Saturday, June 13, 2009

Path to Recovery

In recent months or may be from last year we have seen some tremendous ideological changes at the national level and more so at the international level. People no longer speak of reforms as some magic wand that will solve all the problems. Don’t get me wrong they are not against it either but they are apprehensive about it. It has lost its charm. If people do approve of reforms they ask for stricter regulation. Being a Keynesian is no longer a drawback. The reason for this tectonic shift is the ongoing recession. It is the worst that the world has faced after The Great Depression and hopefully the worst that I would see in my life time. Though the damage in India was not of the same magnitude as in America or Europe but it certainly was felt. I agree that banks did not collapsed neither do companies seek state support or filed for bankruptcy but there is decline in the foreign direct investment, GDP clocked its lowest in the last five year and there certainly is decline in the job sector, something which all of us are familiar with!! What was most frustrating in the entire experience was lack of information. Suddenly everyone was expert and even the experts were clueless about the impact. First there was denial (Even likes of Chidambaram said that our economy is decoupled from the world economy and that we do not depend entirely on exports, ours is domestic demand driven economy and that the recession would not affect us), then there were talks of credit card crises about to break out in US, talks of China proposing new world currency (how would that affect us, I have no idea), prices of houses going down and inflation was high thereby making it hard for government to infuse liquidity in the market and it being an election year government was in no mood to risk. It seemed like a bottomless pit and on top of that Obama was saying that it is going to be worse before it gets any better.
But that’s not the case with India. The worst is behind us and we can look ahead for better times. Sure recession is not over yet but we are well on our way to recovery. There are signs of recovery and I am not making facts up. The following points will illustrate my view.
1. Indian economy clocked 6.7 GDP in 2008-09 year while most economies around the globe contracted. This performance was better than those predicted by the IMF and other leading economic bodies which said that we will clock 5-5.5. The performance was even better than that predicted by even RBI which said 6-6.5. The unexpected but robust performance enthused investors round the globe about India’s future potential.
2. The Sensex is riding high again. Though I believe it is not a parameter to judge economic growth but it is a parameter to check how world perceives us. Its current bull riding on FII is an indicator that world sees us as a safe and profitable investment option. That means we can look forward to some increased FDI flow in the country and if we can get huge FDI in infrastructure then it will certainly augur well for the country.
3. The most visible signs of recovery are the increase in the direct tax collection which is 17%higher than last year’s may collection when economy was booming. This is an early but sure signs of recovery. If there is an increase in the corporate tax collection for first quarter it would certainly be an indication of revival.
Add to this the return of UPA with a thunderous majority and their resolve to carry out reforms has infused markets with new optimism. However there are few bottlenecks too. The government expenditure would have to rise if we to have to continue on the path to economic recovery. The yawning fiscal deficit is a hindrance to it. Though we know that Manmohan Singh led government is not blind to it but the flagship schemes and others social sector programs (very important though) is costing exchequer heavily. Unless we get huge FDI inflow we can see reduced expenditure in infrastructure and sectors like increasing land under irrigation. Both of them are very important for the long term and should be ignored at one’s own peril. What lies ahead for the government is a tough balancing act between social sector expenditures, infrastructure and yawning fiscal deficit. It would have to tread very carefully. Can we trust Team Manmohan for the job? I will bet my money on them..
Signing off

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