The stock markets are normally seen as the best barometer of the overall economic outlook in the medium term. If one goes by this logic, then things don?t look very good for the Indian economy, besieged as it is by factors both local and global. And some of the issues dogging the economy will not go away anytime soon. On Monday, there was a big scare in the stock market as it fell sharply on rumours that India was renegotiating its double taxation treaty with Mauritius from where most of foreign portfolio investments come into India. Now, anybody with the most cursory knowledge of the Indo-Mauritius Treaty would know that it cannot be changed overnight. Besides, the finance ministry would be stupid to take any precipitate action that would bring the markets crashing down. Yet rumours to the contrary did shake the market, even if temporarily. Analysts are suddenly talking about the sensitive index going to sub-16,000 levels. When confidence is low, rumours become all the more believable. Are the animal spirits in decline again?
Confidence levels are very low on various counts. The domestic factors include signs of a discernible slowdown in private investment, inflation remaining stubbornly elevated, GDP forecasts for 2011-12 being lowered to about 8% by most experts now. Most analysts cite ?government inaction? as another major cause for business sentiment getting depressed. Prime Minister Manmohan Singh held a much publicised press conference with television channel editors some months ago and said the government would get back to its business of pushing much-needed reforms to keep growth ticking at a good pace. Not much has been heard on the subject from either the Prime Minister or any of his senior colleagues since. Senior Cabinet ministers in New Delhi are spending much of their time responding in a paranoic manner to incipient threats from civil society players. The minister of water resources, Salman Khurshid, was at the Indian Express office the other day for an extensive interaction with the journalists of the Express Group. Indeed, it was a telling comment on the general state of affairs that the entire session was devoted to the problems the government faced in coming up with an agreeable draft of the proposed Lokpal Bill that would satisfy civil society representatives. Of course, there was no time to discuss Mr Khurshid?s main portfolio, water resources, which requires equal attention from a development perspective.
Ditto is the case with telecom/HRD/science and technology minister Kapil Sibal, who too is perhaps expending much of his energies these days on the Lokpal draft. It might be useful to ask him how much time he gives to the major reforms agenda waiting to be implemented in the departments of HRD and telecom. Most of these ministers, whether they are in office, home or TV studios, seem preoccupied with dealing with the amorphous civil society. At this rate, we may soon have a Union minister for civil society! Well, one may not be enough.
On a more serious note, daily, bread and butter decision-making has come to a standstill. Last week, a crucial meeting of Cabinet ministers to decide the freeing up of coal mines to meet massive coal shortages had to be postponed as the UPA is grappling with various political crises. Union finance minister Pranab Mukherjee continues to head some three dozen GoMs and EGoMs, which have a large number of economic and other governance reform items to clear.
But there seems to be little urgency in dealing with many of these pressing issues. Meanwhile, the Congress?s relations with the main opposition, the BJP, are again back to an all-time low. There appeared a silver lining some months ago when the leader of the opposition in the Lok Sabha, Sushma Swaraj, gave out a conciliatory signal, suggesting her party would cooperate on some of the critical legislative reform items that are not politically fractious. Of course, the BJP has now tasted blood and will go back to its cussed position on most of these issues.
The stock market, of course, is anticipating future political instability and a significant slowing of GDP growth. No wonder there is talk of the Sensex testing the 16,000 levels now. Even if the fear over some of these domestic factors proves somewhat exaggerated, the global macro indicators are not helping. The dreaded term ?double dip? is firmly back in the discourse of global economic analysts. Political instability in Greece and other crises-ridden countries is threatening to blow into a larger crisis, though there is still some sanguine hope that the stronger European economies could work with ECB and IMF to work out reasonable deals with the crisis economies. One worrying data point is that many major European banks? stock prices are near the lows that existed after the 2008 global financial meltdown. There are toxic assets informally estimated at over $300 billion lying in the European banks, including German banks, which are yet to be marked to the market. They are being held at face value till maturity in the hope that reasonable economic growth in Europe will eventually mitigate the massive erosion in the value of these assets in the bank balance sheets.
However, if economic growth is what the West is relying on, it is surely not reviving either in Europe or in the US anytime soon. Most analysts believe America will take at least 5 years to come back to a normal unemployment rate of about 5% from the current 9.4%. In previous recessions, the bounce-back was much quicker. Unemployment rate among the youth is about 40% in Spain, and over 20% in Greece and some other European economies. There are too many macro headwinds emerging economies like India will face in the near future. Domestic governance issues and political instability will only add fuel to the fire.
mk.venu@expressindia.com