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Careful consumers, careless government - Views on News from Equitymaster
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  • Jan 5, 2009

    Careful consumers, careless government

    "Worst is over," opines SBI chief
    There's no keeping aside the optimism of Mr. O.P Bhatt. In being the Chairman of India's largest bank, State Bank of India (SBI), he is of the belief that profits for the Indian banking sector will grow strongly this year. In his view, the sector is resilient against any crisis in the world financial system owing to the prudential norms it follows. "No bank has failed in India," is his argument.

    In an interview with The Economic Times, Mr. Bhatt opines, "My own sense is that the worst is over. There may be lull for another month or so, but ultimately people will spend...people will start buying."

    Well, the way the RBI has acted to the financial and liquidity crisis and has brought down interest rates, Mr. Bhatt's words are not really without basis. With savings rate for Indian households remaining high thereby providing a cushion against adverse times, consumption spending is not likely to take a big knock going forward.

    This can clearly be gauged from a visit to shopping areas. People are still buying clothes, electronics, luxury items and other consumption products. While slowdown has hit footfalls at big malls, it is but a bubble (of malls that have emerged at every nook and corner) that has been pricked. FMCG companies continue to report good numbers and are not thinking twice before raising prices to factor in higher raw material costs.

    The biggest change that this slowdown has brought is that people are now spending more carefully than they were in the heydays of easy and cheap loans. As Mr. S. Narayan, India's former finance secretary writes in his article for a leading business daily, "The speculative urge has been dampened, but not the entrepreneurship and drive for self-improvement."

    Government's balance sheet in a mess
    While the Indian consumer remains prudent in his spending, this cannot be said of the Indian government, which has created a big hole in its own pocket. In the name of stimulus and bailing out industries from a deeper crisis, the government is set to see its fiscal deficit shoot up to 5.5% of GDP by March, much above the stated target of 3%.

    While policymakers may argue that the very idea of a stimulus means that the fiscal deficit will be larger because stimulus can done either by raising expenditure or giving up revenue (indulging in tax cuts), the fact that the government wasted last five years of boom to mend its financial reforms cannot be denied. Wasteful subsides on power and fertilizers, oil bonds to correct its own menace and poorly directed welfare schemes have already cost the government heavily. And mind you, these 'extraordinaries' are not even counted while calculating the fiscal deficit. As such, the actual excess of spending over income is much-much larger than what is reported.

    "The economy should turn around by 2010-11," predicts Mr. Montek Singh Ahluwalia, deputy chairman of the Planning Commission. "When will our governments do?" we ask.



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