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|Will Rains Boost the Economy?|
|Thursday, 05 July 2012 07:28|
Deficient monsoon and the new person at the helm of the finance ministry may not spell good news.
Source: Economic Times
This is the time of the year when the country’s weakest spots are exposed; despite our high growth and emerging-economy status, we continue to depend on the rains to boost rural incomes and provide a cushion in a slow economy. All eyes are on rainfall in July, which is crucial for the kharif crop that accounts for about half the food grain output. The consequences on inflation are, of course, obvious.
Every month, the economy is struck with ‘unexpected’ shocks, but the last month had a few too many — the delayed and weak monsoon only being the latest. Another ‘unexpected’ shock last month was the Reserve Bank of India (RBI) staying on rate cuts, despite the poor IIP growth numbers. A third was the government’s and RBI’s pathetic attempts at supporting the rupee. A fourth was that the frontrunner to the President’s post has no replacement — and now our hugely ineffective Prime Minister, Planning Commission chairman and head of the Prime Minister’s Economic Advisory Council will get to increase the scope of their ineffectiveness into the finance ministry. But Indians are an optimistic lot, as many surveys show, and the stock market reversed its fall somewhat on the mere promise of correcting one tax-related anomaly.
It is now clear that India is unlikely to have a full-time finance minister, and the Prime Minister will run the finance ministry. One of the first results of this is for everyone to see: the government has announced yet another welfare programme in the name of National Urban Health Mission priced at slightly above . 20,000 crore annually. And it has also given in to the TMC on service tax on Railways. But the Prime Minister did not get anything in return, neither on Teesta watersharing from the TMC nor on petro-pricing or subsidies from the National Advisory Council. If this is how the Prime Minister plays his politics, we don’t expect any important reform from him.
On the monetary side, the RBI changed track and refused to loosen interest rates. Why is the RBI so fearful of inflation? Growth is down, international commodity prices are down, new hiring is down, and so, inflation is unlikely to get out of hand. True food inflation continues its marathon run, but it has a mind of its own and is not impacted by what the RBI does with interest rates.
Meanwhile, the slowdown is spreading, construction activity is down, auto sales are down, hiring has slowed down — all these are caused by, and are causes of, a definite slowdown across urban India. Rural markets are holding up in part due to massive transfers and subsidies by the government and partly due to the major construction boom in rural India. But if the monsoons do not show up in July and August, even rural India will be hit.
Investment is already hit, government expenditure will hopefully not grow too much, exports are being hit due to international conditions though the weaker rupee is helping a bit. That leaves domestic consumption: for the last two years, it is this segment that has been leading the Indian economy, but it can’t hold for long. Meanwhile, from the West comes one positive benefit for sentiment as Indian equities are being upgraded. The oft-repeated ‘strong fundamentals’ seem to be making a comeback on the rating scene, but again, that is the stock market, not the real economy.
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