One more Festive season has vanished. The common men and various people in the industries may have taken so many deep breaths in this period. We have seen happy faces of share brokers and financial institutions as the Muhurata trading has filled them with lots of pleasure. In the week of Diwali the Sensex (Sensitive Index) reached a record level of about 21300. Our Finance minister was also happy with this and he proclaimed that it is a good sign and our economy is on its recovery path. But at the same time due to the rise in Wholesale Price Index (WPI) the Reserve Bank has increased Repo rate by 25 basis points and lowered Marginal Standing Facility (MSF) interest by 25 basis points. So loans will remain costlier for the common man and the business people but banks will get more liquidity due to the less expensive MSF (It is almost like the over-draft facility that common business people avail from banks; here scheduled banks are business people and the Reserve Bank is the bank). Now the percentage difference between Repo and MSF is just one percent (It was more than 3% before the new RBI governor took the charge).
After Raghuram Rajan became the Governor of RBI, he has taken many steps to strengthen our currency. In line with the same our Finance Minister has taken steps to reduce CAD by curbing import of gold, prohibiting import of other non-essential things, etc. Finally Indians are on the feel that the country has started doing better in these months. But is there any real reason to cheer? In my opinion there is none. The reasons are:
All rating agencies and financial institutions like World Bank and IMF have reduced the growth projection of India even though the FM and policy makers are having their opposed views. Capital goods are still imported in bulk. Only gold import has been controlled – which in turn increased smuggling of the precious metal. Our production of materials like Cement, Iron, Rubber, Coal, etc. has not increased much and we still depend on importing.
No phenomenal increase in production. Many MSMEs (Micro, Small and Medium Enterprises) closed down due to bad market conditions. That means our manufacturing sector is still suffering. Festival seasons gave some momentum but on ground level Indians are feeling the real recession now.
If real growth is there, then Rupee should be in between 58 and 60 with respect to the Dollar but it is still under values and is in the 61-62 mark. It would have been more, but thanks to the American treasury crisis which eased the demand for Dollar in the currency market. Due to the high value of foreign currencies our NRI’s have sent so much foreign exchange to India which has helped to maintain our foreign reserve. But due to Nitaqat and job localization problems thousands of people are coming back from Gulf countries. This will create adverse effects like unemployment, less flow of foreign money, etc. Also, Federal Reserve at any time may taper the Quantitative Easing (QE) which may have a devastating effect on our economy.
Sensex growth is mainly due to Banking shares and a few big companies like TCS, Reliance, etc. and out of the 30 listed and 500 unlisted companies there is no increase in share for most of the companies which reveals the real problem. Due to the rise in Sensex the common man will think that their ULIPs and other market related investments will give big returns. We will get more NAV (Net Asset Value) on our shares if the value of shares of companies where our insurance companies invested got a higher value. So don’t expect much return from the same.
Many economists are of the opinion that Indian economy is in a stage called as ‘Stagflation’ [Stagnation of growth at the same time inflation (closely linked to growth) reaching higher levels]. The purchase power of common man has been reduced heavily. For one KG of onion they have to pay a huge amount. Prices of all other essential commodities have gone up. But there is no phenomenal increase in their earnings as most of the industries are struggling due to bad conditions. The sales of cars, TVs and other consumer durables, etc. showed decline compared to last year festive seasons like Vishu, Onam, Dussehra, and Diwali. Only Christmas and New Year is pending which may also give same result. Raghuram Rajan is making preparation for reducing the tapering effect by maintaining high level of Dollar reserve. Even if it will help in one way, the rupee will again reach its bottom of upto 70 Rupees for a Dollar due to heavy withdrawal of Dollar from our market if tapering comes into effect. FDI in Insurance and Aviation sector, currency swaps facility, curbing offshore currency trading etc. are the steps taken by him. But these are not sufficient as FIIs (Foreign Institutional Investors) will prefer US once the interest rate in the country would have been increased.
Investors lost lots due to the problems in NSEL (National Spot Exchange Limited), Multi Commodity Exchanges (MCX), etc. Even though regulators like SEBI and Forward Market Commission are trying to reduce the negative effect by imposing more stipulations, the investors need to take legal action to get their money back. So new investors may hold their money till the issues become settled.
Poor Development Index
In the latest ranking of countries, India ranked lower than our neighbor Bangladesh in world prosperity index. This will make a negative impact as companies from foreign countries will hesitate to start businesses here.
Free Trade Agreement
FTA with other countries is making a lot of threats to the Indian economy. Our manufacturing sector has been affected very much by the cheap imports from China and ASEAN countries. So our Finance Minister Chidambaram asked Minister of Commerce and Industries Anand Sharma should stop making more FTA pact with other countries. But as a policy matter India seems to continue with the creation of FTA’s.
During the reign of Ahmedinejad Iran stood arrogantly against US and its European allies. But when Hassan Rouhani took charge of the office, he resumed diplomatic talk with those countries and almost succeeded. Production of nuclear weapons – the main issue raised by foreign countries is almost close to settlement as the country has invited foreign delegates to examine the sites. There is every chance that sanctions imposed by US and its allies would be lifted if the nuclear issue is settled. Ahmedinejad regime allowed India to make payment for oil in Indian Rupees. Now they are not ready to receive the full payment in Rupees and has asked India to pay at least 55% in Euro. So the dependency on foreign currencies like Dollar and Euro, which is the core cause of most of the problems, will not change in the near future and will remain as a threat to our economy.
Due to the increased pressure from big countries, Switzerland has agreed to disclose the details of black money investors from other countries. If Indian government is sincere, they can now avail the facility to find the defaulters. But due to political pressure we cannot expect an immediate action from our Government. Narendra Modi has several times raised this question in his rallies. But we are not sure of the keen-ness of his organization – the BJP. Most of the political parties will fiddle with the existing bureaucracy and political system on coming into power even though they boast a lot about changing the country during election time.
Indian economy is still like a child suffering from malnutrition. Resources are available. But the inability of the government in taking bold steps is the problem that Indians are facing. We have enough coal but it is now mainly imported due to our inability to mine. There are so many examples like this. As the political parties are preparing for general elections they will not take any action on powerful defaulters now as they are the sources of fund for all the major political parties and elections.