The “worst is not over” for the Indian economy, according to economist and Member of Rajya Sabha N.K. Singh.

India may achieve short-term reprieve through “expenditure compression”.

However, it may not be sufficient to bring macro-economic stability in the medium and long term.

Singh, who was India’s Revenue Secretary from August 1996 to August 1998 and Principal Secretary to the Prime Minister, felt that the prevailing policy would shift the fiscal pressures to the next year.

“The difficult decisions on subsidy and public expenditure rationalisation have been postponed. Those are necessary if you want to have a fiscal deficit that is acceptable in the medium term,” he told Business Line after the launch of his book The New Bihar here.

CAD Reduction

According to him “imaginative steps” taken by the RBI in reducing the current account deficit through the dollar swap window, coupled with reduction in gold imports, was one reason for the short-term reduction in Current Account Deficit (CAD).

Slackening of oil prices post Syria crisis and lifting of sanctions on Iran is another reason.

“These are, however, not long abiding factors. In the long term, exports need to pick up far more significantly,” he said. The fact that export growth has not gone up despite the rupee depreciation and improved competitiveness, suggests that new markets and products are “far more problematic”.

“People are worried that given the regulatory hurdles and labour laws, the Indian manufacturing activity has become globally uncompetitive,” he said.

According to Singh, the slowdown in India is primarily because of domestic policy paralysis and less of exogenous factors. The “worst is not over,” Singh said and pointed out that investor confidence remains weak, interest rates are high and food inflation continues to be a matter of concern.

“Temporary reprieve has been obtained and serious problems have been brushed under the carpet,” he said.

Fed Tapering

According to Singh, confidence over the RBI’s enhanced capability to manage inflows has seen less impact of Fed tapering.

However, bulk of the tapering is yet to be done and its impact will be visible in the long run.

“The best bet (now) is that there won’t be further outward flow. But we do not know. How much and to what extent the markets have factored in is what time will tell,” he said.

(This article was published on December 22, 2013)
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