State of the economy: Fault lines getting deeper?

The fault lines in the economy are only getting deeper with each passing day. The rupee, which plunged to a new all-time low on Thursday, is the biggest casualty, even as the widening current account and fiscal deficits are posing new risks to the economy managers.And with fuel prices touching new highs every day, it is a raw deal for the common man, too. Rising crude oil prices are sure to push up the trade deficit, which is already ruling high. Remember, the spike in petrol and diesel prices will have a recoil effect on inflation, forcing the central bank to adopt a more hawkish approach while framing the monetary policy.The bad loan menace is another big problem which has already pushed several power companies to the brink. Looks like the economy is gasping for breath, taking a heavy toll on the confidence levels of industry and investors.Interestingly, the macro-economic concerns come at a time when the Modi government is pitching for a ratings upgrade with S&P. In November last year, S&P had ruled out an upgrade in India's sovereign rating, pointing to ballooning government debt and the slow growth in revenue collection.Political party leaders and economists analysed the state of the economy on a special edition of ET NOW’s India Development Debate. Here are the key takeaways:PANEL VIEWMYTHILI BHUSNURMATHCONSULTING EDITOR, ET NOWRBI, as is common with central banks of all emerging market countries and even for some of the developed countries for that matter, always intervenes when they feel that movement is too sharp. So, what the RBI is doing in the process of intervention is to ensure that the depreciation is gradual and not too dramatic. So that’s what the RBI has been doing for the past couple of weeks. Given the fact that we have over $400 billion reserves, I think $25 billion is not a large amount to spend.R GOPALANEX-SECY, DEPT OF ECONOMIC AFFAIRSTrade deficit is one factor that contributes to the value of the rupee but there are other activities going on outside where the EM currencies are facing a bit of a problem. We have dollar strengthening, you have got oil price increasing — all these factors are contributing to weakening of the rupee. On the eve of elections, there’s always a tendency to slip the fisc a bit. There will be some slippages but there will be a greater attempt to see that the slippages are very marginal.SAUGATA BHATTACHARYACHIEF ECONOMIST, AXIS BANKThere are signs of some slippages; borrowings are relatively higher front-loaded again at this point of time. Tax collection is not that buoyant and robust as we had earlier expected. But to the government’s credit, the fisc is not that big a problem at this point of time. More than the fiscal, I think the immediate problem at this point of time is the current account deficit.JAIMINI BHAGWATIFORMER AMBASSADOR AND RBI CHAIR PROFESSOR — ICRIERRBI’s latest report mentions that the rupee is heavily overvalued. If you look at real effective exchange rates against six major currencies, the rupee is something like 25per cent overvalued even now. So, you have systematically high interest rates, both nominal and real in India compared to the USA. We have systematically avoided allowing the rupee to correct over the past, at least five, if not 10 years.

from The Economic Times https://ift.tt/2wzbO2J