THE DOWN­TURN

India Today - - CONTENTS - and Sh­weta Punj By M.G. Arun

Run­away fuel prices, a fall­ing ru­pee, a widen­ing CAD, a bank­ing cri­sis and an in­vest­ment slow­down have all put the econ­omy un­der strain

A raft of is­sues—both threaten to global and de­rail the do­mes­tic— chal­lenges econ­omy, pos­ing the to the Naren­dra fresh run-up to the Modi gov­ern­ment quick Lok Sabha in turn­around elec­tions. is not on the And a cards

Back in the last gen­eral elec­tion, in 2014, noth­ing helped the then prime min­is­te­rial can­di­date Naren­dra Modi more than his promise to root out cor­rup­tion and bring a trou­bled econ­omy—de­railed by the ‘pol­icy paral­y­sis’ in the sec­ond edi­tion of the UPA gov­ern­ment—back on track. With just months to go be­fore the next gen­eral elec­tions, the econ­omy, iron­i­cally, is oc­cu­py­ing cen­tre stage again. There’s dis­tress and un­cer­tainty, trig­gered by a host of global fac­tors, and, yes, some pol­icy ma­noeu­vres and mis­ad­ven­tures too. The short-lived op­ti­mism in some quar­ters, as GDP growth ticked past 8 per cent in the first quar­ter of the cur­rent fis­cal, is all but gone.

Ris­ing oil prices and a widen­ing cur­rent ac­count deficit (CAD), where the value of im­ports is higher than that of ex­ports, have weak­ened the In­dian ru­pee by 14 per cent this cal­en­dar year, and it’s be­ing pushed down fur­ther. High fuel prices are threat­en­ing to stoke in­fla­tion, forc­ing a wary cen­tral bank to re­sort to a ‘cal­i­brated tight­en­ing’ of the mone­tary pol­icy. Stock mar­ket in­dices, quick to re­act to news, good or bad, have been on a los­ing streak, as for­eign in­vestors pull out of In­dian stocks, with global wor­ries and a weak ru­pee hit­ting lo­cal re­turns. Five days of mar­ket tur­moil in late Septem­ber wiped out Rs 8.47 lakh crore in in­vestor wealth, while an­other Rs 4 lakh crore was lost in the first five min­utes of the trad­ing ses­sion at the Bom­bay Stock Ex­change on Oc­to­ber 11. V.V. Viju, 40, a Mum­bai-based in­vestor in the stock mar­ket, says he has been so bruised by the re­cent blood­bath in the mar­kets that he plans to keep away from in­vest­ments for a while. “The Sen­sex has fallen over 10 per cent since Au­gust 28 this year, and an­a­lysts pre­dict more tur­moil,” he says. “This looks like a long-term de­pres­sion, so it’s bet­ter to exit and be back when the re­vival re­turns.”

Mean­while, for­eign in­sti­tu­tional in­vestors (FIIs) had with­drawn over $12 bil­lion (Rs 90,000 crore) from the In­dian cap­i­tal mar­kets till the first week of Oc­to­ber, which, re­ports say, is the worst ever out­flow since 2002. “The sit­u­a­tion looks grim in the short term,” says Pro­fes­sor R. Na­garaj of the Indira Gandhi In­sti­tute of De­vel­op­ment Re­search in Mum­bai. The prob­lem is the flight of cap­i­tal as FIIs with­draw their money, lead­ing to a fall in the ru­pee and plum­met­ing stock prices, he adds.

The econ­omy, say ex­perts, is grap­pling with three ma­jor global shocks: the ris­ing global oil prices, ris­ing in­ter­est rates in the US (the 10-year gov­ern­ment bond yields have risen to over 3 per cent) and trade pro­tec­tion­ism around the world, re­sult­ing in trade wars that scare global in­vestors from the fi­nan­cial mar­kets. Add to th­ese an ar­ray of do­mes­tic woes, largely the re­sult of faulty gov­ern­ment poli­cies, favouritis­m, cor­rup­tion and bu­reau­cratic hur­dles over the years, and the pic­ture gets scarier. “The In­dian econ­omy is in­deed in a pre­car­i­ous po­si­tion where it is fac­ing the prospect of the main driv­ers of growth of the past few years com­ing to an abrupt halt,” says Pronab Sen, Coun­try Di­rec­tor, In­ter­na­tional Growth Cen­tre, In­dia.

This pe­riod of grave un­cer­tainty, fluc­tu­at­ing oil prices, a de­pre­ci­at­ing ru­pee, fall­ing in­vest­ments, a stressed bank­ing sec­tor can be termed the worst the In­dian econ­omy has seen in the past four years. Be­cause this is the first time in many years that In­dia is fac­ing global head­winds as well as a tu­mul­tuous do­mes­tic en­vi­ron­ment. Be­sides the oil and ru­pee prob­lems, the In­fra­struc­ture Leas­ing & Fi­nan­cial Ser­vices

TILL OC­TO­BER 15 THIS YEAR, FOR­EIGN IN­STI­TU­TIONAL IN­VESTORS HAD WITH­DRAWN OVER Rs 90,000 CRORE FROM THE IN­DIAN CAP­I­TAL MAR­KETS

(IL&FS) cri­sis has also hurt In­dia’s cred­i­bil­ity.

A Mum­bai-based macro economist talks about an in­vestor meet he is plan­ning and how many more in­vestors want to visit New Delhi to meet Fi­nance Min­is­ter Arun Jait­ley af­ter the IL&FS cri­sis. “IL&FS is a gov­ern­ment-owned com­pany, they don’t know whom and what to trust. I usu­ally take about 15 of my clients, but this time ev­ery­one wants an as­sur­ance,” he says. In­dia is fire­fight­ing on both ends. And ev­i­dently, the gov­ern­ment is wor­ried about how the econ­omy plays out for them be­fore the elec­tions.

Jait­ley has ve­he­mently de­fended the most re­cent pol­icy de­ci­sion of an ex­cise cut in fuel, say­ing, “No gov­ern­ment can be in­sen­si­tive to­wards its peo­ple. In the past four bud­gets, the Modi gov­ern­ment has con­sis­tently given some di­rect tax re­lief each year to the small and mid­dle tax-pay­ing pop­u­la­tion. Last year, in Oc­to­ber, when oil prices were ris­ing, the Cen­tre cut down ex­cise duty by Rs 2. We re­quested the states to make a sim­i­lar cut. Most of the BJP-NDA states did so. The oth­ers re­fused to do so.”

Economists say it was a bad move, since it will cost oil mar­ket­ing com­pa­nies Rs 1,40,000 crore and the gov­ern­ment nearly Rs 70,00080,000 crore since it is a share­holder. And while the gov­ern­ment might end up pay­ing through its nose for the ex­cise cut, its im­pact on house­hold ex­pen­di­ture will be about Rs 900, equiv­a­lent to two cof­fees from Star­bucks, says a re­search note by Citibank.

So while the econ­omy is nav­i­gat­ing choppy wa­ters, the gov­ern­ment is be­ing crit­i­cised for the lack of co­or­di­na­tion be­tween the cen­tral bank and North Block, and of pol­icy co­he­sion. Whether it is the strat­egy to stem the fall of the ru­pee or the flight of cap­i­tal from the coun­try, In­dia seems to be on the back foot. To as­suage fears, Sub­hash Garg, Sec­re­tary, De­part­ment of Eco­nomic Af­fairs, at the re­cent an­nual meet­ing of the In­ter­na­tional Mone­tary Fund and the World Bank in Bali, said: “Pru­dent pol­icy mea­sures have helped, and mea­sures be­ing un­der­taken now will also help con­tain the stress cur­rently seen in fi­nan­cial tight­en­ing and oil prices.”

ALL IS NOT WELL

On the home front, state-owned banks are strug­gling to ad­dress the moun­tain of over Rs 10 lakh crore bad loans, even as lit­i­ga­tion de­lays the sale of stressed as­sets of com­pa­nies un­der a re­vamped bank­ruptcy code. Mean­while, the NBFC (non-bank­ing fi­nan­cial com­pany) space, also omi­nously called shadow bank­ing, has been shaken up with the fall of IL&FS, which has piled up Rs 91,000 crore in debt, as de­layed or shelved projects felled prof­its. Even the pri­vate bank­ing sec­tor faced a cri­sis of con­fi­dence as the top boss at the sec­ond largest bank—ICICI Bank—re­signed over charges of ne­po­tism, while the reg­u­la­tor cracked the whip on two oth­ers—Axis Bank and Yes Bank—dis­al­low­ing ex­tended terms to their CEOs over al­leged ir­reg­u­lar­i­ties.

Agri­cul­ture con­tin­ues to be in the dol­drums, de­spite the gov­ern­ment’s promise to dou­ble farm-

Ni­lan­jan Das Il­lus­tra­tion by

FUEL DIS­CON­TENT Ris­ing crude oil prices have sent the gov­ern­ment’s fi­nances into a spin

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