The good news is that the viciously volatile 365 days of 2011 are over. The bad news is that 2012 threatens to be worse than 2011. The havoc wreaked by the party in power in 2011 threatens to haunt the economy through 2012. It may seem crass to be gloomy on the first day of the year but it would be downright stupid to not recognize the signs of decimation and the looming spectre of a crisis. Every single signal on the e-way is blinking amber and red.
The symbol of India’s economic health, the rupee, has sunk over 20 per cent to lurch around the Rs 54 per dollar mark. The Sensex, a measure of corporate vitality, slipped from its December 2010 perch of 20,025 points and is threatening to test new lows below 15,000. The cost of money is at its highest in over a decade. The government is borrowing at nearly 9 per cent; corporates at over 13 per cent and EMIs for homes are over 11.5 per cent. Industrial growth is slipping and green field investments are virtually stalled. It will be a miracle if GDP growth doesn’t slip below 7 per cent for 2011-12.
The reasons for the build-up of this crisis are simple. Two decades after the famous Manmohan Singh reforms, India still imports much more than it exports, leaving the rupee vulnerable. If the rupee managed respectability, it was thanks to inflows from foreign portfolio investors, FDI and remittances from NRIs. But then, paralysis in government led big-tag investors—FII and FDI—to shun India and stay home, leaving a ballooning gap in the current account.
Add to this inflation. Interest rates are rising because the government’s borrowings have shot up six times in seven years. The value of the rupee cannot be better abroad than it is at home.
And the situation threatens to only worsen. There is little scope for improvement in portfolio flows into India, not until the second half of 2012 in any case. Indeed, a slide in GDP growth could trigger outflows and put further pressure on the rupee. Already the bearish are making dire predictions for the Sensex. Some exports may grow but a large chunk of low-capital, high-employment exporters are struggling to find customers and make payments. The rising insurance pay-outs and the reluctance of Export Credit Guarantee Corporation to provide cover to exporters are clear indicators.
It would be tempting to cite global economic conditions for the mess India sees itself in. Indeed, the government has tried to sell this alibi. But that would be taking refuge in denial. Yes, there are problems in the Euro zone and there is uncertainty in the United States. The two zones account for nearly half the global GDP. But India’s problems are of its own making. Punch drunk, the government spent its way out of political trouble and bought an economic crisis. Inflation-inspired slowdown predates the crisis in the Euro by over a year.
The truth is that political profligacy has left the economy with a severe hangover. Inflation has made many business models unviable—after all, which business can plan for doubling of interest costs in one year—leaving a trail of consequences. A report by rating agency Crisil suggests that bad loans in the banking sector could shoot up to as much as 300 per cent from `56,000 crore last year to over Rs 150,000 crore. This could translate into large bailouts (as is being done in the airline business) and large-scale retrenchment. It promises to get worse. Thanks to the paralysis in the government, institutions are now refusing to lend monies to businesses that are vulnerable to clearance delays.
It is not as if the government doesn’t have options. Just like those in an alcohol-induced state, the hangover in the political economy needs rehydration. Theoretically, the government could revive the stock market and raise resources to plug the deficit with offerings from the star performers among PSUs and financial institutions. It could unroll a plan on curbing exemptions to the corporate sector, and drive subsidy controls.
Instead of sulking about “negative comments” by CEOs, the government should address the issue of stalled clearances. If the government-owned Coal India has to shrink expansion for want of clearances, what must the fate of others. Really, how much worse can it get. Truth is, projects with investments worth over Rs 2 lakh crore are stuck. Power plants are stuck without coal and steel plants without iron ore. Why not create a GoM and clear the case-by-suitcase queue?
In terms of legislation it could—again theoretically—push the Companies Bill that is languishing since 2005, liberate the Land Acquisition bill held hostage by the civil war in the government, clear the PFRDA bill held to ransom by Mamata Banerjee, and campaign for an early adoption of the pending Goods and Services Tax Bill. But all this would require a government with objectives. On Twitter the other day, someone described Pranab Mukherjee as the Prime Minister India never had. He is also the Finance Minister India does not have, stuck as he is in the political laundry.
The worst news is that there is no sign of the government waking up to the crisis. It has been spectacularly casual about the causal factors and seems to be in no hurry to act. The sermons on expenditure control are for Sundays. On weekdays the UPA’s faith is invested in debt and deficit. There is no slowdown here. Lined up on the bar counter are more ideas for spending. If, at all, the government’s borrowings are set to rise and the deficit of the Centre and states could cross the 11 per cent of GDP mark. It is almost as if a higher deficit is a badge of honour among Congressmen.
The cliché about crisis is that things get worse before they get better. India’s economy is trapped between possibility and plausibility, between a definite circumstance of crisis and infinite hope that its political masters will act. The tragic irony is that, 20 years after the ‘reforms’, the key to economic redemption is yet hostage to venal politics.
The writer is a senior journalist and is working on a book on the
history of India’s political economy