Fiscal and rural buffers of India missing this time?

In 2008 when the world was facing recession India appeared relatively calm. Its exports were certainly hit and the industry did face some degree of liquidity crunch however, a few fundamentals and policy events kept the economy kicking.

Pay Commission announced hikes and big lump sum packets of retrospective salaries were doled out, agriculture and therefore the rural economy was doing well, the central government was prepared for a fiscal stimuli and the RBI brought the bank rates down. The B and the R of the BIMARU states provided positive sentiment with their growth stories and the new middle class and the new set of salaried individuals entering the economy kept the engines warm.

This time around when the world seems to be stuck in a low level growth equilibrium India appears more pessimistic. It all started with the inflation that tempered the economy followed by RBI’s monetary tightening. Thereafter it was the loss of faith in the Indian Government in the wake of scandals and the loss of faith in the Indian currency as the Eurozone plummeted.

India is currently caught in a phase of macroeconomic instability where the twin deficits are high and the inflation is above the targets. This macro instability has derailed India from its high growth trajectory for now and it would need some positive policy actions in the next quarter or so. Few days back T K Arun of The Economic Times talked about irrational lack of exuberance in the Indian Economy and he almost derided experts who look at the stuff like twin deficits.

“The trouble is, respectable people see respectable things like the fiscal deficit, the current account deficit, inflation and the exchange rate, and feel discouraged. 

They see other respectable folk - foreign investors and their lobbyists, some of them state dignitaries - shake their heads in knowing disapproval and feel doubly disheartened. If only these respectable people would look into the grime and murk that is India's politics.”

The current situation I am sure would certainly make T K Arun think again, However,  what I am hopeful about and where I am on the same page as him is that once the government starts to show some constructive path, the economy can certainly come back to a high growth rate of about 8%. Also I think India is not likely to go below a 6% growth rate in its current form. The reason I hold such confidence in the Indian economy is facts like this:

• -          Competition between states is increasing and the states are at different stages of development. Bihar is still doing well and it needs, and is likely to attract significant investment even if the average mood in Indian economy is sombre.
• -          The Industry is showing signs of flexibility and is quick to shift to states that show better governance. Maruti for example is moving its plants to Gujarat from Haryana.
• -          The latent demand with the non-salaried class is quite high and is now beginning to surface. People are actually spending more – be it on child’s education, be it on electronics, be it on property or be it on alternative medicine like Ramdev’s.
• -          Indian households are still less leveraged compared to what is the norm in the developed world. In USA or Australia households are in debt up to 100% or more of their income while in India the ratio is about 30-40%. Such households as in India do not defer or change their durable or property buying decisions in response to minor ups and downs in interest rates or in the economy.
• -          Marriage and religion would continue to support the Indian economy even now.
• -          As mentioned in my previous blog rural demand is likely to be robust.

So while the fiscal buffer is certainly missing this time I would like to bet on the other buffers to help keep the economy in a 6% kind of state even in the absence of positive policy moves.