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Stock Markets: Indian economy falters - Views on News from Equitymaster
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  • Sep 29, 2000

    Stock Markets: Indian economy falters

    The facts are finally flowing in. The Indian economy has over the last several months witnessed an about turn from a position of resilience to one of weakening fundamentals.

    First, according to data released by the Central Statistical Organization (CSO), growth in core sectors slumped to just over 3% during August 2000 as compared to over 10% in August 1999. The second piece of data pertains to the balance of payments, which has posted a deficit in the first quarter of the current fiscal year. Both these factors clearly vindicate the stand that fundamentals have weakened considerably during the first half of the current financial year.

    Core sector falls flat
      YoY growth (%)
    Sector Aug-99 Aug-00
    Electricity 9.1 0.6
    Cement 16.1 -2.3
    Steel 15 6.3
    Coal 0.5 4.3
    Crude 4.1 0.1
    Refining 28.4 14.2
    Overall 10.9 3.1
    Growth in the core sectors (comprising electricity, coal, steel, cement, petroleum refining and crude petroleum) is very crucial for our economy. Infrastructure constraints are already hampering economic growth. There is a need to rapidly step up investment activity. However, policies, and now the economic climate, are not very conducive for the same. Delving a little deeper into the numbers the situation is even grimmer. Electricity, cement and steel sectors have witnessed a sharp slowdown. Infact, the cement sector has recorded a decline in absolute volumes. Growth in crude production too has fallen dramatically, just when there is a need to step up domestic production to combat the OPEC menace. The slowdown is largely a result of the sharp turnaround in business confidence due to rising crude prices and the prospects of rising inflation and interest rates.

    The slowdown is not limited to the core sectors alone. Overall industrial growth too has slumped from a high of 12.6% in February 2000 to just over 4% in July.

    The second development pertains to deterioration in the external account. According to data released, India recorded a deficit of over US$ 1 bn during the first quarter. This too marks a turnaround from a situation where the BoP was logging in large surpluses. This development is largely due to rising crude prices. This development too can have implications in terms of a weaker currency (costlier imports) and rising interest rates.

    The time has been long due for the government to take hard decisions. Petroleum prices need to be rationalized. Public sector disinvestment needs to be speeded up, especially now, when finances of the central government seem to be getting stretched (the deficit in the oil pool is around Rs 80 bn). However it is unlikely (elections in key states are around the corner) that the government will take hard decisions. Take for instance the petroleum price hike. The government will increase prices only partially, meeting the remaining deficit by a reduction in duties. In other words transferring funds from the budget. And may we ask who finances the budget? The option is either we pay more for petrol or compensate by paying higher taxes (direct/indirect).



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