Caught in a pincer

If the time horizon is restricted to a couple of months ahead, the outlook for the Indian economy is bleak. This is primarily because the pressure behind the dollar outflow — which is currently hitting hard the value of the Indian rupee — is expected to continue, the main reason behind which is the upturn in the US economy. The other reason behind the continuing “depression” in the national economic scene is the increasing pressure on the current account deficit.

What this is expected to translate into is higher prices for essential commodities fuelled by higher import costs. It is unfortunate that the UPA-II Government will have to face this situation at a time when the nation will be preparing for the next Lok Sabha polls, but there does not appear to be an escape route. Not surprisingly, the Prime Minister is busy holding meetings to devise ways in which the expected price increase can be controlled, but, frankly, it does not appear possible that any steps envisioned by the Government will produce the desired result. Imports will have to continue, and they will have to bought at a higher price by the final consumers at home. The Government can, of course, temper the increasing price burden by subsidising the rates at which essential items are sold. But, then, this will have the effect of steeply increasing subsidies, which in turn will add to the pressure on prices in the medium-long term.

Project implementation

The other route which the Government is already considering is to improve implementation of projects which have already been delayed. Prolonging project-gestation periods can actually lead to a waste of precious resources. However, the important point is whether the implementation-tightening measure being considered now will produce the intended results.

And yet something has to be done to hold the national economy on an even keel in the coming months, especially as inflation is expected to get back to the 6-7 per cent range. No doubt economic steps will be taken to temper the adverse effects, most probably pushing fiscal deficit-control programme off course (the target this year is 4.2 per cent of GDP against 4.8 per cent last year). The current account deficit, already high, will also increase further, leading to concern about the way India’s economic status is viewed abroad.

OECD has ‘good’ news

Admittedly, a silver lining on the horizon is the OECD’s latest composite leading indicators index pointing to “a tentative upward change in momentum” for the national economy. This is good news since the June index had indicated “growth below trend”. But the OECD would have done better to have spelt out the reason why it considers the scenario to be improving. All indications point to a resurgence of the inflation rate in the weeks ahead; so would that mean that the OECD’s favourable prognosis will be short-lived?

COMMENT NOW