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Wednesday, February 19, 2020

Across the Aisle: Things fall apart; the Centre cannot hold

There is an old saying ‘Misfortunes don’t come singly’. It seems that the gods are not smiling on the Indian economy.

Written by P Chidambaram | Updated: October 28, 2018 12:30:34 am
Across the Aisle: Things fall apart; the Centre cannot hold Govt working on measures to ease NBFC cash crunch

There is an old saying ‘Misfortunes don’t come singly’. It seems that the gods are not smiling on the Indian economy.

Look at the bad news that is raining on the economy:

* Stock prices have dropped so much that the indices are trading at levels where they were 15 months ago.

* Foreign Portfolio Investors pulled out Rs 35,460 crore this month until October 25. This year, so far, the outflow has been about Rs 96,000 crore. The rupee was in free fall and, among developing economies, it is one of the worst performing currencies against the US dollar. It has depreciated 16 per cent in 2018 and may fall further.

* The price of crude oil (Brent) has risen to USD 77 per barrel. Global uncertainty, especially the turmoil in the Middle East, may cause a further increase in price. The almost daily increases in the prices of petrol and diesel have imposed an intolerable burden on the consumer. Rupee Falls, Prices Rise

* The depreciation of the rupee and the rise in prices of petroleum products have created a big hole in the pockets of consumers. Consequently, consumption of other goods and services is depressed.

* Rainfall this year has been below average. About 36 per cent of the districts have reported large deficiency in rains.

* Farmers are in revolt. The market prices of most agricultural produce are below the declared Minimum Support Prices (MSP). Only a handful of states have procurement centres, and in insufficient numbers. So, few farmers get the MSP.

* Merchandise exports have been disappointing in the last four years and have not exceeded the level of USD 315 billion recorded in 2013-14. In the first six months of this year, it was about USD 160 billion.

Little Investment, Scarce Credit

* According to the Centre for Monitoring Indian Economy (CMIE) data, new investment proposals worth only Rs 1,50,000 crore were announced in July-September, 2018, well below the long-run average. CMIE data also shows that 5,394 projects are stalled.

* Growth of credit to industry has struggled to reach the level of 1.93 per cent in August 2018. In most months of the current fiscal year, the y-o-y growth has been barely 1 per cent.

* Non-performing assets of banks have crossed Rs 10,00,000 crore. Adding to the woes of the financial sector, a systemically important NBFC, Infrastructure Leasing & Financial Services Ltd, has collapsed, casting a dark shadow on the entire financial sector. The insolvency cases are moving at a snail’s pace, and no big case was resolved within the stipulated 180-day period.

* The employment situation is bad and likely to get worse. The CMIE has reported that the unemployment rate was 6.6 per cent in September 2018, up from 6.3 per cent in August. This is when the labour participation rate has fallen from 46+ per cent (in 2016) to 43.2 per cent.

Macro-economic Instability

* The fiscal situation is a matter of worry. Against a budgeted growth of 19.15 per cent of net tax revenue, the growth rate between April and September 2018 was only 7.45 per cent over the collection in the same period last year. To reach the budgeted number, net tax revenue has to grow by a whopping 28.21 per cent in the remaining months of the current fiscal year, which is near-impossible.

* The disinvestment programme is stalled. Against a budgeted target of Rs 80,000 crore, the government has been able to raise, so far, only Rs 9,686 crore. What will be the hole under this head is not yet clear.

* The Budget has assumed that public sector enterprises will give the government a dividend income of Rs 1,07,312 crore this year. By being forced to absorb Re 1 per litre of petrol and diesel, the oil companies have taken a hit of Rs 3,500 crore in the October-December quarter alone. Hence, their dividend distribution will be lower. The same may apply to LIC if it bails out IL&FS.

* The government is pushing programmes that are grossly underfunded. An example is the insurance-based medical care scheme, Ayushman Bharat Yojana. The goal is to cover 10 crore families (50 crore people) but the allocation, so far, is only Rs 2,000 crore! Other under-funded programmes are MGNREGA, PM Awas Yojana, Drinking Water Mission, Swachh Bharat, National Health Mission and Gram Jyoti Yojana.

* The current account deficit (CAD) at the end of September 2018 is estimated at USD 35 billion. There is no hope that it will narrow; on the contrary the year may end with a CAD of USD 80 billion or about 3 per cent of the GDP. Measures announced by the government last month were feeble and ineffective.

* The pressure on FD and CAD will push interest rates up. Bond yields have hardened. The RBI seems inclined to raise the policy rates. If, as feared, borrowing rates go up, both investors and consumers will be hurt, depressing economic activity.

All of the above, and more, will require competent economic advisers and competent economic managers. After the exit of Dr Raghuram Rajan, Dr Arvind Panagariya and Dr Arvind Subramanian, there is no economist of international repute advising the government. Of the economic managers, the less said the better. They are busy defending the indefensible and writing blogs.

I am reminded of a verse by W B Yeats: ‘The Centre cannot hold’.

Website:; Twitter: @Pchidambaram_IN

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