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Economic Slowdown: India critical in global deflationary ecosystem

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By Gaurav Sharma

As the global headwinds gather speed, India, a major emerging market economy finds itself at a crucial juncture. The global economy is in a state of flux, even as the world currencies tumble to record levels against the US dollar and the brick wall of China devalues the Yuan in the face of an escalating slowdown in growth.

money-bag-400301_1280How will the Indian economy hold up in the midst of falling commodity and currency prices? Will it plunge as China has or does India have the firepower to withstand, or better still, translate the global crisis into a growth opportunity?

The macro numbers present signs of an impending danger to the Indian economy. After the BSE Sensex, the benchmark stock market index, crashed a whopping 1,624 point last week (the fourth largest in the market’s history), Prime Minister Narendra Modi had to call a meeting between bankers, economists and industry behemoths in order to urge them to jump-start the domestic investment and thereby calm down the declining temper of the market.

The Prime Minister had to intervene to stall the spiralling damage is proof enough of the urgency to protect and rekindle the economic fire.

Declining currency prices pose a challenge to Indian exports as international goods and services become cheaper and Indian exports become dearer. However, the damage has been negated somewhat due to the fall down in rupee vis-a-vis the US dollar. The decline in oil prices, on the other hand, should bring much cheer to policy-makers as India imports as much as 75 per cent of its total oil requirements.

This means the current account deficit (imports–exports or net imports) can be bridged further from its already negative figure of 0.3 per cent. The additional revenues also provide a leeway to the government to plug the structural deficits in the infrastructure sector

Meanwhile, the low inflation rate of 3.8 per cent has raised clamours for an interest rate cut from RBI chief Raghuram Rajan but the Governor has stuck to his dovish stance by arguing that the prediction of inflation target is looked upon by RBI at an approximate time span of one year before it takes a call on slashing interest rates.

Moreover, with the anticipated hike in US Fed Reserve interest rates, Rajan finds himself in a quandary as foreign institutional (FII) flows begin to taper-off from the emerging economies in the wake of improving unemployment data and pick-up in growth in the United States.

If the Governor succumbs to the clarion calls for reduction in interest rates, there is the risk of a further pull down in the foreign inflows which have already touched the $ 3.25 billion mark in the Indian equity and debt market. In addition to that the dismal monsoon season and the rising food prices and the Governor have every reason not to hold the interest rates at the current level.

Furthermore, the banking industry is in a mess as non-performing assets (NPA’s) or bad loans begin to take a toll on the banks’ finances. The increased debt burden implies a reduction in the already flagging credit growth in the country.

In this regard, the RBI has taken a step in the right direction by making the requisite regulatory changes (increased pre and post sanction due diligence) in the wake of an Ernst & Young report highlighting the misuse of borrowed funds which added to the woes stifling the banking industry.

On the part of the government, the failure to pass the much-anticipated Goods & Service tax (GST) bill along with the stalling of the land acquisition bill has raised much concern. The lack of a coherent tax structure and clear-cut investment rules will further drive the foreign inflows away from India.

However, steps such as financial inclusion (Jan Dhan Yojna), digitisation and skill development will add to the labour productivity and therefore contribute positively to the economic growth. RBI has extended a helping hand by allowing payment banks and small development banks to set up shop in the country. As many as 11 entities have already been granted license.

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The pertinent reason why the RBI is persisting with the watchdog mode is because it is guided by inflation as measured by the Consumer Price Index (CPI). With the gloomy monsoon season affecting the kharif output and the inherent high weightage given to food in the index, the current 3.8 per cent figure is bound to go up.

However, with the precocious bent towards CPI, one wonders whether a more cumulative benchmark such as the Wholesale Price Index (WPI) and the GDP deflator can be kept out of the scope for long. With a discriminatory inflation index, the RBI can easily lose sight of the overall deflationary trend afflicting India.

Hence, NewsGram urges the honourable Governor to take stock of the situation and include an all encompassing measuring of inflationary rate which is so critical in guiding the monetary policy of the Central bank. A cogent monetary policy is in-turn the key to attracting the ebbing foreign flows in the country, and therefore, at the heart of the current nosedive in the markets.

With the Organisation for Economic Co-operation and Development (OECD), a Paris-based think tank, predicting “firming growth” for India amidst the unpredictable global trends, the RBI can do much by giving the initial boost through revamping of the inflation index.

Besides, the top leadership of any central banking institution is hired for making the right judgement call and providing the requisite thrust during seemingly difficult and confusing economic environment, and not merely being a passive observer to the swinging tides.

Here’s hoping that Rajan makes the choice, soon.

Next Story

The Rafale Deal: Corporate Rivalry Impacting National Interest

A deeper look found a correlation between the end of Shourie's dreams of being appointed Union Finance Minister and the beginning of his tirade against the Prime Minister on one issue or the other.

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Defence Minister Nirmala Sitharaman has been obtuse in accusing the Congress of becoming a pawn in corporate rivalry. She made the comments during a recent seminar on 'India's strategic interest in the context of the Rafale deal'.Pixabay

A recent European Union intelligence sharing exercise with India has revealed that Lockheed Martin, the US-headquartered company which manufactures the F-16 fighter jets, has been up to mischief mongering on the Rafale issue.

The Rafale jets, which India wants, is manufactured by the French aerospace company Dassault Aviation, a rival of Lockheed Martin.

That Lockheed Martin could be working in the shadows to sour the Rafale deal for India so that it could move in with its own deal was validated when Vivek Lall, Lockheed Martin’s high-profile head of strategy and India operations, said that the company was in the process of finalising the sale of 200 fighters to India.

During the UPA regime, the government had signed an MoU for 126 Rafale fighter jets to replenish a major shortcoming in air defence preparedness because the Indian Air Force did not have quality fighter jets. When the NDA government led by Prime Minister Narendra Modi came to power, this deal was revised and an inter-government deal was struck to receive 36 fully-loaded Rafale jets. The controversy now raging in India is related to the pricing for the fighters negotiated by the NDA.

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Defence Minister Nirmala Sitharaman has been obtuse in accusing the Congress of becoming a pawn in corporate rivalry. She made the comments during a recent seminar on ‘India’s strategic interest in the context of the Rafale deal’. Pixabay

In December when the Rafale case came before the Supreme Court, Chief Justice Ranjan Gogoi observed that processes were generally followed over the procurement. He also noted that the controversy had been triggered by comments by former French President Francois Hollande over the selection of the offset partner and that mere comments could not form the basis for a probe.

However, this has not prevented the Rafale purchase controversy from becoming a high-octane political battle between the Congress party and the Bharatiya Janata Party (BJP).

Repeatedly over the past few months and more stridently now in the lead-up to the Lok Sabha elections, Congress President Rahul Gandhi has led a no-holds barred attack on the government and the Prime Minister specifically on the issue. From the earlier public disinterest on the controversy, it is now now getting some traction — the Congress party believes this could be possible because it has relentlessly raised the matter at all public forums.

Bringing up the case of the state-owned Hindustan Aeronautics Ltd (HAL) was said to be part of the orhestrated plan to present the case of the American companies while also appearing nationalistic. In the government’s estimate, HAL’s record is abysmal and it cannot be given a big responsibility like building fighter jets — more so in the light of the safety record of MiG fighters purchased from Russia and made under licence from HAL.

The BJP-led government at the Centre believes — and it is certain it has evidence of this — that the Congress party is doing this as it has become a party to corporate rivalry between the US and French aerospace companies. For the record, Lockheed Martin is believed to have found a sympathetic ally in another US aerospace major, Boeing, which manufactures the F-18. Dassault has another rival in French manufacturer Airbus Industrie, which is associated with BAE for the manufacture of the Eurofighter. It is also angling for a fighter jet contract with India.

Rahul Gandhi’s attacks on the government over the Rafale issue started after his visit to the US in August 2017 when he met several defence lobbyists, CEOs of US defence companies and Pentagon officials.

Defence Minister Nirmala Sitharaman has been obtuse in accusing the Congress of becoming a pawn in corporate rivalry. She made the comments during a recent seminar on ‘India’s strategic interest in the context of the Rafale deal’.

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Contrary to popular perception, the Trump administration is said to be extremely unhappy with India because the NDA government under Modi has been successful in building strong relationships with Saudi Arabia, the United Arab Emirates and Qatar. Pixabay

The government’s efforts to trace the footprints of the dramatis personae at the forefront of the campaign to target the government over the Rafale deal has produced surprising results. It has found what it believes are eye-opening linkages between Prashant Bhushan, Yashwant Sinha and Arun Shourie — who filed a PIL in the Supreme Court accusing the Prime Minister of corruption in the deal — and arms dealers and defence manufacturers. At least in one case, the linkages show deep connections between members of Shourie’s family with aerospace companies, arms dealers and defence lobbies.

A deeper look found a correlation between the end of Shourie’s dreams of being appointed Union Finance Minister and the beginning of his tirade against the Prime Minister on one issue or the other.

Also Read: The Craft of Distilling Is Ancient, Different Story Behind Every Bottle

The government is also aware of the links between a top BJP leader’s son-in-law and a French manufacturer. The son-in-law is said to be advising Rahul Gandhi and is believed to be making government documents available to him for the campaign against Rafale.

Lockheed Martin’s alleged actions to work the political ecosystem to pull down the Rafale procurement deal also has a larger strategic context. Contrary to popular perception, the Trump administration is said to be extremely unhappy with India because the NDA government under Modi has been successful in building strong relationships with Saudi Arabia, the United Arab Emirates and Qatar.  (IANS)