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Our site is blessed with a myriad of posters, all with incredible insights into various topics of discussion. Such being the case, its quite hard to do a blog and yet be different from others. But given that this dedicated space offers all of us a chance to talk and discuss about issues that are otherwise not considered fad in the general discussion forums, I have decided to write exclusively about Politics and Business, mostly with an Indian focus and occasionally, also trying to give a world-view. No! No! No! Don’t start yawning this early. I haven’t started yet!
For this blog entry, the topic of discussion would some of the generic economic challenges facing the Indian economy at present, specifically within the current environs of a global slowdown and what awaits us, in the near future.
First though, some boring numbers. Inflation is at a startling 12%, threatening to rise even further. Interest rates are on the rise and basic food prices have gone up from between 25%-40% percent in the last one year. GDP growth rate is down to 7-7.5%, from the double digit speeds it managed to garner in 2005-2006. All of these owe their origins either in full, or in part, to the skyrocketing oil prices. When the G8 leaders met last year for their annual summit, apart from sightseeing in the luxury tourist resorts that they hold these farcical gathering in, all they did was discuss about Aid to Africa. But, just a year later, when they met in Japan a few days back, the economic landscape had shifted dramatically. Almost all of the leaders were faced with slowdown of their own respective economies, high fuel prices and in some cases, an acute credit crisis. There was hardly any talk about Africa this time, everyone was busy salvaging their own situations. How things can change in one year!
What do these numbers mean for us anyway? To begin with, credit will become dearer, as the RBI drives up interest rates in an effort to control spending and inflation. So, you may end up paying more on your home mortgages than you had previously planned for. Almost every basic commodity’s price has shot up, hitting the average Indian’s purse hard. And all these factors work in conjunction to slow down economic output, as people cut their spending on leisure and luxury. And unfortunately, given the cyclic nature of the economy, all this will further slow down the engine of growth. And when GDP rate falls, it means the number of people ‘lifted’ from poverty, so as to say, drops. So, the bitter truth is, it is the poor who are hit hardest by the current economic climate, despite the fact that they had little to do with its causes in the first place.
All this means a definite economic slowdown, atleast for the next 3-4 quarters. However, its not all doom and gloom for us. Unlike our Western counterparts, the basic drivers of growth of our economy are still in healthy shape, with domestic demand still remaining strong. Consumer spending is still on the rise, albeit slower than before. Real Estate is booming, Industrial output is steady and almost every sectors of Industry, bar the oil companies, are making handsome profits. A lot however depends on the price of oil though. If it continues to rise, almost all of the RBI’s measures for improving fiscal health will be rendered void. The good news is, recent months of high prices is bound to slow down demand, atleast in the short-term. The same cyclical nature of the economy will come to our rescue, with lesser demand leading to reduced prices, stimulating growth again. Of course, all of this with the assumption that the political climate remains stable, which is obviously, is a big bet to make.
Overall though, it is expected that things will begin to get back to their usual tracks in about the second quarter of next year. Till then, its choppy waters for all!
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Thus, India run a massive trade deficit with the world. When import prices go up, as they have because of the skyrocketing oil tariffs, India is unable to export its way out of trouble, unlike China. This has several ill effects on the economy.
Firstly, everything goes up in price. With the inflation genie out of the bottle, people's buying power declines, they spend less, and the main driver for growth, which is domestic demand, dries up even further.
Secondly, the trade deficit and weak domestic demand scares off investors. The rupee takes a tumble on forex markets. Imports therefore become even dearer, causing a vicious cycle of falling consumption, coupled with a falling currency.
Unfortunately, with a miniscule export sector, India is unable to counterbalance this by taking advantage of a depreciating rupee.
If you look around the world, the net exporters are the ones that have fared the best in the midst of the current crunch- Germany, Australia, Japan. No country can afford to have its growth driven by domestic demand alone.
I don't share your bullishness on the Indian economy for the above reasons. I think a recovery is years away. Some investors are likely to get excited at some dead cat bounce, but it won't last.
Sure, the devaluing rupee is making imports costlier, driving prices up, but atleast in the short term, the biggest worry is inflation. If we can curb that, we'll make a lot of progress. For that to happen though, oil HAS to go down. There's no second thoughts about it.