JOIN USThe year 2013 was dismal as far as the economy was concerned. Growth came down to below 5 per cent. The Consumer Price Inflation hovered around double digits while the food inflation approached 20 per cent towards the end of the year.
The rupee became the worst performing currency among the emerging economies. Both the fiscal and the current account deficits reached alarming levels. The appointment of Raghuram Rajan as the new RBI governor and some of the emergency measures (like RBI directly lending the oil companies dollars to import oil, outside of the regular foreign exchange market) and the postponement of the winding up of monetary stimulus by the US Fed have temporarily halted the slide of the rupee.
The finance minister, apart from blaming his predecessor, has taken some steps like raising the import duty on gold and luxury articles, which, together with the big fall in the rupee (which has made imports more expensive and exports more profitable) has helped reduce the trade deficit while encouraging more smuggling. He has also resolved to rein in fiscal deficit, though it is unclear at this stage how he would achieve his target.
Politically, the Congress party has suffered a disaster at the recent polls. The high inflation, massive corruption and the slowdown in growth and job creation have all contributed to this. BJP, under the new leadership of Narendra Modi is trying hard to project a more modern and secular image (where toilets matter more than temples) and according to most opinion polls, is going to get more seats than the Congress in the coming elections. The meteoric rise of the Aam Aadmi Party and its capturing of Delhi administration is an indication of popular anger against the old style politics and politicians steeped in exorbitant entitlement culture.
But what is disturbing is that AAP is mainly focussing on populist measures like halving electricity tariffs and legalising illegal settlements to attract votes, instead of devoting energy on providing a responsive corruption-free government improving the quality and delivery of public goods and services. This is the kind of politics which the Left parties resorted to, which eventually led to the economic decline and fiscal ruin in all the states ruled by them, despite their initial success in redistributive policies like land reforms winning them popular votes.
In the external economic environment, the US economy is finally showing some signs of economic recovery. This is good for India as far as its exports are concerned. But it may pose problems for countries like India to the extent it induces the US Fed to tighten its cheap money policy leading to higher interest rates which, along with higher growth prospects in US, would divert more global funds towards America. The rekindling of growth in the US and Japan together with continuing high growth (though a bit subdued) in China and protracted recession in Europe may, on balance, put an upward pressure on the world price of oil.
However, the revolutionary developments in shale oil and gas exploration technology may temper the rise in global energy prices, helping India to contain its oil import bill. The bigger danger for India could be the fall in the value of the rupee which would fuel inflation and aggravate the massive oil subsidy bill.
High inflation
Though the near-term economic outlook for India is rather gloomy with a lame duck government for another five months in office (growth rate for 2014 would, in all likelihood, be around 5.5 per cent), the bright spot is the continuing faith of global companies in the longer-term India growth story.
For example, MNCs like Hindustan Unilever and GlaxoSmithCline are investing sizeable amounts in expanding their operations in India. This is despite some big investment projects (like those of Posco, Vedanta and Mittal) not getting off the ground due to lingering land acquisition and environmental issues even after the formation of the Cabinet Committee on Investment (CCI) to clear big-ticket projects.
A lot of investors -- both domestic and foreign -- are now banking on Modi coming to power. Nonetheless, a big question mark hangs over whether Modi's Gujarat model of governance and creation of an investor-friendly climate can be replicated at an all-India level where BJP is highly unlikely to get an absolute majority and will have to form a coalition government with motley regional parties pulling in different directions.
As regards the common people’s concerns of high inflation and corruption, it would be naïve to expect any significant improvement, even if the UPA coalition is replaced by a NDA coalition at the centre. Some of the BJP leaders and their likely coalition partners have proved to be no less corrupt whenever they got opportunities to enrich themselves through illegal mining, award of contracts and real estate deals.
The high inflation -- particularly the high food inflation -- is also going to stay with us as the demand for superior varieties of food like pulses, vegetables, milk and poultry would continue to grow, specially with rising incomes in the countryside thanks to the rural job scheme(MGNREGS).
The supply of such articles cannot keep pace with the rising demand due to supply-side bottlenecks like diversion of agricultural land to industrial use and urbanisation, stagnant productivity growth in agriculture, steadily rising minimum support price leading to land being used for producing grains (and then rotting in godowns) instead of other food articles and many rural workers opting for less arduous MGNREGS jobs in place of working in agricultural fields. The only respite for common people would come if high growth revives as a result of better global economic conditions and improved governance in India, creating jobs and incomes for more people. The chances of this happening in 2014 does not appear particularly bright if one looks at the crystal ball at this point of time.
(The writer is a former professor of economics at IIM, Calcutta)