Dont eat lizards, eat crow PDF Print E-mail
Friday, 09 December 2011 01:20
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It speaks volumes for the crisis of confidence that the finance minister has to say things aren’t so bad that we have to eat lizards



A 70% hike in subsidies, a likely 1.5 percentage point hike in the fiscal deficit, a nervous rupee, plunging investment levels, and a Parliament that doesn’t function thanks to the combined weight of not just the Opposition but also the government’s allies … Worse, the government itself remains deeply divided on even the UPA’s flagship UIDAI project—while the finance minister is in favour of the UIDAI, the home ministry thinks UIDAI is eating into its turf (so when the standing committee has a problem with the UIDAI, we can blame the Opposition, or we can blame the government for not putting up a strong enough case for it—it’s probably a combination of both!) Finance minister Pranab Mukherjee is obviously right when he says, as he did in Parliament, the economy was in a difficult spot but things weren’t so bad that we shall have to start eating lizards, but the 6.5-7% growth we’re looking at now is a far cry from the 9% the finance minister was projecting just 10 months ago. And things are only going to get worse from here on. With senior Cabinet ministers already talking off the record on how no major reform measure is going to be planned till the Uttar Pradesh elections are over, the investment climate looks a lot more tenuous—you have to read India Inc’s pained statements over the last few days to know just how bad things are (see graphics). If the rupee has fallen far more than competing currencies have over the last few weeks, this is the main reason.

While FDI in retail has been put off, the parliamentary standing committee has rejected the increase in FDI cap to 49% in the insurance sector, it is unhappy with the UIDAI, and the Pension Bill is also likely to become a casualty as the government has rightly rejected the standing committee’s suggestion that a minimum return be made mandatory for pension funds and that an FDI cap of 26% be put into the Bill itself—even more important, retail-FDI killer Mamata Banerjee has made it clear she does not support the Pension Bill.

If the attitude of Parliament towards reform is one thing, the government’s attitude towards investment isn’t helping either. There are too many projects you can think of where the government has gone after investors—while the pink press cheered the clearance of the Cairn-Vedanta deal, keep in mind that the government arm-twisted Cairn into accepting ONGC’s conditions even though ONGC didn’t have a leg to stand on. The ongoing row about intra-circle 3G roaming is another such example of the government playing the heavy, and there are many more including Lavasa where, while the company was challenging the central government’s jurisdiction in one court, the government filed charges against it in another. That’s why, primarily, the value of new projects announced by India Inc fell from R7.2 lakh crore in June 2010 to R2.6 lakh crore in September 2011. Which is why, in the latest quarter, investment levels (including those by government) fell by 0.6% (they grew 10.6% in the same quarter last year).

If this isn’t bad enough, there are the other factors that will ensure GDP will continue to get hit. The US/Europe crisis, for instance, will mean that exports will get hit. Given that exports were a big growth driver in the first half of the year, the impact will be to lower growth from current levels—as a proportion of GDP, exports rose from 21.2% in the first half of FY11 to 24.8% in the first half of FY12. Similarly, government expenditure was one of the growth drivers in the first half of the year—given the state of the fisc, that’s also going to get hit.

The larger impact of the US/European crisis, though, will not be felt through just export markets. A new study by the IMF points out that the impact gets magnified through financial markets. A 1% fall in US GDP, the IMF points out, would have a 0.05% impact on India through the conventional route of exports; bring in the financial channel, in terms of the impact on bond yields or the forex flows to/from US, and the impact rises to 0.4%; in times of financial crises, the study further pointed out, the financial impact gets magnified and the impact will be double. Watch the mayhem in the markets on Monday if, as expected, there is no meaningful solution over the weekend to the runaway crisis in Europe.

The finance minister was absolutely right when he said things weren’t so bad that we had to eat lizards. But given how we’ve lost such a great opportunity to attract investors when the US, Europe and China are running into trouble, we need to eat crow.

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Last Updated ( Friday, 30 December 2011 14:09 )

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