Inflation is the biggest immediate challenge that the new government will face, according to Ajit Ranade, Chief Economist, Aditya Birla Group. He spoke in some detail on the strengths of India as also the mixed signals from different economies of the world at the panel discussion on the economy titled Economists on the Economaze, presented jointly by SASTRA University and The Hindu in Chennai on Saturday.
“We are in midst of election season. For the 16th time, a major transfer of power in a large country, which has 17-18 per cent of humanity, is to happen in a largely peaceful way. In no other country, be it small or large, there was such frequent major transfer of power in such a peaceful mode,” he said, adding that “it’s a modern miracle that a large country like India with extremely diverse flavours is together. But it’s majorly due to its civilization.”
India had many challenges, he said. Among the key ones, which hade been bothering the nation over the past 2-3 years, was zero growth in manu facturing or close to zero industrial growth. ``Yet, we have very, very high inflation,’’ he pointed out.
``The Number 1 challenge to tackle immediately is inflation,’’ he said. Control of food inflation would require even more attention because about 60 per cent of budget of most Indians went for food, he pointed out. ``You may call it non-core area in the U.S. and Europe, where food and fuel account for less than 10 per cent of their budget. But in India, it is core, and it needs to be tackled immediately,’’ he pointed out.
Focusing on the ‘maze’ part of the panel discussion topic, Mr. Ranade illustrated four mazes in the global economy that gave confusing signals to the world. Firstly, he presented a case on Japan and its economy. Japanese Prime Minister Shinzo Abe was celebrating the first anniversary of his government. He won on a thumping majority a year ago after making a single biggest promise. It was “Vote for me, I will give you inflation.”
He guaranteed high and stable inflation for the Japanese, Mr. Ranade said. ``So, there is a peculiar situation in the modern world where one country is desperately seeking inflation to end deflation, while in India we have been struggling with very high inflation — unimaginable levels in our history. We never had persistent double-digit official inflation (headline WPI) for 3-4 years in a row,’’ he said.
“Thus, in an integrated world or increasingly integrated world, inflation is high in one part. The other part, however, is struggling with deflation,” he pointed out.
The second maze he highlighted was the European situation. ``The European Union has been battling with debt crisis. Greece and many other countries have been struggling with sovereign debts, and their governments are indebted with no clear clue on repayments,’’ he said.
There was a fear that the debt crisis would lead to collapse or break-up of the EU. ``But the impact of such unstable situation on the Euro is surprising and intriguing. Yes, the Euro is strengthening amid debt concerns,’’ he pointed out.
The third maze was surrounding the U.S. economy. Standard & Poor downgraded the U.S. economy from AAA to AA on August 2, 2011. ``Normally, after such a downgrade, one would expect the bond market to crash. But, a day after the downgrade, there was a huge bond rally in the U.S.,’’ he said.
The fourth maze, he pointed out, was the debt-to-GDP ratio concerns. ``With debt crisis, Greece’s debt-to-GDP ratio is 100 per cent or slightly above. Other countries such as Italy, Belgium, Spain and Portugal are also having debt-to-GDP ratios over 100 per cent. It is about 40 per cent for the U.S. and China. In India, it is 80 per cent. While there are concerns over sovereign debt crisis in the EU and other countries, there is, surprisingly, no mention about one country that has the highest debt-to-GDP ratio in the world. It is Japan … and that has the ratio of about 350 per cent. Not only the ratio is high, large portion of debt is held by Japanese themselves not foreigners,’’ he said.
There were the signals in the modern world that were so mixed and confusing, he said. ``You can’t draw anything through conventional conclusions,” he concluded.