We did say last time that if the RBI cuts rates, it would do so only in March – that’s what happened, and as we expected (as did the RBI) the markets were not impressed. The monetary overtures were overshadowed by the grim news on the fiscal front, as the government put forth demands for the highest borrowings ever of Rs. 3.6 trillion. The flip-flop over the budget was particularly disturbing, as was the three times revision of borrowings over the year – all with not a bit of apology. The problem is that under the excuse of ‘exceptional times’, all that talk of moving towards controlled budgeting and market based pricing in fuel has gone up in vapour. Meanwhile, amidst all this turmoil, we don’t have a full time Finance Minister, a clear indication that the economy really isn’t a priority.

The quarterly GDP data is showing a sharp falling trend; even though we take this data with a pinch of salt, we would advise everyone to take the falling trend very seriously. International efforts are showing that nothing is working quickly enough, and we also know that no macro-economic models are working.

So what should the government do? When no one knows what to do, go back to first principles. The first principles are, spend your money where it has the most impact. But that is not what the government is doing, and is throwing away its money. It is trying to help the organized sector, by giving them all sorts of interest and tax advantages – but these only help those firms that have orders. What about firms whose orders are falling or non-existent? These firms need a lifeline. The lifeline could be on the credit front, where the government can ask FIs to distinguish between company specific and structural/economy-wide shocks and resultant defaults. But there is no such move. As toplines fall, banks reduce credit for working capital – but that is precisely when firms need more leeway. The list is very long.

Meanwhile, real estate firms are in deep trouble, and it is surprising that real-estate prices have not fallen more; this only indicates that the banks have restructured the terms of credit. In other words, they have delayed the bad news. The hope must be that, after a quarter or two things will improve; but they are sorely mistaken. This is not a short term slowdown for the real estate sector, and it is not going to see high growth for a long time. The more rapidly we correct the prices, force the companies to reveal the extent of the shock, the better it is for India’s economic stability.

Then there are those who think that the gvernment can spend its way out of this. The reasoning is, that since there is an international recession, prices will remain low, so we can spend as much as we want without fear of inflation. This is a flawed argument, if we spend large amounts, it will increase demand in the country, and to keep prices low, we will need to keep international trade very open – that is, import more. The hit will then be taken on foreign exchange reserves (already down by USD 60 bill), and further impact our ratings if nothing else. The point is, to try and limit one loss, we will need to take a hit somewhere else.

The government also needs to ensure that when times do turn-around, India can access international funds – but the large fiscal deficit has powered the downfall of our credit ratings, give it a few months and we will not be in the investment grade anymore. At that time, even if the world will want to invest in India, it will be unable to, as their regulations will prevent them from doing so. Do we have any credible policy measures in place to tackle this upcoming problem, or are we just hoping for the next government to bear the headaches?

Going ahead, while this quarter is still set to be a gloomy one, there are some small signs of spring-time joy, (Feb auto sales, price of copper at 3 month high, cement sales up, easing of loan rates from banks etc.) but it is difficult to read too much in these random data elements. Anycase, we do not foresee a smooth path ahead, returning to our recent 9% growth level is a government dream, if we can do 7%, we should be happy.

In April, two shows will roll - the IPL and the elections – no prizes for guessing which one will boost sentiments more, which one will boost the economy more.