Vivek Kaul
A few days back the finance minister P Chidambarm said that green shoots are sprouting up everywhere. Green shoots is a term propagandistically used by politicians to indicate that signs of economic recovery are visible during a period of economic downturn.
As The Hindu reported on November 1 Chidambaram said ‘green shoots’ were visible on multiple fronts. “A bumper harvest is expected, core sector growth numbers are encouraging, and a strong rebound in exports as well as reduced imports on the back of a fall in gold imports are likely to bring the CAD(current account deficit) down significantly.”
Chidambaram expects the CAD to come down to below $60 billion this year against $88 billion last year. This is already reflected in the value of the rupee against the dollar. Rupee is currently quoting 61.85 to a dollar. This after it almost touched 70 to a dollar in late August this year. Hence, things have clearly improved on that front. There is no denying that.
The Reserve Bank of India(RBI) has taken steps to defend the value of the rupee successfully. But a major reason behind the recovery of the rupee against the dollar is the fact that the Federal Reserve of United States has decided to continue printing dollars for the time being. The day that decision is reversed rupee will start coming under pressure again. Hence, Chidambaram’s optimism needs to be taken with this factor in mind.
The finance minister also talked about a bumper harvest. This has been on the back of a very good monsoon season. As Ashok Gulati, Shweta Saini and Surbhi Jain of Commission of Agricultural Costs and Prices write in a research paper titled Monsoon 2013: Estimating the Impact on Agriculturereleased in October, “Monsoon showers in 2013 have been one of the best the country has experienced during the last two decades or so. The June to September rainfall has been 5.6 percent higher than the Long Period Average (LPA). But if one counts the continuing rains in early October (till October 10th), the excess rains turn out to be almost 7 percent above LPA, the best since 1995.”
This is widely expected to boost rural demand. As the CACP authors point out “This can imply enhanced demand for credit to buy seeds, fertilizers, farm machinery, and after the harvest, the demand for several consumption goods in rural areas, besides propelling logistics, agro‐processing and retailing.”
So far so good. But what the authors as well as Chidambaram do not take talk about is inflation and the impact it has started to have on rural wages. Rural wages after adjusting for inflation fell in August 2013. As Sonal Varma of Nomura points out in a note dated October 24, 2013 “Growth in the average daily wage rate for agricultural labourers moderated to 13.1% y-o-y in August 2013, significantly slower than 18.5% y-o-y in 2012 and 23.4% in 2011. After adjusting for inflation, the decline was even more stark: real rural wage growth moderated to -0.1% y-o-y in August from 9.3% y-o-y in 2012 and 13.4% in 2011.” (y-o-y = year on year)
A real rural wage growth of -0.1% basically means that the income is growing just about at the same speed so as to match inflation. And this can’t be a good sign for consumer demand of any kind. The inflation devil has caught up with rural India as well.
Consumer demand remains subdued in urban areas. Car sales haven’t grown in almost a year now. Sales for the month of October were expected to be robust given the festive season that was on. But the numbers that have come in are largely disappointing. The sales of Maruti, the biggest car marker in the country, were more or less flat at 96,062 units against 96,002 units in the same month last year. The sales of Hyundai, the second largest car marker, fell by 0.6% to 36,002 units. The sales of the third largest car maker Mahindra fell by 15% to 22,924 units. And that of Tata Motors, the fourth largest car maker, fell by 33% to 14,133units.
Car sales are not a theoretical construct unlike many other numbers which tell us which way the economy is headed. They give a real indication of the state of the economy. Floyd Norris writing in The New York Times explains it best: “New-car sales can be a particularly sensitive economic indicator because few people really need to buy a new car, and thus tend not to do so when they feel uncertain about their economic prospects. Even if a car purchase can no longer be delayed, a used car is an alternative.”
And people are not buying cars because they are having a tough time trying to make ends meet, given the high inflation. This lack of demand is also reflected in the slowing down of consumer durables output. As Sonal Varma of Nomura wrote in a research note dated October 11, 2013 “consumer durables output growth remained in the negative, possibly due to a sharper slowdown in white goods production.” Consumer durables output fell by 7.6% in August 2013. This after falling by 8.9% in July. This is a clear reflection of the fact that people are not interested in buying things.
A massive increase in food prices has been a major driver of wholesale price inflation. Onion prices rose by a huge 323% in September 2013 in comparison to the same period last year. Vegetable prices were up by 89.4%. Fruits were up by 13.5%. Food prices as a whole went up by 18.4%.
As I have constantly pointed out in the past, half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011). In this scenario it is more than likely that people have been cutting down on expenditure on non essential items like consumer durables and cars, in order to ensure that they have enough money in their pockets to pay for food and other essentials.
Unless, this cycle is reversed, consumer demand cannot be revived. And if consumer demand cannot be revived, there is no question of the economy growing at the pace that it was over the last few years.
A major reason for high inflation is the high fiscal deficit that the government has run over the last few years. And it continues to do so. Data released by the Controller General of Accounts shows that in the first six months of the financial year (i.e. the period between April 1, 2013 and September 30, 2013) the fiscal deficit was already at 76% of its annual target. Fiscal deficit is the difference between what a government earns and what it spends. It makes up for the difference through borrowing. The government has targeted a fiscal deficit of 4.8% of the gross domestic product (GDP) during the course of this financial year (i.e. the period between April 2013 and March 2014).
The high fiscal deficit can have serious repercussions in the days to come. The government is most likely to meet this target by not recognising some expenditures in this year’s budget, even though it will incur them. As a finance ministry official told Reuters some time back “It’s a given” that the government will have to use this strategy. “The worst-case scenario as of now is that $15 billion in costs will have to be rolled over into next year’s budget,” the Reuters article pointed out.
Even though, creative accounting will ensure that the government will meet its fiscal deficit target, the problem of excess fiscal deficit will essentially be postponed to the next year and will become a headache for the next government and its finance minister. Also, it remains to be seen whether international rating agency fail to see through the accounting gimmicks that the government is likely to indulge in.
Meanwhile, there will be other serious repercussions as well. As economist Shankar Acharya wrote in an article in the Business Standard in October 2013 “In the first five months of 2013-14, the Centre’s fiscal deficit ratio has been running at a whopping 8.7 per cent of GDP. Bringing it down to 4.8 per cent in the remaining seven months looks impossibly difficult, without recourse to seriously creative accounting ploys.”
These creative accounting ploys may help the government meet its fiscal deficit target of 4.8% of the GDP, but there will costs attached to it. As Acharya wrote “In any case, it is worth pointing out that a deficit that stays high through most of the year imposes the associated costs of higher inflation, higher interest rates, more crowding out of private investment and greater pressure on the current account deficit during the period, even if “miraculously” corrected in the final months.”
All in all the situation remains difficult, even though the finance minister P Chidambaram wants to give a positive spin to it by using a couple of positive data points. But then, that’s his job.
The article originally appeared on www.firstpost.com on November 9, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)