Even as different political parties and politicians start positioning themselves for a shot at the job of the Prime Minister in 2014, the economy continues to suffer from neglect and deliberate harm caused by the government. Lack of rains is compounding the problem. The rainfall shortage is still 22% for the current monsoon season.
The Sunday (22 July) edition of the Business Standard does not leave much to imagination with its story (‘Power sector’s dark days’) on the shortage of coal for India’s power plants:
“The unprecedented shortage of coal has created a crisis-like situation for the power sector with plants of 30,000 MW capacity lying idle. Also, the number of power units that failed to meet their targeted plant load factor (PLF) jumped sharply from 10 in January to 25 last month.”
Another story in the newspaper on Sunday on the likely “reform” measures that Prime Minister Manmohan Singh is likely to undertake now that the presidential elections are over is breathtaking for the sheer modesty of its expectations. The “government may opt for reforms like partial decontrol of diesel prices, introduction of the Direct Taxes Code (DTC) Bill and the new Companies Bill in the monsoon session of Parliament. It may also tweak the norms for foreign direct investment (FDI) in single-brand retail.”
Prime Minister Manmohan Singh (Left) with the newly elected President, Pranab Mukherjee . Reuters.
On the inflation front, the wholesale price inflation rate in June remained at over 7%—as it has been throughout the year—with wholesale food price inflation above 10%. The failure of the monsoon will not help matters. The household survey of inflation expectations, undertaken once a quarter by the Reserve Bank of India, shows that Indian households are resigned to the fact that high inflation is here to stay.
In the latest (June 2012) survey, around 98% of the survey participants expect inflation to be higher in the next 3 and 12 months. The inflation rate is expected to be around 12% in both the horizons.
The Indian rupee has stabilised around 55 to a dollar buts its dark days are not yet over. They may come back. The failure of the monsoon could accelerate inflation and if the central bank does not respond aggressively, the rupee will suffer for want of real rate support. The price of Brent crude oil has gone up by over 20% since its low of around $89 per barrel a month ago. The price per barrel of the Indian crude oil basket rose by 14% in rupee terms during this period.
Another country that has had the same problem as India with even larger current account deficit and an equally high rate of consumer price inflation is Turkey. The Turkish lira had performed worse than the rupee from 2011 right until the end of March this year. The positions have reversed since then. Now, the rupee is 10% weaker than the lira against the dollar in nominal terms. The bulk of the rupee’s underperformance versus the lira has occurred since April 2012—after India released its tax-payer unfriendly, anti-foreign investor budget for 2012-13 in March.
Turkey’s current account deficit ratio to gross domestic product (GDP) peaked at 10.4% in the first quarter of 2011 and has since improved to 7.7% of GDP in the first quarter of 2012. India’s current account deficit is yet to stabilize, let alone decline. Turkey’s current account improvement came because it managed to offset the decline in exports to Europe with an increase in exports to Arab countries. Further, it undertook several structural reforms.
According to JP Morgan’s Global Data Watch (20 July), Turkey introduced an incentive package for “strategic investment.” These investments are defined as (1) investments made for the production of those intermediate or final products for which import dependency is more than 50%; and (2) energy investments that are used exclusively by the strategic investments in (1).
Among the incentives are VAT exemptions, tax reduction, social security premium support and land allocation. The second scheme is the introduction of direct public sector support for the private pension system.
What caught our eyes was the mention of land allocation. In contrast, in India, land acquisition for industrial development has become next to impossible. In fact, the draft legislation for land acquisitions looks set to make it even more unviable for companies to acquire land for industrial projects. Land acquirers have to pay five times the market price of the land acquired, return 20% of the developed land to the owner and guarantee jobs to land owners for the next 20 years.
At the aggregate level, Indian stocks are far from pricing in the consequences of the failed monsoon, continued policy paralysis until 2014 and a fractured polity after that. It may be tiresome for readers to read that India is a land of missed opportunities because that has been the enduring feature of the nation—with occasional interruptions—since Independence. This time, the miss appears to be particularly enormous.
V. Anantha Nageswaran is an independent financial consultant based in Singapore. Comments are welcome at firstname.lastname@example.org
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