Column: The countdown begins

Written by Madan Sabnavis | Updated: Dec 24 2012, 07:32am hrs
The economic scene, as usual, had interesting tales to narrate this year, which put policymakers in the centre of several storms as economists continued to offer advice that, when combined, covered all possibilities. Here is how the billboard would read.

At 10 is the euro crisis, which is now into its third year. The beauty of the crisis is that while questions are raised every year on the disintegration of the euro and the eurozone, it has not quite happened. The ECB has plans to revive the economies and actually thinks that they will follow austerity as it buys back securities. Germany opposed saving Greece and Spain, but finally relented. After all, if any country falls, it will bring down the others. They are all in it together.

At 9 is the US economy. Last year, it was a possible default that made rating agencies trigger-happy. It was actually seriously debated that the US would default on its debt. This year, it is the fiscal cliff that became an issue during the elections when Obama batted for tax increases and Romney for expenditure cuts. But, with Obama coming back, it is the devil or the deep sea. It has to be resolved with either or of the two options. 2013 will witness which way the die is cast.

At 8 are the Fed and the ECB, which sort of competed to induce liquidity into their systems. QE4 looked like a cynical joke at the beginning of the year, but is now a reality. We have had QE (various versions) operation twist, LTRO, government-bond-purchase programme and so on. The Fed will keep buying all bonds now to ensure that banks have money to lend. The ECB also will buy back bonds provided the countries promise to be good. So it is liquidity everywhere. The question is whether it will help

At 7 the emerging countries come into focus, talking of BRICS getting together to create a bank. Can this happen Each country is of a different variety with differing forms of governance iced with a large degree of mistrust. Will this ever work given that these countries are spread so far apartany economic union of sort should qualify for the proximity factor which is missing here

At 6 it is our own GDP growth forecast. Starting with some degree of pomposity at the beginning, and a strong sense of denial during the year, we have now come down to earth with official estimates ranging between 5.5-6%. More importantly, this is based more on hope and optimism and partly on statistical effects with little happening at the ground level. But one likely possibility is that while we may crawl, we will not slide down further. This is probably good news.

At 5 is inflation, which has always been a hard nut to crack. Everyone talks of inflation and the need to control it. But no one except RBI is serious on prices. MSPs are being raised and justified. Fuel prices have been increased and will probably be done again, which is inflationary. Crops have failed, which has added to price increases. To top it all, the CPI numbers, which is closer to our homes, is still near 10%. But nobody has done anything to actually bring them down. It is a case of what the bard would saytime is a great healer.

At 4 are the rating agencies that continued to threaten to downgrade India to junk status. We were appalled and rubbished such threats; but finally tweaked our policies to their liking. A Freudian slip was made when these policy statements made references to them meaning thereby they were influenced by their warnings. The rating agency views still did not quite gel with what foreign investors felt about India as FII funds continue to pour into the country. And these are the people who are putting their money where their noses are. The Sensex showed resilience and ranged around the 18,000 markgive or take 1,000 points. If this was the market sentiment, then things could not really be that bad.

At 3 comes the interest rates that were kept at elevated levels by RBI. The banks wanted RBI to ease rates, which they didrepo by 50 bps and CRR by 50 bps this year. Yet banks were not satisfied. The benchmark 10-year G-Sec yields have come down to 8.15%, but base rates of bank remain high at 10.25%. Quite clearly, banks are not lending for other reasons, which is partly due to NPAs and partly due to cherry picking. At their end, their NPAs have been increasing substantially (around 2.8% by September) and their restructured assets have also risen to almost R1.87 lakh crore in September 2012.

At 2 is the rupee, which continued to be volatile in the range of R51-56 to a dollar during the year. The current account deficit continued to increase with declining exports and the capital flows fluctuated periodically giving different signals. RBI was at peace because it was not like 2011 when it had to intervene regularly to steady the rupee. The euro-dollar influence is still there, and as long as the euro crisis surfaces periodically, the rupee is in for a bumpy ride.

The top position actually goes to critics and economists. They just revelled in bashing the government for inaction, and coined the term policy paralysis. The scams came and went and this provided further ink to the pen. Suddenly the government awoke and announced a plethora of reform measures, some of which like hiking diesel prices and LPG subsidy created a stir. The FDI-in-retail debate became even more important than the US elections as the coalition developed fissures that were bonded by other parties whose views are known to be even more volatile than the rupee. But, what did the disparaging economists saythese are not really reforms and not enough. Some people are hard to satisfy.

The New Year will probably have its own such moments. Happy New Year.

The author is chief economist, CARE Ratings. Views are personal