Crude realities for India’s economy

June 23, 2008

sg1.JPGOnly last year Indian policymakers were showing off the strong fundamentals of the economy to the world and pressing for a seat at the high table of global fora. Everything was going well — high growth, a surging stockmarket and a lot of attention from global investors attention.

But high oil prices and rising inflation threaten to bring the India growth story to its knees. Finance Minister PalaniappanChidambaram’s speech at a meeting of oil producing and consuming nations in Jeddah on Sunday showed the cracks in India’s confidence levels.

No doubt oil prices have spiralled, threatening the economic gains made by developing countries, as Chidambaram said in his speech.

But in the case of India was it misplaced optimism about growth or lethargy in getting the right policies on the ground that made things worse?

It pained me to read Chidambaram speech, in which he expresses “a heavy heart and foreboding” and says meeting India’s Millennium Development Goals had been imperilled by soaring crude oil prices.

But it is both a frank admission of the dangers facing developing countries, including India, and a fervent call for cracking down on speculators who, according to the minister, are playing havoc with the fortunes of nations. For the complete speech please click on
www.pib.nic.in.

The Congress party-led government contains three key reformers — Prime Minister Manmohan Singh, Finance Minister Palaniappan Chidambaram and Deputy Chairman of the Planning Commission Montek Singh Ahluwalia — and it had four years to get things moving. But they appear to have succumbed to their communist allies on policies
and reforms that investors see as vital for India’s growth.

The oil surge and rising prices pose huge challenges for Indian policymakers. Strong measures will be needed. But will India’s leaders bite the bullet?

7 comments

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Unless and until there is growth in industrial production, good quality agricultural production Indian economy will be always bumpy, India needs to innovate product
Not supply slaves in the name of outsourcing for industrial growth

Posted by Iftakhar Latif | Report as abusive

Do you think decoupling will work? and I don’t have the US economy in mind. I think India and its economy can be secured only after we decouple politics from economy. How do we do that? I don’t have a clue. Can we have independent policy formulators? Just a thought.

Posted by Madhu | Report as abusive

Do you think decoupling will work? and I don’t have the US economy in mind. I think India and its economy can be secured only after we decouple politics from economy. How do we do that? I don’t have a clue. Can we have independent policy formulators? Just a thought

The Congress government had four years to build on high forex reserves, FII and FI interest, and strong GDP growth, to push the economy into a higher growth trajectory. But it, as Surojit rightly hits the nail on the head, timidly surrendered to its leftist allies and did not undertake any major reforms–whether disinvestment or financial sector reforms.I
It lost a golden opportunity to push India ahead of China in terms of growth. Posterity will not forgive Manmohan Singh for this lost chance. Now, inflation is rampaging and growth could be hurt. What a shame.

Again, Manmohan Singh is showing timidity and weakness in dealing with the left on the nuclear issue. Manmohan Singh, stop giving into the left’s blackmail. Resign and leave with a bit of dignity from high office. Otherwise, your tenure will barely be a footnote in history.

Posted by Syed Mansoor | Report as abusive

Syed aka Kamil your argument ignores India’s political reality. How can you ignore the political compulsions of the prime minister? After all he is leading a coalition. If he tried to bulldoze his policies through, the communists would brook no delay in withdrawing support and bringing the government down. Will political uncertainty be any good for FI interest? Democracy (however flawed) and political stability have been as important a magnet for FII interest in India as our huge market.

Also, you have spoken of the headstart the congress government had in terms of a comfortable forex reserve, a blazing GDP growth and FI interest that it could have capitalised on to push India ahead of China. Consider this: From an average of 6.9 pct growth (the time the congress took over from the BJP) to a 12-13 pct growth that is needed to overtake China would mean huge inflation pressures on the economy and infinite fiscal problems. Aren’t we already seeing the effects of an over-heated economy?

But then again I am not trying to completely absolve the prime minister. He has made mistakes. The government should have abandoned the outdated idea of controlling and subsidising fuel prices long ago. After a populist budget and fuel tax cuts, the fiscal outlook is also deteriorating and of increasing concern to investors.

The problem is this: hard decisions are tough in a country ruled by disparate coalitions. The government should have taken tough decisions last year to raise fuel prices and tighten monetary policy before things span out of control.

Instead, the need for some decisive policies
is obscured by an often inflated sense of well-being.

The resignation of Manmohan Singh may only help him salvage some of his personal dignity but not pull India back from the financial quagmire we are headed towards.

Bumpy rides will be there for any growing economy. A PM who is clearly not a leader, but at best a honest man, is not helping India take tough decisions and rally support from masses.

India needs Young leaders. That never seems to happen in the country and somehow the ‘Left’ leaders not aging fast enough and retiring from active politics.

Posted by Ravi Krishnamurthy | Report as abusive

Bumpy ride is ahead. Inflation is still climbing despite recent rate hike and it looks that another one is on its way. India has become one of the poor performing Asian index this year.Oil has again claimed today (142$) despite sometime back assurance from Saudi’s (opec) pledge to increase production. Will Libya cut the production or is it just a talk?
But I guess oil hedging investors/funds making fortune, is there way to crackdown as US says they will?