The recession, the inflation and now the monsoon... Where is India heading?
Aug 22 2012, 14:58 | By SME Mentor
It is evident that the Indian economy is staring at a crisis. With inflation averaging at 8 %, oil prices spiraling upwards, Industrial production growth almost stagnating, GDP growth that has slipped to 5.3 per cent, (the lowest in nine years) and now with an officially deficient monsoon the economic situation is worrisome to state the least.
The first official indications of a deficient monsoon from the Indian Meteorological Department have come in that say monsoons are likely to be deficient by 15 per cent this year. As a result, a drought like situation is a near certainty. This is the second drought that India will witness in the past four years.
Add to this the fall of the rupee against the greenback. Though the Indian currency has managed to recover from the record low of Rs 57.32 against the dollar it touched in the month of June, it still remains volatile. The fall of the rupee has resulted in the rise of the import costs for Indian companies and also made foreign currency loans dearer.
Is India growing?
Economists express concern over the fact that the growth in India is now shallow and unsustainable, mainly because ours has been a consumption led growth. Investments by businesses that are a good indicator of creation of new capacities and jobs have been on the decline. A recent report by Morgan Stanley notes how the share of investments has come down steadily from 26.2 per cent to 18.5 per cent (as a total percentage of the GDP) in the last five years.
Dharmakirti Joshi, chief economist at Crisil, one of the largest credit rating agencies in India points out, that India, which is still in the low per capita income category (under $1500) growth slipping to 5 percent, along with rising inflation is a cause of "grave concern" and should be treated "with a sense of urgency".
Growth Rate lower than expectation
The RBI had earlier forecasted an overall growth rate of 6.5 per cent for the year, on the basis of the assumption that the monsoon would be normal and agricultural growth would be in the region of 3 per cent. But this figure does not seem likely given the current state of the monsoons. With a drought like situation farm output is likely to stagnate bringing down the growth rate to 6 per cent or even lower.
Food prices to go up
Keeping in mind that the monsoon could indeed ditch Indian skies, the RBI in its July 31st monetary policy review mentioned that the effect of deficient monsoons would have a direct impact on inflation. As an immediate fallout of the poor monsoons the rise is food items such as milk, vegetables, fodder and the likes will shoot up. RBI is therefore justifiably worried about the fact that the high prices of food particles to further remain under pressure in the near term and the inflation will remain stubbornly high.
Can fiscal stimulus help?
There seems to be precious little the Government can do by way of providing fiscal stimulus. India's fiscal deficit for the current year remains high at 5.2 per cent of the GDP which overshoots the earlier target of 4.6 per cent by a wide margin. This is what is making it more susceptible to the global uncertainties as well.
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