The Economic Spiral of '' Acha din '' and our Marie Antoinettes in Delhi:

Mitro, 

During this time when the Indian economy is passing through a roller coaster ride ,it is interesting to note politicians becoming economists and vice versa. However in this process of politicization of economics the reality is lost. The innumerable WhatsApp messages TV debates and now the opposition bandh are points to the fact that politics dominates economics .  At this juncture we need to understand the pure economic issues  faced by us through a nonpolitical lens and then see its political impacts

India’s economic growth is now around 8.3  %  in this quarter . So anybody can ask why the economic woos now. We  need to be understood that the current growth in the economy is fueled by consumption and not by production. The demand side is growing without proportionate  supply. The increase in demand or in other words increase in public spending is fueled by the sedimentation of the GST/Demonetization hiccup. People are ready to spend and cash is back post demonetization  (this is another controversial subject as to Why and How cash is back, which is not in the purview of this discussion and hence omitted ) and  GST rates are almost settled  . So the demand is back . Now  the supply has to match to this  with either increase in the capacity utilization of the manufactured product base or by formation of additional capital into product and services . Capital formation can happen if there is sufficient credit growth. Unfortunately the NPA problem and the RBI monitoring is now preventing industries from risk free borrowing . So they are borrowing less and hence investing less for additional capacity . If you notice the Gross Fixed capital formation which is an indication of credit growth and capital investment (see chart 1) it  is showing  a negative growth  since 2018 beginning. So the conclusion is that we have a consumption-led growth, not capital formation led growth beginning in 2018. Unless we have a capital formation led growth we will not meet the demand domestically as well as we will not be able to create jobs:

                                                                              Chart 1

                                                                          

Now when you have more consumption it correlates to an increase in imports. This is evident from the increase in imports of metals and manufactured products. Proportionally, due to various reasons which include failure of the export policies, increase in free trade agreements, trade wars, anti-globalization-protectionist policies of major economies, our exports are diminishing. So we have an increasing import and decreasing export resulting in a widening trade balance. (See chart 2 ) So when your trade balance is widening we spend more rupees to buy the dollar and this depreciates the rupee. Moreover the strengthened and protected US economy is increasing the Fed Rates which might result in the flight of capital further weakening the rupees. 

                                                                             Chart -2

To add to this problem Brent crude oil which was trading at around $ 50/Barrel in 2017 is $ 78/Barrel when I am writing this. This is further increasing the trade balance in Re terms with impact on the Current  account deficit (see the third chart) which is expected to touch the 2.3% mark in 2018 with increasing fuel prices

                                                                                Chart -3

The government can’t control the increase in fuel cost because now administered price mechanism does not exist.With nearly 6-7 % of the cost being freight/Margins etc. the Refinery transfer price (the price at which the  Oil Marketing companies buys the product ) is widely is the cost of crude itself which is import driven. They can’t also decrease the fuel tax. Nearly 50 % of the cost is taxes which if decreased by Rs 1 will result in a loss of 14000 crores to the exchequer further worsening the CAD. This is a catch -22 situations  where laterally thought policies are required

We  can  summarize  the economic part as  following

1.      

       Our growth is consumption-led and is not creating any supply increase or job growth and in fact contributing to more imports and an increase in CAD.

2.       The above factor along with demand in dollars is weakening the rupee making import further expensive and increasing the CAD.

3.       The increase in crude prices and the dependence on fuel taxes is not allowing the government to reduce fuel rates

What is the conclusion here? 

This will lead to a spurt in further money supply and increase in the inflation. As a result, the monitory policy will try to balance this by an increase in interest rates. The increase in interest rates will further reduce credit growth and we get into a spiral of economic woos.

Now let us get into the politics of this economics. These economic cycles are agnostic to any political party in power. However, it has an impact on the future of a political party. We faced this spiral in 2014 ( analyze chart 1 and 3 ) paving way for the ‘’acha din’’. Now it is time for the next rhetoric. Whose ‘’din’’ is going to be ‘’acha” time only can say. The BJP national executive, PMO and the finance ministry have been silent till now. Do they have a plan in hand or are they becoming another Marie Antoinette ‘’ saying ‘’if not bread let them eat cake’’ In India at least the voters can decide this in  2019? 

Till then I wait for my acha din…..

Sanyasi