Tuesday, July 30, 2013

The Hindu Rate of Growth Is Back

The RBI did not do anything. A quiet 'state of the nation' address. Not surprising, given that it has the unpleasant task of having been told to keep the rupee below sixty to a dollar. The only answer was to squeeze the liquidity so tight that in the short run, forget dollar, the demand for everything calmed down. Will the rupee stay around or below sixty for some time? Unlikely, given that we continue to import beyond our ability to pay. We are paying for imports with borrowed currencies. How long can this go on? Fundamentally when we are revenue deficit in foreign exchange terms on a permanent basis, we have to either reduce imports, hike exports or attract long term capital that will find a home in India. Obviously that cannot be through the portfolio route. It has to be by letting foreigners engage in business in India. For that, we need infrastructure. Even that is not a big thing if our policies were stable and friendly. The number of permits and permissions, the number of bureaucrats to meet and then the capricious policies et al do not exactly welcome foreign business to set up base here. The other reason why manufacturing cannot move to India is because of the poor work ethic and the absence of a speedy and effective legal redress system. We have some laws, but apart from overhaul, they also need to be timely. With this situation, the economic growth also takes a hit. Capital expenditure in India is not happening. Demand is booming at the consumer end thanks to easy loans and a high wage services sector. With supply refusing to go up, the outcome is a combination of stagflation and higher current account deficits. The thing is that we are also seeing a slowdown in job creation. The situation now is not good at all. Maybe even consumer spending will be throttled by runaway prices. Once that happens, we will be back to five and four percent growth. But no, let us hope that the politicians do not screw it up so badly. But the last four to five years are putting spokes in every wheel of our growth story. Let us wait for interest rates to cool off. In the meanwhile, let us watch the Direct Cash Transfers. In all this economic problems, if Telengana happens, there is going to be more mess. Truly, Darkness At Noon

1 comment:

Unknown said...

This is Santa Singh & Banta Singh style of economics - of digging graves (for burial of India's Growth story)