Current State of Economy

While the general sentiment in India is highly bullish, I am of the view that the Indian economy is not going to barge out of the cage and shoot up with growth. We still have the major issues of inflation and job creation that need to be handled. High unemployment and inflation would be one of the toughest domestic challenges facing the government. Getting people back to work will be high on agenda of the Government for its long term prospects. Creating jobs is critical to sustaining the economic recovery when government stimulus fades. I do not see much job creation happening in the manufacturing or construction sector, services sector may see some stabalisation. While layoffs may not be there but new hiring is also not there and that shows that we are in for a very bumpy recovery. I think RBI should not raise the interest rates in the 1st quarter of 2010.

Inflation and IIP number

Friday, November, 13, 2009: The IIP numbers coming down somewhat was something that was expected and I see it coming down further in the coming months, barring a few exceptions. The growth of capital goods is due to the liquidity that the government pumped in by way of pay commission and other stimulus measures. Sustained and stable industrial growth does not happen when the consumer level inflation is in the range of 15% or when you get peas at Rs 80 a kg. Car sale figures are not representative of industrial revival it merely shows that banks are desperate to lend and they consider lending against an asset called automobile to very safe, I think banks would do much good to India if they start lending to small enterprises on merits. It will solve many direct and indirect problems.
I disagree with economists who want to revise the numbers upwards in the coming months. The weakness of the dollar, the way Yuan is moving against the dollar, US unemployment figures etc point to a poor export growth scenario in the coming months. The numbers that we are seeing are due to the excess liquidity of the west that is pouring into India, the ground reality is that the feel good factor is due to this free money from the west, which can be called back anytime, it is their money not ours; we must keep this in mind. We have to be cautious and optimistic together. The growth that we are seeing is because of the feel good factor that is due to availability of easy capital. Fundamentals of economics point towards something quite different.

The base effect will start coming into play from Jan 2010 onwards and we must keep that in mind. I would like that RBI monitors the lending of the banks. Fundamental growth does not come by selling cars; in India it will come when the small enterprises flourish when agricultural production per unit land area increases. On the side of the government they will need to ensure that inflation is kept under check, else the social problems will surpass the economic issues and it would be something that cannot be tackled by either monetary or economic policy.

Economic Note - Economist Siddharth Shankar

While the figures of car sales, real estate prices and the stock market indices may all signal that things have bottomed out, I’am still not convinced that we are out of the bad phase. I expect that unemployment in India would continue to rise; coupled with this increased unemployment would be high inflation that would translate into social problems very soon. We have already seen inland security is becoming a major problem and a major cause of that is the un-employed youth, we cannot fight it by force, it can only be countered by providing employment to the youth and by way of educating them. I think the government must focus on this larger socio-economic issue rather than bothering too much about short term economic recovery.

I still do not see manufacturing or service sectors picking up in the near term. A much bigger problem will come in how to ensure that small business are able to sustain themselves in the coming one year. Government and the central bank have to look at sustaining the small businesses for overall stability of the Indian economy. The industry on its part will have to act with maturity and ensure that they do not push up the wages as it would lead to wage push inflation.

[Note: As said by Economist Siddharth Shankar on - 7-Nov-09]

Impact of Inflation

Looking at the figures released yesterday the inflation has maintained an upward tick. While the upward move was statistically expected the worrying part is the build of inflation this fiscal that is around 6% and which is higher than last year. If we look at the components, the numbers worry me more because the inflation has been higher because of basic items like tea, pulses, spices etc. If we exclude the drop in prices of items like aviation turbine fuel and light diesel oil the inflation figures would become more worrisome. If the current trend continues we would land up at an annual figure of between 8-10% that would translate into 20% inflation at the consumer level. Looking at the trend I think the government has to become more proactive to control inflation than RBI.