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Economy: What's the weakest link? - Views on News from Equitymaster
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  • Jul 26, 2004

    Economy: What's the weakest link?

    With India's FY05 GDP growth now shrouded in clouds of uncertainties on several accounts, we decided to conduct a poll on our website asking our readers what they believed would impede FY05 growth the most. The options were: government policies, monsoons and changes to interest rates. The result of the poll can be summed up in the chart below.

    As indicated by the pie, half of those polled believed that monsoons could play the biggest culprit in the growth process in FY05. 43% polled that government policies will hamper growth, 7% indicated that a rise in interest rates could be the possible spoilsport. Before gauging what can be the biggest impediment out of these, let us take a look at implications of each of them.

    Government policies
    The newly formed United Progressive Alliance (UPA) alliance taking over the management administration of India, and the fact that they are likely to take some time to settle, is a factor that could impede the growth process in FY05. Then there is some internal bickering within the coalition relating to difference in ideologies, like the reservation shown by the government's Left partners on the FDI policy. If the government with its Left partners continues to get involved in solving their respective ideologies, rather than taking stock of the management and administration of the economy, it may slow its reflexes in responding to a given situation. Consequently, growth might suffer.

    As per a latest release from the Indian Meteorological Department, the monsoons this season are 12% below average as of now. The release also states that 17 meteorogical sub-divisions out of 36 have received deficient rainfalls. If this situation of below than normal monsoon continues for some more time, FY05 GDP forecasts of 6.5%-7.0% growth could be seriously dented. This is because large proportion of our population (around 60%) depends on the monsoons for its livelihood. And if something goes seriously wrong on the monsoon front, apart from the agriculture sector, the industrial sector would also get a hit owing to reduced demand. This could impact the economic performance in FY05.

    Rise in interest rates
    With inflation crossing the 6% level, there has emerged a possibility that the Reserve Bank of India (RBI) may consider raising interest rates in order to cool a heating economy. Rising prices on account of rising input costs might also put additional burden on India Inc.'s profitability, thus derailing the government's objective of meeting its revenue targets. This might then slow down the government's initiatives towards infrastructure development and other developmental activities. Thus, if interest rates were to rise, the populace (especially the middle class), which has been at the forefront of consuming by borrowing, might go slow on the same.

    So, what's the weakest link?
    A famous quotation states, "A chain is only as strong as its weakest link." While all the three factors mentioned above have implications that could slow the growth of the Indian economy in FY05, we believe that a below average monsoons is likely to have the maximum effect. Also, the fact that it is beyond human control makes the situation even more perilous.

    Now, even while the UPA government has initiated its movement on the reforms path through increased initiatives in improving standard of living of the rural poor, proper implementation still remains the key. And if the government fails on the implementation part, it would only be flirting with a sustainable growth of the Indian economy and the development of its masses. After all, flirtation, in its true sense, means - attention without intention!



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