The Hindu Business Line : Test the quality of govt spending

With 5.3 per cent growth in the latest released data, India seems to have weathered the global financial and economic storm pretty successfully. Concurrent indicators are also positive — direct tax collections are up (if modestly compared with the go-go years).

Industrial production is improving and, in many cases, is only a little below their peaks. (See Business Line, June 8). Inflation is staying subdued — in fact it is a deflation story on a current basis. While some may question using the Wholesale Price Index (WPI) to measure inflation, the movement in the Consumer Price Index (CPI) is not contradictory, although it shows nowhere near the sharp fall in the WPI in recent weeks, continuing to reign well above the WPI.

Better sentiment

Sentiment is definitely better. Business and consumer confidence are rising. If the stock market is anywhere near a reliable indicator, we are out of the woods — it almost doubled from its lows in double quick time.

Doubts remain

But nagging doubts remain. Key sectors continue to ail. One example is heavy vehicles, which are yet to exit the speedbreakers they hit last year. Freight demand has not picked up sufficiently to restore the earlier demand levels. There is a perceptible slowdown in capital expenditure and new projects as unsure corporate scale back investment plans and the fund-raising environment, especially for IPOs, turned difficult.

Exports are badly hit, falling no less than 33 per cent y/y when last reported. The travails of the software sector are well-known.

With oil prices soaring again, the trade deficit implications are worrying. But the rupee is on its own trip, thanks to the familiar phenomenon of strong capital inflows from foreign investors and NRIs. Our policymakers need to ponder how India with only about $250 billion of reserves has a stronger currency in recent weeks than China having $2 trillon of the stuff. We are in danger of perpetuating an anti-export and pro-import economic regime.

Bank credit growth is soft, obviously a fall out of reduced investment and consumption demand in the economy. The crash in property prices and delinquencies in retail loan portfolios are not conducive for new lending.

Willy-nilly, GDP growth is being driven and propped up by robust and brisk Governments’ spending. Nothing wrong with that. It is standard prescription in bad times. As a consequence, there is ample liquidity in the banking system. Overnight interest rates are below 3 per cent.

Deficits and their monetisation are not inflationary or public debt-increasing if they close the ‘output gap’, i.e., the surplus (and idle) production and labour capacity in the economy.

Thus, more than deficit concerns, it is important to ask if public expenditure is creating assets and effectively supporting those in real need in this difficult period.

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