INDIAN ECONOMY: FUNDAMENTALLY SOUND?

[Caution! Readers are strongly advised not to become judgmental about current economic situation based on this article, as I have deliberately avoided Buddha's middle path approach and relied on criticism.]

Tragedy of a liar is not that no one believes him/her, but the fact that the liar starts to believe his/her own words. This statement seems to be correct in the case of Indian government while dealing with the current economic situation. The number of times these politicians have talked about fundamentals of economy remaining strong that they actually have started to believe as a true fact. Are fundamentals of our economy really sound or is it an eyewash to boost the confidence of fellow Indians and investors outside? This is the question looming large at this juncture.

Indian economy is in shamble. GDP growth is at all time low (post 1991) ( first quarter of FY 2013-14 reported only 4.4% growth). Growth is sluggish but our PM is optimistic to achieve a growth rate of 5.5% to 6% by the end of this financial year. Reason being: "Fundamentals of Indian economy remains strong."

Another problem the country is facing right now is the Current Account Deficit (CAD). It is behaving like "SURSA OF RAMAYANA" ( who had the capability to expand her jaw/mouth, each time Hanuman expanded it's body). Whenever government intervenes to rein it, it further gets widened. Isn't the situation demanding policymakers to act like Hanuman ( who countered SURSA by shrinking his volume)?

Here comes the real issue. It is the falling value of rupee. Rupee seems to be enjoying the free ride under gravity. It is about to cross yet another psychological barrier of 70 ( currently hovering around 65- 68). Someone, out of sarcasm, tweeted "PROBLEM WITH RUPEE IS THAT IT IS NATIONAL CURRENCY. LOOK! WHAT HAPPENED TO OUR NATIONAL ANIMAL TIGER". I would further like to add in this about the fate of our national sport ( contrary to the fact that we had learned in our schools and G.K books, Ministry of Youth Affairs And Sports in a reply to an RTI query mentioned that India has not notified any national game). This crisis situation could have been turned into an advantageous one, had our export flourished ( although software industries are gaining a lot at this moment, stable currency is all that everyone wants). And they say our fundamentals remain strong.

Out of many solutions, the one on which our policymakers seem to have relied upon heavily is to liberalize the norms to bring more FDI, FIIs along with increased External Commercial Borrowings. In other word government is arming itself with tools to borrow more from different markets. And if this is true then shouldn't we conclude that government is following an old adage of Sanskrit which says "Rinam kritva ghritam peebet" ( eat butter, even if you have to borrow). All this is happening because of the illusion that our Fundamentals Remain Strong. Some critics call it POLICY PARALYSIS. I would rather call it "FUNDAMENTAL ATTRIBUTION ERROR" by which one blames the external factors overlooking the internal ones.

Inflation is another challenge which is presenting catch 22 situation in front of RBI. Whether to go for growth or to go for reining inflation is the million dollar question. So far RBI has done a commendable job (at least in maintaining it's independence); nevertheless, it has not been successful to achieve rupee stability.

Newly appointed RBI governer Mr. Rajan has said that "Our task today is to build a bridge to the future over the stormy waves produced by global financial markets." I would like to urge Mr. Rajan that the foundation of this bridge must not be laid upon wrong premises. It has rightly been said that crisis presents an opportunity. We must take a look at our fundamentals and address the concerns in an unbiased manner.

India in financial turmoil

The declining value of rupees, the losing points of Sensex, high inflation rate, slowdown in GDP, these all seem to bode evil to the entire Indian economy. In the current scenario the whole world is suffering from the so called “recession". Indian government has repeatedly announced that Indian economy has got very strong fundamentals and it will not be affected at large scale by this global downturn. But a deep sense of disparity is prevailing everyday and this is being reflected as Sensex is losing points day by day. AT the time i am writing this, Sensex is at 8701.07 , a level last seen in -------(In fact I don’t know , as this field has lured me very recently so i don’t have the records) .
Markets do fail often, but the governments intervene and try to solve the problem. Indian government is also trying hard to stabilize the market but still there is no sigh of relief in the market. The question is why?????

[Before i proceed i should tell you that i am not an economist. I am final yr. Btech student and these are not my original thoughts. These ideas are taken from the column written by Dr. Sengupta . i thought it would be better to know all these things those who missed that column]

The fault lies in the conventional approach of our government. But this time a different approach to the problem is required.

The RBI is trying hard to provide enough liquidity in the market. It has reduced the CRR rate and thus has released a huge amount of money which it had withdrawn few months ago to control the inflation rate. But injecting money alone will not increase bank lending unless borrower have the confidence in our economy to induce them to invest more. Also the bank lending money do not have confidence that borrower would be able to return it. So Overall the missing element is "Confidence". Investors do not have confidence in the sustainability of economy, as a result they have become skeptical and they are stopping investment in our economy. On the other hand lenders do not have confidence that they will get their money back. As a result liquidity provided by the RBI is trapped. It is not being used in investment expenditure and result is in front of us.
In such situation, the government has to take steps to increase the confidence in the system, and provide a stimulus to private investors. When private investors are reluctant government should initiate the public investment for stimulation. We have a large number of PSU's functioning well. If the public sector will start in infrastructure it will give a stimulus to private investors.
The money required for this can be provided by the government either by cutting some expenditure on other less important side or it can be generated openly by the government borrowing directly from reserve bank. The effect will be increase in liquidity along with the confidence.
Our fundamentals may be strong but the confidence is grossly eroded. So government should take strong measures to instill confidence among investors. This should be done quickly before the situation deteriorates further and gets out of hand.......

[Again I should remind you that these are not my ideas. ]