Obviously, there can be more than one view on the macro-economy. While no one denies the slowdown, opinion is divided on how soon the outlook will improve. Over the past fortnight, there have been two differing views on the state of the economy and what is in store for it over the next year or so. To be expected, the official view, as articulated by the Finance Minister, P. Chidambaram, is more optimistic than the report by the rating agency Standard & Poor’s (S&P), which on November 7 warned that India’s sovereign rating would be lowered if “the policy drift “is not checked.
Earlier, Mr. Chidambaram, had said that although some economic problems remain, the outlook was much more positive than it had been recently. No stranger to talking up ‘economic sentiment’ - that is part of his job - his recent speech on November 1was as balanced as any official presentation on the economy could be. It probably helped that on the day of his press conference, the domestic stock markets had soared, with the Sensex breaching a record set as far back as in January 2008. The NSE-50 stock index, the Nifty, set its own record soon. On the special muhurat trading session to mark the New Year (a stock market tradition for long), it gained 18 per cent since end-August.
Stock market’s rise — and that too in the festive season — is seen to herald good tidings. The Finance Minister was, however, not relying on stock market performance alone.
In fact, he advised small investors to be cautious. A salutary inference ought to be that everyone should recognise the disconnect between the financial sector. and the real economy. A runaway stock market will not automatically reverse the economic slowdown.
String of good news
A string of good news seemed to support the Finance Minister’s optimism. A turnaround in exports over the past three months has narrowed the merchandise trade deficit and with it the current account deficit, which, until recently, was among the most serious of economic concerns. A highlight of Mr. Chidambaram’s speech was that the CAD (current account deficit) was eminently manageable and could be contained within $60 billion. That would be sharply lower than the $88 billion plus deficit of last year.
Core sector growth has been encouraging, going by the last reporting month’s figures even though it by itself does not considerably improve the bleak industrial outlook. For that to happen, investment has to revive. Various government measures, notably the constitution of a high-level Cabinet committee to push through stalled projects, will help in the investment revival of which the Finance Minister sees ‘green shoots’.
A big positive
Even more optimistically, the Finance Minister was confident of containing the fiscal deficit to 4.8 per cent of GDP (as committed by him earlier). Along with the measures taken by the Reserve Bank of India (RBI), the intractable problem of inflation will also be solved. Mr. Chidambaram’s support of recent RBI measures, which pushed up interest rate signals, ‘has to be viewed a big positive for the economy’. It suggests a co-ordinated, even complementary approach with the central bank to tackle macro-economic problems. It would be welcome indeed if henceforth the Finance Minister does not publicly disagree with the RBI over interest rate hikes, as was the case during the tenure of the previous governor. The S&P report blames “policy paralysis” for India’s economic problems. Evidently, the government’s efforts to revive investments through such measures as priority clearance of large projects and reviving stalled ones will be closely watched by investors, including the rating agencies.
Another point of contention is controlling the fiscal deficit. S&P estimates the deficit to include not only the Centre’s but a broader measure of general government deficits (projected at 7.2 per cent) to which should be added 1-2 percentage points of GDP for unprofitable public sector, including state electricity boards and oil marketing companies. The issue here is reining in subsidies, a perennial worry that has acquired larger meanings in the context of the food security bill and the subsidy it entails.
Mr. Chidambaram may not be exaggerating economic prospects when he perceives green shoots even in investment.