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
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.