Not so rosy: DNA:22nd June 2009

In a rather hard-hitting comic strip on the front page of a daily newspaper, a lady shopping for her daily vegetables is aghast at the price of potatoes having doubled. The unperturbed husband says that they need not worry as the PM had just said the other day that inflation was under control. The unbridled optimism in the air around us, which is supported in its own whimsical way by the stock market movements, must make us think and reflect.We may just be living in a world of economic illusions or delusions as nothing much has really changed in the last few months to warrant such a turnaround in the confidence levels in the country. What has guided our spirits or made us feel more elated than we should be?The first myth so as to call it is that the Congress with just over 200 seats (without the support of the Left) is in a position to drive reforms forward. The Left was antagonistic to an extent on certain aspects of reforms but it was the economic crisis that slowed things down for the government. In fact Nandigram could bring back certain ghosts that may have to be faced going ahead -- all coalition partners may not think alike when it comes to reforms. There is little reason to believe that Foreign Direct Investment (FDI) will now pour into our banks and insurance companies. Or for that matter all those pending bills in Parliament would receive high priority.The second is that the economy will grow at 7 per cent this year. Economies do not grow because someone wishes it. Growth has to come essentially from the industrial sector, which has put up a dismal performance in April. In the past, growth has been at around 6 per cent at the lowest in April, so a number of 1.4 per cent does not bode well for the future. Agriculture will be a deciding factor, which is not because of any government action per se but because of climatic conditions which are uncertain. There is little solace to be had in saying that the 1.4 per cent growth heard last week is a turnaround from the negative numbers we have had in the last two months.The third distorted image is that inflation is low at 0.13 per cent and we are on the edge of a 'pleasant problem' called deflation. However, price inflation, going by the consumer price index, is actually still around 8.5 per cent. Even wholesale prices have climbed by close to 2 per cent since March end. Besides, we are being told that the economy is on the growth path while deflation is always a result of a recession. The reason why prices are down is that the government has not raised oil product prices even though global prices are increasing rapidly. Food prices remain high and global prices too have increased. This means that while the base year effect may bring down the inflation numbers, every Thursday we will still be paying more for our daily wares.The fourth concern is that our exports are declining or rather have come down for the last seven months. The fortunes of our exports are dictated by the global recovery which is now expected only in the third quarter of 2009 - not exactly a cheerful picture.
The fifth area, which is intriguing, is the budget. The government has come to power riding the clichéd troika of inclusion, infrastructure and growth. This being so, it is not possible to really go slow on expenditure for the poor, including subsidies. The private sector's exhortation on infrastructure means that the government has to spend more. Further, to placate the masses there have to be some income tax concessions, as well as excise and customs benefits. The call for high levels of disinvestment is therefore not surprising. While the government had in the past discreetly downplayed the role of disinvestment to support budgets, the issue has been proposed by the same critics who ran it down earlier. Given the limited options now available, it would be tempting to again use this route to finance the budget.Lastly, every time there is a call for lowering interest rates, it means problems for the common man who receives less money as interest on deposits. The bias between interest on deposits which is taxable, and dividend, which is tax free in the hands of the shareholder has never been addressed.In this scenario, should we really feel over-optimistic? There are two takeaways. One, conditions are actually not very different from what they were a month back. Second, even if we do choose to see rainbows in the sky, we will be more reassured if these scattered trends are sustained. Therefore, to appear positive to an extent is reasonable but with a fairly fuzzy economic picture before us, one must tarry awhile before opening the champagne.