The world economy is in turmoil as crude touches a high since 2014 in the wake of US rejection of the Iran nuclear deal. Rupee is on a roll to touch one of the lowest marks against a surging dollar, a phenomenon that occurs for the eleventh time since 1983. Inflation is set to rise in India. The only good news is that as interest rate rises it would cause cheer to the depositors and the banking sector. This is to boost savings which has touched a low of 29 percent growth India in 2016 from a peak of 38.3 percent in 2007, just before the Lehman Brothers crisis ruined the banking sector. Malaysia and Pakistan have already started gradual increases in interest rates.
The rupee had touched Rs 58.96 against dollar in May 2014 soon after the NDA government took over and now it has gone to a low of Rs 67.43 and is projected to fall further. It poses politico-economic problem as twin rises – oil and dollar – disturbs the businesses and the government. It leads to an inflationary situation, trouble for international commerce, trade balance, budgetary projections and possible inequalities.
All this happening at a time when the UN’s Economic and Social Survey of Asia and Pacific 2018 (ESCAP), launched in Delhi, and International Monetary Fund’s (IMF) latest economic outlook project low regional and world growth necessitating economic reorientation. The world bodies are worried at the US attitude and economic roil. India is seeing a currency crisis that had hit it in September, 2013, when rupee had touched almost Rs 68 to a dollar.
It makes crude more expensive for an Indian. It hits an Indian home and may lead to a farm crisis as input costs, particularly irrigation, fertiliser and transport, are bound to rise. Consequently there may be problems for growth, job creation and development funding. Wage rise and many readjustments are must. The IMF has just projected India growth at 7.4 percent up from 6.7 percent in 2018 though advanced economies including the US would have almost 0.2 percent rise in 2018 at 2.9 percent and in 2019 at 2.7 percent. The euro zone will grow 2.4 percent this year before falling to 2 percent in 2019.
The ESCAP projects 0.4 percent growth for Asia-Pacific, having 53 states with 60 percent of world population, at 5.8 percent in 2017 against 5.4 percent in 2016. India and China lead the growth and Russian Federation having come out of recession on oil price recovery may add to the cushion.
But 2018 growth in Asia-Pacific is set to fall to 5.5 percent as in half the countries consumption of the bottom 40 percent grows at a slower pace. As real wages are not rising by rising productivity, consumption would be led with debt and cause financial vulnerabilities.
Social inequalities are also set to rise with higher inflation as economies would be operating below their potential hit by low wage and job growth. Though e-commerce may meet demand at lower costs, automation may further lower wages. The working classes in the region are in for big trouble. It may be an uphill task to contain social discontent.
Trade barriers and harsh US measures are likely to further disrupt cross-border production networks. This may affect not only trade but also long-term investments. Even short-term investments like the withdrawals by foreign portfolio investors from Indian market may cause forex problems to be further fueled by rising import bills for crude and other goods.
Exports rises would be moderate and are unlikely to offset the forex. A repeat of 1997-98 Asian financial crisis is forecast. It may have adverse impact on the India’s Look East Policy as the countries like Malaysia, Thailand, South Korea and China face financial vulnerability in the wake of rising private debt resulting in asset price corrections, says ESCAP. It may impact projected Indian investments in building roads in Myanmar and south-east Asia.
India was hedged as commercial lending rates were not lowered because of banking sector problems, ESCAP says. So rising deposit rates would not be much of a problem for Indian businesses and would help individual savers.
While ESCAP has stressed on further tax widening and increases, it has not stated how rising taxes add to citizen’s woes as it is inflationary and increase in government expenditures. It leads to a concern of povertisation of the transitional, middle, class, says Jaimini Bhagwati, RBI chair professor, ICRIER and former joint secretary in finance ministry. Head of ESCAP South and South-West Asia Rupa Chanda says the tax increase measurers also leads to problem of attitudes (tax-terror) of tax officers.
If the government wants deposits, that had fallen because of lowering of interest rates and taxing individual banks deposits, to rise, improve health of the banking sector, it has to amend its policies and let the deposits not be subjected to TDS.
It will boost the banks, economy, reduce government burden on avoidable costs, processes, and litigation. Since the introduction of TDS on bank deposits, reviews and litigation have increased. If it is done away with individual and bank liquidity is set rise, the government finances are bound to improve with higher consumption, tax realization and better ease of doing business. Similarly, many unnecessary recently introduced banking procedures also have to be simplified. For a few rogues all bank clients should not be punished. Tax procedures and banking should create a friendly approach to the government in the run up to 2019 polls.
The ESCAP also suggests ‘macro-prudential’ measures to do away with financial (tax) excess. These, it says, reduce systemic risks and safeguard stability of financial (banking and revenue) system and markets. It sees problem in India’s Rs 9.5 trillion NPAs caused by corporate leverage. Its oblique suggestion is not to hit the ‘micro’ individuals – citizens of institutions.
Another aspect that has to be taken care of is the surging deficits of the Indian state governments. The centre’s deficit, it finds, is controlled and overall debt is one of the lowest at 60 percent compared to Japan’s of above 20 percent.
It finds strengths in Indian economy but calls for fine tuning to make the trajectory smoother and faster. The international situation – oil prices and dollar – would remain problem but with some ease of methods and trust in citizens, Indian can remain the engine of world growth.
(Views expressed are personal)
