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Explained: The Current State Of The Indian Economy

Non Performing Assets in the banking sector is only one of our problems.

What is the state of the Indian economy? Is it in good shape? Will it be able to navigate through rough waters in the coming days? These questions are important as we face the challenging times ahead.

These challenges are basically on three fronts.

First is the external front where we face uncertainties with respect to oil. We can expect rising prices, a subdued export performance, and foreign funds leaving the Indian bond market as well as a shaky equity market. The second is the domestic politics front where we are going to see general election next year and we are expecting populist policy decisions from the central as well as the state governments. The third front is the Indian banking crises which is showing no signs of abating. Put together, these three pose a formidable challenge to Indian economic policies.

Let us focus on these aspects, one by one.

The External Front

The Trump administration is determined to put an embargo on Iranian oil and this is really bad news for us. We are a large importer of Iranian crude which comes with several economic advantages. We have strong commercial ties with Iran where we are also jointly developing the Chabahar port. A junior minister of the Trump administration has warned us to stop imports from Iran by November 4. Our response will be taken note of with keen interest. Additionally, there is a real danger of oil prices shooting up even further this winter, which in all likelihood will further increase our current deficit.

Our lackluster export performance is another major source of worry. A recent editorial in the The Times of India has highlighted how our non oil and gold deficit has shot up from 1 billion dollars in 2013, to 53 billion dollars in 2017.

Our manufacturing and merchandise exports have refused to grow in last four years. The editorial warns that Indian manufacturing is losing its competitiveness in the International market. We have been extremely lucky to have had subdued oil prices for the last four years, without which, our total deficit would have hit the roof.

As mentioned earlier, a lot of foreign funds are leaving the bond market and the equity market. Our bond rates are hardening due to this tightening of liquidity. The equity market is seeing strong domestic inflows which have kept the market steady so far.

Overall, the external front is no longer benign considering the apprehensions of increase in current account deficit as well as pressure on the rupee in the days ahead.

The Domestic Politics Front

With general election scheduled for April 2019, political parties have already started their preparation by adopting several populist measures.

A number of state governments have already sanctioned large loan waivers to their farmers. The latest to join the bandwagon is Karnataka with a promised loan waiver of Rs 34,000 crores.

Another populist step has been the sharp increase in procurement prices of food grains announced by the Modi government. A leading agricultural economist and former chairperson of the Commission for Agriculture Costs and Prices, Dr. Ashok Gulati, has called this step a “big foolishness”. He has questioned how the prices has been decided on the basis of production costs alone, without allowing forces of demand and supply to fix these prices. The results could be disastrous in the long run and extremely inflationary in the short term. But populism rules when elections are round the corner.

The Banking crisis

The third front where we are facing issues, is the banking sector. Most state owned banks are stuck with large non performing assets. The response of the government has so far been timid. The government has saddled LIC, an insurance company, with the task of bailing out IDBI Bank which has NPAs of 27.5%.

How an insurance company will have the expertise to deal with such a bank, remains a mystery. There is a danger of a healthy company losing money to satisfy the whims of the government. A similar experiment was conducted when ONGC was asked to take over the liabilities of Gujarat State Petroleum Corporation which also had huge liabilities. A series of bold steps are needed, like closing down gradually sick state owned companies and disinvesting in many sectors of the economy where state presence is not required.

It is not as if there are no positives in the economy. The tax collection picture looks rosy and GST collection is also satisfactory. The domestic automobile industry is growing at a healthy clip and inflation figures have been under 5%.

The challenging times ahead provide an opportunity to rid ourselves of a lot of flab and inefficiency. It requires a resolute and firm approach but we cannot expect any bold steps till the general elections. The new government will have its task cut out. My only worry is that we might lose a lot in the intervening period.

Nishat Shah is an alumnus of IIM-A. He is an Ahmedabad-based commentator on business and economic affairs.

(The opinions expressed in this article are the author’s own and do not reflect the views of the NewsCentral24x7.)