Even as India clocked its lowest growth in nine quarters at 6.9%, chief economic advisor in the finance ministry Kaushik Basu described the present phase as turbulence stemming from a shift of the global economic base to emerging economies.
?It is not all gloom. When a shift takes place, just like when an earthquake occurs, everyone suffers, but once the earthquake is over, new lands emerge,? he said.
As per Central Statistical Office data released on Wednesday, the economy grew at the slowest in over two years in the second quarter.
According to Basu, India is likely to do better than most major global economies though 2012 is expected to be a difficult year for the world economy. However, with Europe on the brink, a second-dip global recession can?t be ruled out in 2012. ?If the euro zone begins to split up, that will come with at least temporary debt defaults. And this will infect other sectors and overall production. While a recession that emanates from Europe cannot be ruled out, on balance, my belief is that European leaders will have the wisdom to stave this off.?
Speaking in favour of allowing FDI in retail, Basu explained that it?s a mathematical truism that the margin in the middle will get squeezed in order to lower the price for the consumer and increase the prices that farmers get. But he added that in the long run, nobody, including the middle trader, will lose out. Basu?s diagnosis: Once the sector gets modernised, profit margin per unit of commodity would go down, but volumes would swell, enabling bigger profits. ?The way in which FDI has been conceived right now will allow limited space to be given to the large corporation-run stores; hence, physical space for kiranas will remain ample.? The government decided to allow 51% FDI in multi-brand retail last week, setting off countrywide protests from local traders who fear getting marginalised.
The other advantage he cited is the strong possibility of MNC retailers taking Indian products global through their global network. ?Once a big MNC begins to source Indian products and discovers that a particular product has market value, they will begin to sell it in their chains all over the world. It will be a big opportunity for small Indian producers who sell through little outlets within India. Benefits of letting FDI in retail is, in the long-run, a win-win for all.? The finance ministry has been pitching for this measure for a long time.
Basus added that the inter-ministerial group on inflation (of which Basu is a member) has recommended that the Agricultural Produce Marketing Committee (APMC) Act be reformed to bring more products into cities, thereby flattening out price differentials. ?The current APMC Act, by trying to coordinate trade in cities, provides for a framework that encourages cartelisation of traders. Last year, when onion prices spiked, we were getting data that it is selling outside Delhi at half the price being charged in Delhi, and likewise in Mumbai.?
Providing some relief on the prevailing anxiety on inflation, Basu assured that from the third and fourth weeks of December, food inflation will taper off rapidly while overall inflation will begin to decline slowly. ?Both monetary and fiscal policies have long time-lags and on both these, we have worked for nearly two years now. Policy moves have been made, and they are beginning to accumulate and we have reached a situation where we should have a dampening effect on prices,? he said.