Just like a score of 5 made Niro’s team ecstatic in Silver Linings Playbook, Indians are learning to live with 5% GDP growth and deficit
In the climax scene of the movie Silver Linings Playbook, the protagonists enter a dance competition where other couples score high 8s and 9s. When Bradley Cooper and Jennifer Lawrence come on floor with their passionate, though hilarious moves, the average score awarded is 5. Their entire team, including Robert De Niro, gets ecstatic as this was what their bets were—a score of at least 5. The programme announcer is shell shocked with surprise; and with confusion on his face exclaims, “Why are they so excited about a 5?”Let us take the analogy back home on the economic front and we can ask ourselves, why are we excited about 5? There seems to be renewed feeling of zest and optimism as the financial year comes to an end and we start on a new year. Everyone is gung-ho on how things can only improve in FY13. Even our Budget has assumed a higher growth rate closer towards 7%.Now, let us look at the 5s that we are living with. GDP growth for FY12 is expected to be rather low at 5%, which is the lowest rate since FY03. The declining quarterly trend is disturbing—the Q3 number at 4.5% is the lowest in the last 15 quarters. Discussions today are centred on whether 5% is an understatement, and the perspicuous few who see green shoots in the arid topography are arguing that it would be higher at 5.2-5.3%, though industrial growth is crawling around the 1% mark. Anyway, this is a major comedown from the 8% growth numbers we had taken for granted.We are quite happy with the fiscal deficit number of 5.2% last year and 4.8% for the coming year—an average of 5% again, though we are not quite sure how the assumptions of growth will be achieved and the targets of disinvestment and spectrum sale will be attained. The Budget is based on certain strong assumptions, which has to be the case for any FM, and one can only cautiously view the possible achievement of the set targets. There surely is great resolution showed last year to get this number right, but the cuts in expenditure that were invoked helped a lot, which we cannot afford for another year as we are looking for a Keynesian impetus from this end. Disinvestment in FY13 seems to be more of a forced variety and not the type that took place a couple of years ago when Coal India was divested.If we turn to our current account deficit, it stands at 5.4% of GDP in Q2, which again is some kind of a new record high in any quarter. Last year, at 4.2% of GDP, the current account deficit was the highest recorded in the last three decades or so. While everyone has voiced concern, the disturbing element is that there is no solution here as all components are exogenously determined and hence cannot be controlled by any regulatory body. The problem is not that serious today because we have had capital flows protect this imbalance, which has made our forex reserves stable. It is not surprising that any policy to do with FII flows has to be looked at with double caution as we cannot antagonise these investors.We can just as well spoil the party by asking why we are so excited by the number 5. In fact, inflation remains as high as ever with CPI inflation being around 11%. After a lot of talk of targeting CPI inflation, we have reached the point of no return. We first said that interest rates can bring down CPI inflation. That did not work. Next we said that inflation rose because people were consuming more. That is a reason but not a solution. The novel concept of protein consumption also did not quite help ease the pain, especially so since output did not show a commensurate decline. In fact, the economic reasons espoused fell flat when cereals have shown the highest increase in prices even as we boast of having the highest output levels of wheat and rice. The fact that the FCI is stocked with nearly 63 million tonnes of foodgrains demolishes a lot of the supply bottlenecks clichés that have been given.What, then, makes us cheerful? Is it just the announcement effects of the Budget and the assumption that RBI will lower interest rates during the year because the high internet rate regimes have not lowered inflation anyway? RBI has acquiesced to the demand and lowered rates this time, but has warned that this cannot be interpreted as the beginning of a new trend. Or are we now used to high inflation of 7% WPI and double-digit CPI inflation that nothing really matters. The answer is, really, a combination of all of them.Growth has come to such a level that things can only look upwards from now on. FY13 will be one year when growth would have happened with no contribution from industry. This being the case, any progress in manufacturing should necessarily be good for the country. Similarly, inflation is now at around 7% or 11%, whichever way we look at it. From now on, given a normal monsoon, things cannot get worse as the base effect will help, even though we have imposed the fuel burden on ourselves for the entire FY14. Looking at the current account deficit, exports will pick up as the global economy cannot do worse, and from a negative growth rate there can be a marginal pick up. Also, imports, while increasing, will be subdued as growth will be only marginally upwards. Therefore, assuming stable oil prices, things can get better or remain the same—but cannot deteriorate further.This being the case, it is only but natural for one to expect to see green shoots. But we need some action at the ground level. The government has suddenly sprung into action in clearing projects, which should have really been done earlier—but then, as the adage goes, better late than never. So, while we can be justified in being sanguine, we should also be realistic in the present state. A 6% growth with 6-7% inflation and 4% CAD look more reasonable when looked at conservatively. If any number gets better, then one can feel good. It is better to wait for good things to happen, rather than lay the foundations of the proverbial castles (in the air).
In the climax scene of the movie Silver Linings Playbook, the protagonists enter a dance competition where other couples score high 8s and 9s. When Bradley Cooper and Jennifer Lawrence come on floor with their passionate, though hilarious moves, the average score awarded is 5. Their entire team, including Robert De Niro, gets ecstatic as this was what their bets were—a score of at least 5. The programme announcer is shell shocked with surprise; and with confusion on his face exclaims, “Why are they so excited about a 5?”Let us take the analogy back home on the economic front and we can ask ourselves, why are we excited about 5? There seems to be renewed feeling of zest and optimism as the financial year comes to an end and we start on a new year. Everyone is gung-ho on how things can only improve in FY13. Even our Budget has assumed a higher growth rate closer towards 7%.Now, let us look at the 5s that we are living with. GDP growth for FY12 is expected to be rather low at 5%, which is the lowest rate since FY03. The declining quarterly trend is disturbing—the Q3 number at 4.5% is the lowest in the last 15 quarters. Discussions today are centred on whether 5% is an understatement, and the perspicuous few who see green shoots in the arid topography are arguing that it would be higher at 5.2-5.3%, though industrial growth is crawling around the 1% mark. Anyway, this is a major comedown from the 8% growth numbers we had taken for granted.We are quite happy with the fiscal deficit number of 5.2% last year and 4.8% for the coming year—an average of 5% again, though we are not quite sure how the assumptions of growth will be achieved and the targets of disinvestment and spectrum sale will be attained. The Budget is based on certain strong assumptions, which has to be the case for any FM, and one can only cautiously view the possible achievement of the set targets. There surely is great resolution showed last year to get this number right, but the cuts in expenditure that were invoked helped a lot, which we cannot afford for another year as we are looking for a Keynesian impetus from this end. Disinvestment in FY13 seems to be more of a forced variety and not the type that took place a couple of years ago when Coal India was divested.If we turn to our current account deficit, it stands at 5.4% of GDP in Q2, which again is some kind of a new record high in any quarter. Last year, at 4.2% of GDP, the current account deficit was the highest recorded in the last three decades or so. While everyone has voiced concern, the disturbing element is that there is no solution here as all components are exogenously determined and hence cannot be controlled by any regulatory body. The problem is not that serious today because we have had capital flows protect this imbalance, which has made our forex reserves stable. It is not surprising that any policy to do with FII flows has to be looked at with double caution as we cannot antagonise these investors.We can just as well spoil the party by asking why we are so excited by the number 5. In fact, inflation remains as high as ever with CPI inflation being around 11%. After a lot of talk of targeting CPI inflation, we have reached the point of no return. We first said that interest rates can bring down CPI inflation. That did not work. Next we said that inflation rose because people were consuming more. That is a reason but not a solution. The novel concept of protein consumption also did not quite help ease the pain, especially so since output did not show a commensurate decline. In fact, the economic reasons espoused fell flat when cereals have shown the highest increase in prices even as we boast of having the highest output levels of wheat and rice. The fact that the FCI is stocked with nearly 63 million tonnes of foodgrains demolishes a lot of the supply bottlenecks clichés that have been given.What, then, makes us cheerful? Is it just the announcement effects of the Budget and the assumption that RBI will lower interest rates during the year because the high internet rate regimes have not lowered inflation anyway? RBI has acquiesced to the demand and lowered rates this time, but has warned that this cannot be interpreted as the beginning of a new trend. Or are we now used to high inflation of 7% WPI and double-digit CPI inflation that nothing really matters. The answer is, really, a combination of all of them.Growth has come to such a level that things can only look upwards from now on. FY13 will be one year when growth would have happened with no contribution from industry. This being the case, any progress in manufacturing should necessarily be good for the country. Similarly, inflation is now at around 7% or 11%, whichever way we look at it. From now on, given a normal monsoon, things cannot get worse as the base effect will help, even though we have imposed the fuel burden on ourselves for the entire FY14. Looking at the current account deficit, exports will pick up as the global economy cannot do worse, and from a negative growth rate there can be a marginal pick up. Also, imports, while increasing, will be subdued as growth will be only marginally upwards. Therefore, assuming stable oil prices, things can get better or remain the same—but cannot deteriorate further.This being the case, it is only but natural for one to expect to see green shoots. But we need some action at the ground level. The government has suddenly sprung into action in clearing projects, which should have really been done earlier—but then, as the adage goes, better late than never. So, while we can be justified in being sanguine, we should also be realistic in the present state. A 6% growth with 6-7% inflation and 4% CAD look more reasonable when looked at conservatively. If any number gets better, then one can feel good. It is better to wait for good things to happen, rather than lay the foundations of the proverbial castles (in the air).
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