Euro crisis and its fallout on India
By Gopal K Agarwal,
Global economy is in doldrums, world
economy is sitting on a time bomb, where there are periodical new revelations. Successive bailout packages are being announced, but how long a patient
can survive on life saving mechanism.
It is being said that the economic
activities are moving to- wards east. specially India and China. Developing
countries are attracting funds flow from across the world. Indian Gross
Domestic Product (GDP) is said to be poised for growth rate of around 8 to 10
per cent per annum. But in my opinion these growth rate predictions for our
country are not correct and are presenting a false picture.
Though we have the potential of
becoming an economic super, power but there can be no complacency on our part.
We will have to take corrective steps at every level with determination and
indomitable will. to achieve success. Factors that need our attention are
enumerated below:
Parameters
for Gross Domestic Product (GDP) valuation
There is a large segment of Indian
economy which does not form part of the GDP calculation. With the successive
improvement in the collection and availability of statistical
data, more and more unaccounted economic activity in the country will get
accounted for in the GDP calculations, e.g ser- vices in the unorganised
sector. rural economic and household domestic activities etc.
Secondly, India has a large parallel
economy. As we move towards a regime of low taxation and strong audit trail,
the incentive to move to the mainframe economy will increase. Further, with
the implementation of VAT and GST. There will be a systematic synchronisation
of all business data. Slowly, all these segments will start forming part of the overall GDP figures. This clearly brings out a fact that, the actual current
GDP figures, for India does not reflect its true picture. The Indian economy is
much larger than what it is being represented at present. As we move ahead,
statistical figures will show growth automatically, but there will not be real
growth in absolute terms at this rate.
The other basic problem in Indian
context is of inclusive growth. India has seen widespread corruption throughout
the country. The people in power. Possessing resources make sure that all benefits get concentrated to a select few. This rampant manipulation is a fault
line in our economic planning and is a major cause of concern. A recent
glaring example is the IPL fiasco, where who's who of the society is involved
across party line. Unless the common man stands strongly against this menace of
corruption, nothing much regarding inclusive growth can be achieved in India.
Everything is a mere lip service. Our countrymen need to rise to the concept of taxpayers' money, making every politician and bureaucrat answerable
to its misuse.
Capital flows
There is a very strong pressure by
the US on China to revalue Yuan. Yuan is pegged to US dollar at a fixed rate.
If the Chinese currency appreciates, thereby depreciating US dollar there will
be a major movement in the world currency markets. impacting funds flow to
the emerging economies. India has seen large inflow of funds, causing bullish
trends in the domestic markets. Considering high uncertainty of this hot money
and its impact on our overall economy, Indian Government has set up a committee
under the chairmanship of Shri UK Sinha to gauge its impact on its usefulness
or otherwise for our country. A very thought is required on the issue. Do we
need foreign capital? What is the quantum that we need? And at what terms and
at what cost?
Indian
capital market
Indian markets over the past few
months have seen an upward trend but in the last week this trend has been
reversed. The impending news on the seriousness of the Greece debt crisis has
shown its major impact on the world markets, including our markets. Although.
European Union has come out with a
second bailout package, amounting to
750 billion Euros, but there is an apprehension; whether this bailout package
can contain this crisis as a long-term solution? In addition, there is a
widespread anxiety about the crisis, spreading to other European countries.
Credit Rating Agency: Like Moody's have issued a warning regarding downgrading
Portugal debt rating and further cut Greece rating to junk status. Question
is how our domestic economy can be delinked and protected from the vagaries of
the global financial meltdown?
India
has seen widespread corruption. The people in power, possessing resources make
sure that all benefits get concentrated to a select few. This rampant
manipulation is a fault line in our economic planning and is a major cause of
concern.
In addition to this our market can
get into a bear phase, thereby applying brakes to the future economic
development. Some factors which points towards this scenario are; Firstly,
there is a big queue of IPO's lined up. The total expected targeted collection
figures, amounts to approximately Rs 2,00,000 crorге The huge influx of IPO at
a hefty premium will suck excess liquidity from the system. Secondly, the
current nifty is being traded around a Price Earning (PE) of 24, which is very
high. The basis thumb rule for an investor is to exit markets whenever, the PE
crosses 22. sitting on cash, and buy when the PE falls below 15. Therefore
there can be a selling pressure in the markets. Thirdly, in the Mutual Fund
segment, the April month has seen the net outflow of Rs 1,133 crore from the
equity scheme, against a net outflow of Rs 196 crore in the corresponding month
of the previous year. This is quite high and is contrarian to the market
expectations: Usually, April month should witness fresh inflows in the equity
markets because of a start of new financial year. pointing towards a plight of
capital from the market.
Inflation
and rising commodity prices
Rising commodities prices is
fuelling unprecedented inflation in the country, causing concern for the
common man. The government does not seem to have any clue to contain this
menace. On the one hand, surplus food grains are rotting in the warehouses,
citing inadequate and improper storage facilities, and on the other hand common
men are suffering due to faulty and corrupt Public Distribution System (PDS).
With the storage and warehousing facilities in the county in such a dire state,
the farmers are ready with the new crop to be purchased by the government and
are demanding higher Minimum Support Prices (MSP). Inflation in food items and
mishandling of commodities has resulted in a strong nationwide protest by all
Opposition parties. United opposition brought out a cut motion against the hike
in the petroleum prices by the government in the Budget Session. The manner. in
which the Government has been successful in overcoming this crisis. raises
several questions about the functioning of some of the institutions in the
country.
The way UPA government is handling
economy leaves much to be desired. hope that they wake-up to the situation and
take corrective steps before it is too late.
