarter of 2012. The major reason for this correction is due to appreciating rupee and the increase in foreign inflows as RBI stepped in to reverse the interest rates and tried to attract more foreign investors so that they deposit the dollars and hence rupee shall start depreciating.
Finally, we can strong believe that India can jump through the verge of stagflation into a successful nation and to achieve this, the nation has to address some major issues like corporate governance, corruption, policy reforms etc. We as citizens have to wait for the fruits to grow as government has sowed the seeds of success by paving way for FDI in sectors like aviation and retail and have already amended faster policy reforms. We can see our confidence through Consumer Confidence Index which is at 82.1 for the first half of 2012 which shows that consumers are confident that India will hit back hard and make way for itself through the blockages. Consumer confidence is high when unemployment is low and GDP is high.
The Indian economics is getting worsened because of strong rift between central bank and the finance ministry and the same was visible during the monetary policy review. Both are not inclined to each other. While central bank is trying to tame inflation and finance ministry is trying to improve growth causing a grid-lock.