India is facing a drought. Official declaration would of course emerge over the next fortnight and though the situation may improve in parts of the country, there are many that are already in dire stress. There was somewhat of a drought in 2009 as well. What has been particularly striking this year is that the water storage in the dams was much better during the monsoon of 2011 than it was in 2008 - the rapid decline in the water levels in November to below the ten year average should have alerted our policy makers much earlier. Ironically, despite cities and villages reeling under the lack of water this year and with all food grains reporting lower acreage sown till the end of July, the only crop that stands out with higher acreage sown this year compared to last year is the water guzzler sugarcane.
That should make complete sense to a government that has in the first four months already borrowed 42.51% of this year's target for borrowing. Actually, the government has recently said that borrowings are likely to be lower this year, but such talk will inspire no one. Where is the sense of restraint? Where is the sense of urgency that should come through from a government that is facing a drought, an uncertain and unhelpful global environment and dipping industrial growth numbers? There is a serious drought of action, and we need some real men in positions of power. Mrs Gandhi has done well to put Chidambaram back in the FM's seat. The RBI needs some overhaul as well - where are the forex reserves that India desperately needs to protect itself from impending international shock?
Building the economy does not seem to be a priority at all. Now the Roads and Surface Transport Minister has also gone on record saying that the target of building 20 kilometres of road a day is not possible for another three years. All in all, the inaction on so many fronts is costing the economy dearly in the long run, a point that we have noted often before in our columns. What we are left wondering now is, what will it take for the economy to get going again? The RBI is not planning to cut its rates, the world is not going to turn around miraculously, hopes of a recovery are receding as the months go by and the growth forecast remains in the 6% range this year. In other words, investment and growth now actually outrank inflation as matters of most concern.
Let us look at the official IIP numbers that have turned in an overall negative growth three times in the past twelve months. What has been particularly worrying is that despite all the volatility, the capital goods sector has shown much lower growth, negative in nine months out of the last twelve for which data are available. There has been precious little policy action on this front. In fact, not only has there been little policy action, the discontinuation of data release of item-wise IIP production shows that this government would rather cover up problems than fix them.
Despite the hawkish monetary policy, inflation continues to reign high and the RBI has upped its forecast to 7%. It is clear to everyone that food prices are a problem, as has been showing. When it comes to fuel, instead of decisive action, we see just small fuel adjustments that tinker with the system even as the price of crude increased over the past month to cross $100 a barrel. Though the rupee appreciated slightly over the past month, over the year ahead, volatility for the rupee will be a given, since global factors and risk perception will drive the currency. The country has to be prepared for the consequences of a fall in the rupee since now we know the RBI can’t protect it much.
So growth is set to be down, inflation is set to be high, rates will not be lowered, and investment plans look dim. Is there anything to look forward to? Well, for what it's worth, we have a new Finance Minister!
P.S. Indicus has been tracking real time prices for 63 commodities over the past year and the indices are now available on our website.