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Not all is well with rapid economic growth
If you ask India's Finance Minister about the country's economic health, he would seem to be more than sure about its well being.
- By Chinmay Chaudhuri, Staff Reporter
- Published: 00:00 April 5, 2007
If you ask India's Finance Minister about the country's economic health, he would seem to be more than sure about its well being.
If P. Chidambaram is asked if the economy is showing any signs of flu (overheating, I mean), his answer in the negative comes with a confident smile. He's always happy that India is not only shining, but is now glittering.
India is growing at a pace never imagined by even the super-optimist. The Hindu rate of growth (of six per cent) of the country's gross domestic product is history now. We are currently averaging above eight per cent. Several estimates put current GDP growth rate at 9.2 per cent. And for the first time in the past 10 years, industrial growth in India has exceeded 10 per cent. Also, for the first time ever, the rate of growth of the country's manufacturing sector has exceeded 12 per cent in six months (April-September 2006).
FDI
India's foreign exchange reserves are up at $195.95 billion as on March. The country is poised to achieve the target of attracting $10 billion of foreign direct investment this year. India Inc has recorded its highest rise in salaries at 22 per cent in the first half of 2006-07. And to top it all, India has added the highest number of Asian billionaires (14) to the coveted Forbes List this year.
It's a long list of achievements. No doubt the Finance Minister has every reason to bask in the glory of these superlatives. But the sceptics are saying, "Sorry Mr Minister, not all's well."
Their apprehensions came true on Friday. The RBI was forced to wield its fiscal policy tool to contain inflation which has, for quite some time now, been averaging at over six per cent. That's a clear one per cent-plus above the threshold level considered by economists. RBI's measures include a half percentage point hike in cash reserve ratio (CRR) - part of the deposits banks have to keep with the RBI as cash - to 6.5 per cent, and a 25-basis point hike in repo rate - the rate at which banks borrow from the RBI - to 7.75 per cent.
Banks will now get far less returns on money parked with RBI as CRR since with interest rates on CRR halved to 0.5 per cent. The central bank has also said that it will impound another Rs60 billion through an auction under its market stabilisation scheme.
All home and consumer loans are bound to be more pricey now as a direct impact of the RBI measures. The latest hike would also adversely impact the corporate sector since the cost of funds for India Inc will go up in a big way especially for small and medium enterprises that have no or very little access to cheap funds abroad.
Moreover, the decision is also aimed at curbing the appreciation in rupee against the US dollar, thereby making the export of goods and services expensive. The increase in the repo rate would hit the profitability of banks and financial institutions. So the RBI's measures aimed at containing runaway inflation is about to restrict the growth rate the country flaunts at the global centre stage. The Sensex's 4.7 per cent slide in one day is a confirmation of that.
The common man's worried about his future. He feels that with inflation above six per cent, the Budget sops - such as the extension in exemption limit of income tax by Rs10,000 for general category individuals, raising of the tax threshold limit for senior citizens to Rs195,000 and increase in the deductible amount of medical insurance premium to Rs15,000 for the general category taxpayers and up to Rs20,000 for senior citizens - will hardly bring any relief to him.
RBI's recent tightening steps are directly aimed at taking these worries out of the common man, which is a duty which the Finance Minister, who is busy trying to fetch superlatives, may have forgotten.
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