Opinion Slip sliding away
The governments lack of initiative worsens the economic environment
It might seem harsh on consumers but the government now has very little choice but to increase pump prices of petrol and diesel. Given that crude oil prices are still averaging $110 per barrel,despite dire predictions of a recession in the US and a slowdown in the worlds second largest economy,China,the government cannot afford to foot the bill on its own. Citigroup estimates that,at an average cost for the Indian basket of $105 per barrel,subsidies could cross Rs 68,000 crore. While the government cant be blamed for soaring crude oil prices,it has done very little to keep prices in check; among its initiatives that will further stoke inflation is the hike in the minimum support prices by 15-38 per cent.
Even as it stares at lower revenues this year,it has decided to borrow Rs 53,000 crore more than it had intended to at the start of the year,an announcement that has spooked the bond markets and sent yields soaring to nearly 9 per cent. Even as it spends more,it is crowding out funds for private sector companies at a time when the economy is slowing. Growth in manufacturing has slipped to 6 per cent between April and August from 9.2 per cent in the corresponding period of 2010,while industry as a whole clocked just 5.6 per cent versus a more robust 8.7 per cent.
As the central bank has pointed out,government expenditure needs to be targeted at investments rather than consumption. Already corporate fixed investment,after falling in the second half of 2010-11,shows few signs of picking up,implying growth could come in at sub-7 per cent levels in 2012-13. It is no wonder corporate chieftains are frustrated: Wipro chief Azim Premji has chided the government for being in a stupor,saying growth would be hit unless it made a strong correction. Corporate profits for the three months to September 2011 tell the story: for a sample of 754 companies (excluding banks,financials and oil PSUs) net profits have fallen 21 per cent year-on-year.
At a time when the US and European economies are in trouble,the Indian government has done little to ease the pressure for Indian companies. On the contrary it has contributed to making the macroeconomic environment even more hostile. And for that it is now facing the music in the form of lower revenues; net tax revenues are up a paltry 4 per cent y-o-y between April and September and since there were no windfalls from 3G licences to be had this year,revenues have crashed 24 per cent y-o-y. Also,expenditure has risen some 11.5 per cent,but this has been more on account of lower outflows on plan spends rather than non-plan spends,clearly not a desirable trend. The result is a yawning gap of Rs 2.9 lakh crore,an increase of 120 per cent y-o-y. As such,the fiscal deficit,for the first six months,has come in at 71 per cent of what was budgeted for the full year of Rs 4.13 lakh crore,and how much trouble the government is in is clear from the fact that the average in the last six years has been 50 per cent.
Economists estimate that depending on the quantum of subsidy,on various accounts,that the government chooses to dole out,the fiscal deficit for the current year could now end up well above 5 per cent and closer to 6 per cent of GDP against the targeted 4.6 per cent. One reason for the slippage is also the huge shortfall in collections from the sale of shares in state-owned firms. The government had hoped to mop up Rs 40,000 crore through share sales but,so far,has managed just Rs 1,200 crore. The target didnt seem overly ambitious in late February but although there are five months to go,it seems unlikely that even Rs 20,000 crore can be raised,given the state of the equity markets.
The follow-on issue of oil exploration firm ONGC,for instance,has been rescheduled twice already. The government had been hoping to pick up around Rs 12,000 crore through share sales of ONGC and another Rs 6,000 crore from steelmaker SAIL. While it is true that investors have taken money off the table globally,one reason why India has been among the worst performing markets this year is the near absence of policy initiatives as also the governments inability to tame inflation. Had the government pushed through a few important reforms and managed the telecom and other scams without coming across as rudderless,foreign investors would certainly have given the Indian markets a look-in. Instead,they have stayed away with inflows reduced to a trickle.
A slowing economy,now estimated to grow at between 7.3 and 7.5 per cent this year dragged down by slower merchandise exports at 36.4 per cent y-o-y in September and the anaemic rise in imports at 17.2 per cent y-o-y,can hardly inspire confidence.
The writer is resident editor,Mumbai,The Financial Express,shobhana.subramanian@expressindia.com
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