Maladies Of The Indian Economy: What Went Wrong And How Can It Be Fixed?

Posted on September 19, 2013 in Business and Economy

By Shashank Saurav:

The modern day world economics presents a curious picture. Today, world’s major booming economies are languishing under low industrial productivity as well as under the depleting values of their currencies and high inflation rates. Be it South Africa, India or Brazil. All are now in the same boat battling the waves of economic despair and the inertia of slow growth in the recent financial year.

Indian economy

One wonders as to why such a danger looms so heavily upon all these Developing economies that were recently quite aggressively growing. Have we seen the worst or is it still impending? In India’s case, it is unanimously seen as the repercussion of the magnanimous Government spending that has raised its fiscal deficit to 7% of its GDP from the tolerable 2-3% range. This, coupled with the lack of Foreign Investments funds flowing into the country owing to the distrust caused by the corrupt Govt. policies and scams have thrown the Indian Economy into an abyss of despair and have worn out the shine brand India use to bask in previously. The double digit inflation rate along with the low industrial output has further aggravated its miseries.

So, what are the steps that the Indian economy should take up to enable itself to grow in a similar fashion as it was earlier. Firstly, in my view, Quantitative Easing is very important as this would help it leverage the new rates and the borrowing would become cheaper in India thus giving impetus to the investors. The one step in this direction worth mentioning was the recent MOU signed between India and Japan where they increased the upper limit of credit swapping from 15 Bilion $ to 50 Billion $ between two countries . This would help it to maintain its foreign reserves even in Japanese yen which already is at par with India. Shinzo Abe’s economic policies — also hailed as Abenomics, are worth mentioning in this regard. His second term in office since 2008 has brought in new sense of hope in the dwindling Japanese economy by infusion of fresh policies aimed at solving long term problems of the country. India , Japan and China, all face slow growth and economic challenges. India, however, lacks the prudence of a political class who can gaze future problems and frame policies to tackle long term issues. Populist measures and the subsidies of the Govt. have put increasing pressure on the economy.

For example, the 60,000 crore loan waiver given to the Indian farmers in 2008 wasn’t even accounted for in the budget properly as to where that money will come from. India’s fiscal dislocation is a result of such cathartic steps taken by the Govt. mainly to woo the voters. To add to this, the multi crore scams —the 2Gs , the Commonwealth etc. have further lead to immense loss of public faith and outcry against the rusted system. India was comfortably growing at 8-9% in the year 2008-2010. The fiscal deficit has risen from 2.5% back then to alarming 7% at the present. India’s ex finance minister, Yashwant Sinha had warned that P.Chidambram had overlooked the fiscal issues of the country in his zest to please the masses by introducing such measures. This not only weakened the economy but also set a wrong precedent of defaulting among the farmers. In a recent interview to Mint, SBI’s chief Pratip Chaudhuri candidly mentioned in an interview to a Business daily that since the next elections are deemed to take place in 2014, the farmers have began defaulting since they think that the Govt. will surely issue some waiver to woo them again .

Secondly, the recent Global risk aversion has also demotivated the foreign investors from investing in the developing countries. Global risk aversion has spiked in response to Fed Chairman Ben Bernanke’s announcement of plans to taper Quantitative easing (QE). As the 2008 and 2011 experiences demonstrate, heightened risk aversion among global investors reduces capital flows to emerging markets, even when they are not the source of risk. In such a case, the Indian economists can increase the interest rates such that the FIIs are lured in by higher returns. The recent land reform passed over the hundred year old Land Reform Bill will further even lead to more issues with respect to the acquisition of the land for setting up factories .

The recent effects of the economic tightening of the US reveals the ugly fact that the flow of money in the emerging markets is largely determined by the policies of the Fed Reserve. Among the most vulnerable are Turkey, South Africa, Brazil, India, and Indonesia — a group that Morgan Stanley researchers have dubbed the “Fragile Five.” As I write this article down, the Rupee is recovering and due to the withholding of the Ben Bernake’s tapering of the QE , Sensex has reached its highest peak since Jan 2011 .

It’s high time that Indian political class starts being pragmatic and stops leading us in the Utopian belief that all is well. With an expensive election looming over, chances are rife that the poor and the middle class of our population will have to bear the brunt of these faulty practices. At least, we should have the long term vision for a nation that is poised to become the next ‘Super power’.