Awaiting The New Year Bonanza

Extraordinary conditions demand extraordinary efforts and this is the exact case with the current UPA government, which is trying hard to cope up with the global meltdown. The government and the RBI have initiated numerous steps in the past two months to shield as well as to put the Indian economy back on the tracks but the latest assessment for GDP growth has continued to bother everyone. The half-yearly review has predicted GDP growth in 08-09 at a sober level of 7 per cent, which has actually made the government a little nervous on the one hand and the Indian Inc. somewhat more demanding on the other.

Rumors are looming large that the government is preparing another stimulus package to boost the subdued sentiments of the Indian industries. Having this hint, the corporate world has wasted little time to come out with their bunch of demands. Now it is interesting to see whether these demands would be met or would again go down the drain as in the past. If we go by the demands then the industry is aspiring a lot from the government’s second package, reason being its pathetic performance in the last quarter. Accordingly various corporate bodies have spelt out various demands to the government and it would be interesting to see whether these demands will be met or not.

Why we need another stimulus?
As the brunt of the US-led meltdown is very much vibrant on the various economies around the world, the Indian economy is not an exception. The government is bound to give a second stimulus to the economy. It seems to be ostensibly important if we take a look at some of the recent past’s growth figures. Exports have declined by more than 12 per cent consecutively for the two months since October 08 and the worst part is that this is the first decline in last 6 years. Another point, which adds to the worrisome scenario, is that in the first half of 08-09 exports had appreciated by more than 30 per cent. In the same way industrial production has depreciated to the negative levels with negative growth of 0.4 per cent, first negative decline in last 15 years. This seems to be more perturbing if we take notice of 4.1 per cent growth in the first half.

Due to this scenario, which clearly hints at slowdown, almost all the sectors like automobiles, real state, infrastructure, IT, etc. have taken a very big beating. In fact the automobile sector has witnessed a sharp decline in the production due to declining demand. Production in this sector has declined by 11.6 per cent and 5.8 per cent respectively in the months of October and November, with the commercial vehicle segment getting hit hard. Here, it is very interesting to note that in the first package given by the government the automobile sector did not have anything concrete for it to boost itself from the rubbles.[PAGE BREAK]

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In the same way, with the news of distress sale of property by the real estate giants like Unitech keeps pouring in the real estate and the infrastructure developers didn’t get their pie of stimulus they said to deserve. Apart from this the quarterly performance of sectors like textiles and chemicals has shown a sharp decline in profitability to negative territory as well. This, in addition to the pathetic condition of exports, has actually been a good case for the government to announce a new package to boost the governmental expenditure as well as to give some kind of fiscal stimulus to the ailing sectors over and above the previous more than Rs. 30,000-crore package.

Where stimulus is needed?
Though the glimpses of slowdown are very much clear in almost all the sectors of the economy yet there are some reasons which are primarily responsible for the de-growth spiral in which the Indian economy is into.

These situations need an immediate attention by the government and the RBI and the industry chambers like CII, ASSOCHAM and others are reiterating their demands to give stimulus to curb these menaces. These reasons basically include decline in exports, lack of access to cheap credit facility, slowdown in the domestic demand, impact of restructuring from high cost to low cost economy and abandonment of investments by the companies.

If we diagnose these situations step by step then they clearly seem to be the main culprits due to which the Indian economy is reeling under the pressure of slowdown. A consultation paper of CII has clearly pointed out the repercussions of these causes and its effects on our economy. First and foremost, the biggest disturbing element is the sudden drop in the exports in the last half year. As we all know 20 per cent of the Indian GDP has been contributed by the exports of goods and services. A sudden decline has actually affected the textiles, leather, gems and jewellery etc. in a major way, hitting mainly the SME sector. Even Union Commerce Minister Kamal Nath has admitted to loss of 65,500 jobs already due to the shrinking of export orders.

Due to the slowdown in the developed economies service sectors, such as IT and ITES, have also been hampered to put economy on a lean patch. In the same way the Indian economy has got its double trouble from the indifference of the banking sector to provide cheap and easy finance to the corporate sector despite sustained efforts by RBI to cut the rates. According to CII, in spite of RBI’s figures showing a jump in the credit growth from 23 per cent to 27 per cent in the current year as of November, credit growth should be given a spurt to put economy back on track, reason being that funds from other sources have literally dried up.[PAGE BREAK]

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Inflation and higher interest rates have put brakes on the growth engine

Another element which is putting enormous pressure on the country’s growth is the slowdown faced by the domestic sector. This inscrutable slowdown has actually erupted due to a vicious collaboration of inflation and rise in the interest rates, leading to curtailing the expending power of the common man. As per the data on the private final consumption expenditure (PFCE), 50 per cent of the expenditure is done on food and fuel and as the prices are increased in these two categories, spending on other categories has declined drastically. That being the reason, the Indian economy needs a boost through more spending by the government.

The problem has aggravated manifold due to the negative sentiment among the Indian Inc. as they have abandoned various projects. Though companies are giving various reasons such as decline in demand, scarcity of funds, non-availability of credit, etc. for holding back their investment yet the basic reason for the slowdown is the negativity which has penetrated deep inside the corporate world. “Several massive investment projects in steel, auto, transportation, fertilizer, refineries and oil and gas exploration sectors are currently facing severe capital shortages to execute their planned expansion,” pointed a communication of ASSOCHAM to the finance ministry.

These reasons have mainly provoked perturbed industry bodies to demand further stimulus from the government. In fact, we have seen in the past that the US has earmarked a big chunk for the revival of its  economy and it is now estimated that it will ultimately end up giving an amount equal to 10 per cent of its GDP to the industry. The industry bodies in India are demanding that the Indian government should give at least two per cent of additional spending over the FRBM targets as a booster to the economy. ASSOCHAM has demanded a comprehensive package to create confidence among the investors and the buyers. In a communication to the government and the RBI it has proposed that the coming package should be adequately exhaustive to generate credit availability to the housing sector, the automobile sector and the industry at liberal interest rates. It should also withdraw the dividend tax, should encourage higher infrastructure spending and remove all roadblocks to these investments and help exporters to overcome fall in export demand and realizations. In fact the Camber has mooted a proposal for constitution of Rs. 1 lakh crore Revolving Fund to assist infrastructure firms to hike their activities to beat the current meltdown.