Wednesday, Feb 01, 2023

Over the barrel: Waiting for a big bang

The global economy is in trouble but India is attracting positive comment. Finance minister must make the most of the moment

india, india economy, global economy, indian economic scenario, India news, economic opinions, budget, arun jaitley, 2016 economy, opinions, columns, editorials, indian express Some analysts are suggesting that the recession of 2016 will be worse than the financial crisis of 2008. (Illustration by C R Sasikumar)

Finance Minster Arun Jaitley was sensibly measured in his response to the chatter in Davos that India was in a sweet spot.
He accepted credit for the fact that India ranked amongst the fastest growing economies in the world at present. But he made it clear that India could not rest on this particular laurel.

Much is needed to be done to deliver “achhe din”. Now back home, the FM needs to put together a budget that puts flesh on his intended next steps. He needs to detail not only the arithmetic of governance but also the way he proposes to navigate the economy through the choppy international waters of collapsing commodity prices, demand slump, rising debt, sectarian strife and terrorist violence. He needs to inform the public not only how he intends to address the immediate imperatives of poverty alleviation, income generation, skill development, social justice and sustainable development but
also how India can maximally leverage the opportunities generated by the “fourth industrial revolution” (the theme of discussion at Davos).

The Union budget is not a state of the Union pronouncement but it is the one occasion when all members of Parliament are present and the speech is widely reported. It, therefore, offers a platform to define the government’s economic strategy and, in particular, to embed its various programmes, such as Make in India, Digital India and Start-Up India within a holistic, multidimensional and international framework.

The global economy is in trouble. Some analysts are even suggesting that the recession of 2016 will be worse than the financial crisis of 2008. China has been the locomotive of global manufacturing for more than two decades. But its engine has now slowed in the face of declining demand, rising real wage rates and a shaky banking structure. This slowdown has compelled it to transit from an export- and manufacturing-led model to a domestic- and services-driven platform.

Subscriber Only Stories
Three big takeaways of Union Budget 2023-24: Capex, fiscal prudence and n...
Scintillating sea creatures and what makes them special
Union Budget 2023: How the government calculates the math
Focus on border areas, NCC plans to raise cadet strength by 8 lakh

This transition, along with a broad-based contraction in global demand, has knocked the props from under the commodity market. The price of every major commodity, from soya beans to steel to copper and oil, has plunged and many commodity exporting countries are now on the edge of financial insolvency. The five oil producers in the Gulf (Saudi Arabia, Oman, the UAE, Kuwait and Bahrain), for instance, had a combined fiscal surplus of around $600 billion three years ago. Today, they are struggling to manage a deficit of approximately $400bn — a turnaround of nearly $1 trillion. The Russian economy is on the skids, the Nigerian currency naira has been hammered down against the dollar (as, in fact, have most currencies) and Venezuela is close to declaring a sovereign default. All this has pushed global stock exchanges into a bear vice — the Chinese stocks, for example, are down 45 per cent from the June levels — and with reduced income levels, there is a growing likelihood of corporate and, possibly, even sovereign defaults. And if not that, then there will be monetisation and inflation.

The US stands out for its relatively solid growth rate of around 3 per cent, but even in the US, banks are exposed: Reportedly, they have lent between $500bn to $1tn to shale oil and gas companies. With the price of oil at around $35 a barrel — and still under pressure as Iran looks to add 500 kbd (thousand barrels per day) in by March — most of these companies are staring at bankruptcy. In 2008, the US financial system was brought to its knees by the loans extended to the housing market. In 2016, it could be placed under a comparable stress by the petroleum industry.

Against this international backdrop, it is no surprise that India attracted a positive comment at Davos. Its macro fundamentals are strong. The balance of payments is healthy; the current account deficit is down to 1 per cent; the fiscal deficit is on track to reach its target of 3.9 per cent of GDP; inflation is in check and, on a trade-weighted basis, the rupee exchange rate is not a cause for worry.


But the FM knows better than most that these macro details hide underlying weakness. Growth is not generating enough jobs and the numbers of unemployed and underemployed are increasing; private sector investments have dried up in the face of over-capacity, high debt and slackening demand; the public sector has not taken up the investment slack; the banks are loaded with non-performing assets and there is a gap between the rhetoric of structural reform and the reality on the ground.

The FM does not need a tutorial from armchair commentators on what needs to be done. That said, my hope is that he will present a big bang budget that will address most, if not all, of the above issues. And that he will set out a roadmap for leveraging the benefits of the oil price decline (such as competitive fiscal terms for domestic exploration, opportunistic acquisition of stranded assets, subsidy reduction, etc) and, at the same time, moving the economy further down the path of a non-oil- and non-coalbased energy system (such as gas pipeline grid, clean energy innovation).

I also hope that he will make the most of the heightened interest in India and the fact that China’s gloss has dulled somewhat. India has for long pitched its investment story around its open and transparent system. Hitherto, this has not cut much ice because of red tape, corruption, contractual uncertainty and unfavourable comparison with China’s decisive and swift decision-making.


Now, however, India’s pitch could have greater resonance. This is because investors have woken up to the reality that they do
not really know what is going on in China, that its numbers cannot be trusted and that, when push comes to shove, they have no — or at best limited — recourse. In contrast, India does not fudge its numbers, information is freely available, its problems are on full display and criticism is normal. Although the proposition would be even better if it were to reduce the hassle factor of doing business in the country. This altered mindset should be in the FM’s mind when he is crafting his speech.

First published on: 02-02-2016 at 00:02 IST
Next Story

Burglars make off with booty worth Rs 24 lakh

Latest Comment
Post Comment
Read Comments