10 Questions for the Prime Minister of India

1. What are the steps that India has taken to overcome the contagion effect of the impending European Crisis?
2. What are the reasons for the high inflation in India? Does the government have a comprehensive plan to contain inflation or are we in reactive mode?
3. Is the fiscal deficit, having crossed 10% of GDP in this year, a matter of deep concern for the government?
4. What are the urgent steps being taken by the government to contain the fiscal deficit?
5. Has India become too dependent upon external FDI and FII for growth? Is this desperation leading us to go in for huge long-term investments in nuclear power plants and opening up of the civil aviation and retail sectors?
6. Has government spending focused too much on short-term socially contributing schemes that fuel inflation rather than on building infrastructure that provides the base for higher growth?
7. Is government spending causing upward pressure on the cost of funds, and hence diverting funds away from private-sector capital investment?
8. Is scarce capital being invested in longer-term investments like 3G and nuclear power which will choke shorter-term availability of capital leading to further increase in the cost of capital?
9. Considering the fact that the Commonwealth Games were a major contributor to enabling the 9% growth rate in the year 2010-11, does the government feel that 8% is the maximum growth rate that India can achieve presently?
10. Is devaluation of the Indian currency a better option to making India more competitive?

INDIAN ECONOMY
OCTOBER 2009

Demand and Growth trends

Industry: The Index of Industrial Production (IIP) indicators are positive. However, this indicates only the supply side. The demand is mainly from government agencies for their economy-stimulation programs. Corporate cost-cutting and restrained personal consumption spending due to the bleak outlook of employment is constraining demand.

Services: Still stagnating due to corporate sector cost-cutting, airlines, insurance and now, even the telecom sector.

Agriculture: No respite for agriculture with the excessive rains again playing spoil-sport. Food-grain prices, especially sugar and rice, will continue their upward spiral through to the New Year.

It seems that personal consumption, which was to an extent alive in the Indian economy heretofore due to momentum of spending-habits developed in the last few years and the expectation of recovery, is slackening. Demand for goods will expectedly see a sharp drop after Diwali leading to stocks accumulation. Government spending will also reduce due to the ballooning budget deficit and reduced motivation because of election season coming to an end.

The much-awaited global recovery is apparently not happening soon: European economies are recovering as expected. The US economy may take a couple of months more to enter the recovery phase. The Indian economy may remain buoyed up by the stimulation program; the problem here is that any excessive spending will increase the interest rates further, while a slackening of stimulation will negatively affect the economy, affecting corporate profitability either way. Industry needs the stimulation program to continue for 2 more years. Expect a balancing act from the government during this time.

Stock Markets

Apparently, the stock markets are acting as a buffer soaking up the excess money in the global economy. This is also due to the interest rates being near-zero across the world except in India. Interest rates in India are high due to an overdependence on foreign funding and high government spending. The world’s stock markets have pushed ahead to 2011 expected-earnings levels in the meantime. Any delay in recovery will show the stock markets to be overvalued in the short-term. Indian PSUs will expectedly hit the Indian stock markets in a big way through January 2010 to enable the government to temper the ballooning budget deficit before the budget presentation in February 2010.

Inflation

Expectedly, consumer prices (except for food prices, mainly rice and sugar) will start declining after Diwali. Consumer prices will decline faster than wholesale prices in the short-term. Inflation, if any, is expected to be cost-push rather than demand-pull. The Indian economy could be headed towards stagnation due to high interest rates, sticky to higher oil prices, and slackening demand. Only government spending through PSU divestments will keep the Indian economy held up.

Employment

Not expected to pick-up until second-quarter of 2010 due to stagnating demand in all sectors. Government spending is expected to reduce in the near-term, further aggravating the jobs scenario. Private sector (except IT sector) will continue cost-cutting in this area. Airline, telecom and export sectors cold see further big cuts in employment.

Estimated GDP growth rate in July-September 2009 quarter: 5.5 to 6.0%