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Special Feature
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B&E
Boom or bust is
none of their business...
It is surprising that the government is being held responsible for economic ills today
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 One of the most remarkable features of the India of this decade is the manner in which its economy has insulated itself from its politics. World over, analysts have been admiring the neat compartmentalization between the economy and the politics of India. The last time political decision making caused a downturn in the growth story was when the unfortunate nuclear tests were carried out as India flexed its muscles at the world. That was when we saw slowdown in growth, a decline in investments and a downslide in industrial confidence. But since then, no political event has affected growth, not even the shameful incidents in Gujarat. Nor the surprising election results that saw a shining government fall and get replaced by an unlikely and tumultuous coalition that saw the left parties supporting a reformist government. In fact, in the last four years, India has averaged a growth rate of 9%, something we have only seen China do in modern times, where the political and the economic agenda are the same.
There is faint suspicion that this year seems to have reversed the trend. Ironically, the same people who argued that politics and economics in India are divorced, have started blaming the government for the economic situation. High inflation, oil prices, the rise and fall of the rupee and the trade deficit. In a market economy that is growing at a fast pace, it is axiomatic that there will be some inflation. Inflation at 11.5% is undoubtedly high and does affect the poor, but is not surprising and cannot be blamed on the government of the day. There are global food shortages, market imperfections and domestic seasonal fluctuations that do cause food prices to go up. But these cannot be tackled with hikes in interest rates, which is the only significant option a government has today when pressurized to act. Imports don’t help when world prices are high, banning exports amounts to penalizing the farmer just when he is looking forward to some gains from high prices. On petrol and diesel again, what role does a domestic government have when crude prices keep going upwards? Subsidies can be given but beyond a point will come back to haunt everyone through high taxes and deficits.
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The subsidy, one must remember, is not only on petrol, diesel and kerosene, it also goes up on chemicals and fertilizers. The Ministry has put out a statement showing how the fertilizer subsidy has tripled in the last four years and now is at 1.2 lakh crores a year. When truck drivers call for bandhs against petrol prices going up, little do they realize that that there is no option today but to allow prices of fuels to go up. However, political calculations will come in here and not allow the government to increase fuel prices. The only solution is to really privatise petrol pumps, and so customers will not blame the government when prices go up and not compliment it when international prices come down. At the moment, because the government controls imports and prices, it gets the blame too and finds its hands tied when it wants to increase price.
The rupee has depreciated and now is close to 50 to a dollar. The same lot was complaining when it had strengthened and gone up to 39 to a dollar. But now that it is back to a weak level, no one is celebrating. A weak rupee is bad for imports as it makes imported goods more expensive. It is also bad for Indians spending and investing abroad, they must pay more to get the dollars needed. With a large number now investing abroad and rising imports, a weak rupee is not good news. And the point that needs to be underscored is that just as the government could not be given credit for taking the rupee to 39 against a dollar, it cannot be held responsible for bringing it down to 44 to a dollar. Oil prices are the reason this is happening and these crude prices seem to be under no one’s control, despite having come down a bit recently.
What is interesting to note however is that Indian firms seem to be doing well. The manufacturing sector and the IT sectors are producing more and exporting more. Despite reports of lower consumer spending and lesser footfalls in retail malls, the construction sector does not seem to have slowed down, building more commercial space and residential square feet that earlier.
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