The Mid- year Economic Review presented to the parliament scaled down the GDP forecast for 2011- 12 to 7.25 to 7.50% from the 9% projected in the budget. The stock market reacted sharply with the Sensex declining by 275 points to 16,213. Is the sharp decline justified? After all against the background of the fast deteriorating global economic environment and the Eurozone crisis, even a 7% growth is commendable. Here one has to look beyond GDP growth to the overall state of the economy. The outlook for the economy is shaped by a number of factors, other than the fundamentals. First, the infirmity of policy formulation. Our policy- makers seem to be a confused lot. This is illustrated by the fact the Government had to put on hold its proposal to permit FDI in retail. The more pertinent question is: how is it that FDI in organised retail became all of a sudden a top priority on the policy agenda? Admittedly, FDI in retail does confer some benefits to the economy. But our policy- makers began to discover new virtues in FDI in retail. The Chief Economic Adviser, Ministry of Finance, asserted that we can control inflation through FDI in retail. Since when have the standard textbooks on monetary policy began to include FDI supported retail as an instrument of inflation control? One may ask. Second, there is a sizable wastage of farm produce because of lack of proper storage. Agreed, but is FDI in retail the only solution? We have been discussing this since the Report of the All- India Rural Credit Survey in 1956. Why have we not been able to achieve much progress in this field? After all, there is no technology which is the exclusive preserve of the MNCs and India Inc or even PSUs can handle these problems effectively. Third, FDI in retail is supposed to generate a number of jobs. This is doubtful. In fact unorganized retail, by its very nature, is labour- intensive. The scope for self- employment is enormous. Ironically, the Agriculture Miister recently wrote to the Prime Minister advocating that the scale of operations under the Mahatma Gandhi National Rural Employment Guarantee Act should be reduced because it has resulted in the scarcity of rural labour for normal cultivation of crops. In other words, NREGA is creating labour scarcity in some areas. In any case, experts have enough experience in forging the supply chain that links farmer- producer to the consumer. But today where are the cooperative leaders of yesteryears who built up the mighty sugar cooperatives in Mahrashtra? Or Dr Kuriens who had such resounding success in the dairying industry? We have to re- discover such leaders both in the private and public sectors. The point to drive home is that if our policy- makers - irrespective of the party in power - had pursued these objectives of streamlining agricultural marketing and providing proper storing and transportation of agricultural produce, with even one- tenth of the passion with which they are now pursuing FDI supported retail, our problems would have been solved long ago. We have resources to build world- class airports but not for building storage facilities for foodgrains. It is tragic to see the foodgrains stored in the open by the FCI being eaten by rats or rotting because of rains. The other two major concerns expressed by the Mid- year Review are fiscal deterioration and slower moderation of inflation. Though inflation is decelerating, the pace is not satisfactory. Inflation eased to 9.11% in November 2011. The Government expects inflation to decline to 7% by March 2011. Even this level is well above the RBI's comfort level. Without mentioning the likely outcome of fiscal deficit, the Review admits that, deficit target of 4.6 would be exceeded. Two other developments subsequent to the release of the Review have clouded the growth outlook. First, the credibility of export data is being questioned. There has been overestimation of exports because of wrong data entry, double counting of some items of exports and malfunctioning of computer. However, what is consoling is that even after correction of these errors, export growth during Apr- Nov remains comfortable at 33%. The second is rather disturbing. Data on industrial output released on December 12 showed that on a year- on- year basis, the output declined by 5%. Unless this is an aberration from the trend, such sharp decline raises apprehensions regarding our ability to sustain a 7% growth. As an immediate reaction the Sensex dropped by 343 points to touch 15870. There is some tentative evidence to indicate this is an aberration. First, Manpower Groups' employment outlook Survey indicates that India Inc will continue to hire staff, although in small numbers, in the Jan- Mar 2012 quarter. Second, bank credit off- take has picked up. Outstanding loans recorded a growth, on a year- on- year basis, of nearly 18% for the fortnight ended Dec 2, 2011. One could, therefore, hope industrial production will resume its normal growth path. The most redeeming feature of the deceleration in inflation is that food inflation declined sharply to 4.35% during the week ended Dec 3, 2011 from 6.6% level of the previous week. Prices of vegetables, fruit and pulses softened. This should enable policy- makers to re- focus on issues relating to slowing down of growth. This change in policy stance was clearly reflected in the monetary policy of RBI Governor Dr Subbarao on Dec 16. Policy rates remained unchanged. Repo rate remained unchanged at 8.5% after 13 successive increases. Reverse Repo rate remained at 7.5%. There was some anticipation that the Cash Reserve Ratio ( CRR) would be reduced: but this did not happen. But Dr Subbarao clearly indicated. " From this point on, monetary policy actions are likely to reverse the cycle responding to the risks to growth." One would have thought that his pause in monetary tightening would give a boost to the stock market. But the Sensex declined by 345 points to 15,491. Are prophets of doom dominating the market? One should remember that stock markets are not a barometer of what transpires in the real economy. Despite the adversarial global economic crisis, India is capable of sustaining a reasonable high growth momentum. This is because the bulk of development is financed by domestic savings. So long as India's domestic savings remain high at around 35% of GDP, one need not unduly worry, about a random decline in industrial growth.
FPJ
