Recession on the Horizon?
The rupee fell to an all time low ~ almost touching Rs 59 to a dollar last week. The Index of Industrial Production (IIP) reading for April was 2 per cent, lower than the 2.7 per cent the market was expecting. Consumer Price Index-based inflation for May came in at 9.31 per cent. The International Monetary Fund lowered its forecast on India’s economic growth to 5.7 per cent for 2013, down from its January estimate of 5.9 per cent. Simply put, our economy has trundled onto a bumpy path currently. Growth has slowed to a decade-low of about 5 per cent, a worrying sign, given that the country’s economy was booming at over 9 per cent a few years ago.
All around us, the excesses of a long boom are evident. After a 20-year charmed run with the boom, the auto industry is now up against challenging times. This perhaps is the price to be paid for the explosion in the industry during the “resurgent India” phase which saw car sales peak under the various schemes on offer that made loans so accessible to middle class India in the last decade or so. This was the time when EMIs (easy monthly instalments) became a household term and was stretched to cover practically every consumer product in the market. The enticing offers with the spaced out repayment facilities ensnared millions into the web, without too much thought given to maintenance costs of products like cars, for instance. Such has been the level of advertising hype, that viewers are often blinded to logic. All that matters is how one can keep up with the neighbour.
There are probably many now who regret that impulsive decision to buy a car. Failure to pay EMIs has already upset some families in the mining sector. So too those who bought gadgets and gizmos they could flaunt but hardly pay for. Every upgraded smartphone ~ well advertised on TV and other mass media ~ has been on the list of must-haves not only among the youth, but also mature adults. A hawkish consumer industry has been able to successfully ensnare gullible consumers into buying top-end gadgets, purely on its perceived ability to foster envy. While self-indulgence has become the mantra of a consumerist society, there is something to be said for a more disciplined life style for which billionaire investor Warren Buffet, for instance, is well admired. Buffet continues to reside in the same house he has lived in for the last 30 years or so. The US billionaire still travels around in the same ageing car.
The boom period also saw Indian industrialists acquiring huge stakes in companies overseas, including the US, with many going for aggressive takeover bids. Now, it appears the country’s economic situation is coming full circle, evident by the fact that the RBI is in a bind. With growth not picking up, there is a compelling case for cutting interest rates. But with the rupee touching a record low, and consumer inflation not showing any meaningful reduction, cutting interest rates could well turn out to be counter-productive, analysts have argued. The underbelly of economic liberalization is showing. Crony capitalism has seen prominent industrialists injecting unethical business practices and successfully influencing government policies to subvert the rule of law. No wonder the country has lately witnessed some of the biggest economic frauds involving misallocation and undervaluation of coal and electro-magnetic wave spectrum. The IMF has assessed that India’s banks are well capitalized, but remain vulnerable to long-term risks due to deteriorating asset quality. The government on its part has tried to introduce reforms like FDIs, reduced fuel subsidies, eased foreign investment restrictions in retail and civil aviation, but the efforts are simply inadequate at this stage.
There are ominous signs in the economic sphere resembling the pre-recession days of the past. High debt levels have raised the chances of a global recession and India evidently cannot be insulated from the gloomy scenario. Time indeed, to tighten the belt!
