It is unfortunate that the Economic Survey of India 2013-14 presented by Arun Jaitley in the Parliament does not address the impending financial crisis warned in the following document.
If Arun Jaitley and his economic advisors had taken note of this document presented by Gitanjali Swamy and R Vaidyanathan, specific steps would have been outlined in the Survey document. Unfortunately, there is no indication that the warnings contained in the document have been read and taken note of.
Indian Budgets should cease to be driven by the market indices such as BSE Sensex since the health of the Indian economy is NOT driven by these indices but by the capacity of the Indian households to maintain and improve upon the savings rates and to invest in productive enterprises.
Acche din aanewale hain is a mere claptrap if this hope is not matched by fiscal action through Indian budgets.
Even now it is not too late for Arun Jaitley as Finance Minister to wake up and provide a white paper answering the concerns raised in the paper briefly outlined below.
I wish Gitanjali Swamy and R Vaidyanathan provide a two-page summary of their fiscal and financial prognoses and outline in bullet points, the steps to be taken by the Prime Minister and his team to set the economy on an even keel and get it out of the rut left behind by the corrupt SoniaG regime.
Acche din ke liye, stop politicking, start maintaining the fiscal disciplines the way a Bharatiya mother takes care of her family finances caring for her children's education and health and future job opportunities.
Kalyanaraman
With high probability the most likely scenario is a fiscal crisis first that in turn triggers a banking crisis in sector weakened by alarmingly large non-performing assets. But even if this worst-case scenario does not occur, we are still stuck with the alarming situation of slow and painful economic stagflation.
The East Asian crisis was started by a run in the foreign currency market that induced a banking collapse, which in turn triggered a fiscal crisis. The crisis started with Thailand, spread to Indonesia and South Korea, which suffered the most. Evencountries like China, Singapore and Vietnam, whichdid not require IMF intervention, suffered a loss ofdemand and confidence throughout the region.
Current Indian Economic SituationThe Indian economy is in slow, painful stagflation today with distressing growth and inflation performance indicators. India shows stagnation in GDP with growth at 4.4 percent (CSO) estimated for 2013-2014. This growth has been consistently declining over the last decade and while some attribution may be made to external factors such as the global recession, the nodal factors lie in the poor economic development and financial mis-management of the internal Indian economy. In particular, Agriculture which employed the bulk of the Indian populace and formed 16% of GDP grew at only 1.9% and the Industrial sector which formed
25% of GDP flat-lined at 0.9% leaving the onus of growth almost entirely on a service sector that provides 58% percent of the GDP but only employs a little over 30 percent of the population. The nature of a majority of these services is low value add; according to IBEF the high value add IT/ITES segment only contributes to 1% of employment or about 12.5Mil direct and indirect jobs. All software IT/ITES related activities come under business services, which itself is about 5% of national income.
The low growth and high inflation have exacerbated poverty.
The Indian economy benchmarks at comparable rates to distressed economies such as Turkey (at 29%) and Argentina (at 27%) with respect to India's short-term debt at 24.7% of total debt. India's short-term debt is also 28.8% of our foreign reserves as compared to China at only 15%.
As per the situation 2013, it is highly likely that India will default and trigger a fiscal crisis even with the barest cover at 4-month import payment. Three cautionary notes must be added; Firstly given India's recent track record of fiscal performance,there is serious concern among foreign investors,secondly FDI cannot come in any industry where the local business are made disadvantaged or uncompetitive by its entrance and thirdly FII must come with a long term horizon. Both FDI and FII in India are complicated by instruments like participatory notes that allow illicit black money to rapidly be moved anonymously in and out of the Indian system causing further instability and capital flight in times of uncertainty.
Furthermore, it is of note that the dominant portion of Indian savings comes from the internal household sector rather than FDI or FII. Over the past decade on an average 75-80% of domestic savings come from the internal household sector. Of this sector 25% to 30% comes from the household non-corporate sector. The Indian traditional values of thrift and savings are critical aspect of the psyche and are unchanged. Unlike the US economy, which is driven on consumption, the traditional Indian economy continues to be driven on savings. Unfortunately, over the past 5 years, there has been an erosion in the Indian savings; some suggest that this is in part because of a shortage of instruments that the average individual can invest in that provide an adequate return. Due to cultural and economic reasons, Indians tend to invest in gold, real estate and limit their exposure to equities. In actuality, less than 3% of the financial savings of households isinvested into stock markets.
Given all this evidence, it is fair to say that if India persists in the current course, it is expected that the Indian economy will see a fiscal crisis within the next 3 years and even today India is teetering dangerously on the edge of a fiscal crisis. We must next examine the balance of trade to see if there is
any hope for this improving over time.