Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Implications of Government's Macroeconomic Perspective - Outside View by S.S. TARAPORE

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Implications of Government's Macroeconomic Perspective
Dec 28, 2015

The government's Mid-year Review is a masterly document which carries the unmistakable imprimatur of the erudite and articulate Chief Economic Adviser, Dr Arvind Subramanian. In the absence of the Prime Minister's Economic Advisory Council's Report, the Mid-Year Review is an authentic benchmark reference document. The Review is a virtual tour de force on the economy and one should readily congratulate the Chief Economic Adviser and his team. There are, however, some serious concerns about the government's thinking on certain vital issues which portend trouble lurking round the corner.

Scaling Down the GDP Forecast for 2015-16.

The government has scaled down the earlier real GDP forecast for 2015-16 of 8.1-8.5 per cent to 7.0-7.5 per cent. This reduction in the GDP forecast for 2015-16, by itself is welcome and comes closer to other estimates both by other Indian agencies as well as foreign assessments. What is of concern is the response of the government on key parameters. It is argued that the potential for growth is higher and as private investment is not accelerating, government should step up public investment. With the additional burden of the Pay Commission Award and the lower revenues resulting from lower than anticipated growth, the Review argues against curtailing other expenditures. This then implies that there is a need to be flexible on the commitments under the Fiscal Responsibility and Budget Management Act (FRBM). The government, however, assures that the immediate target for 2015-16 of 3.9 per cent of GDP would be attained but the target of 3.5 per cent for 2016-17 would need to be eased. Now it is unfortunate that the track record ever since 2003 has been that the targets are frequently postponed on the basis of strong arguments. Thus, over the long run, the FRBM targets are thrown forward and attainment of these targets is becoming a mirage.

Inflation Targets

With the loosening of the target for the fiscal deficit, the Review makes out a case for flexible interpretation of the inflation target of 4 per cent with a gentler glide path (read as a recommendation for a higher target for inflation). It is claimed in the Review that this will give scope for further reductions in policy interest rates. A characteristic of India is that the moment inflation rate falls below 5 per cent the forces for expansion hold sway till inflation reaches double digits. Hence the battle against inflation is invariably in the 5-10 per cent range.

The RBI has already set out the final guidelines for determining borrowing costs based on the marginal cost of funds. This will imply that the pressure for reducing deposit rates would be very strong and depositors have to be ready for further in-roads in their meagre earnings. The year-on-year increase in bank deposits as of September 2015 was 10.6 per cent, as against 12.6 per cent in the previous year. Progressively it should be expected that holders of fixed deposits in banks will balance the risk-return and move over to riskier instruments. While the level of deposits may not fall, the composition of deposits will shift from longer tenures to shorter tenures which could leave banks with huge asset-liability maturity mismatches. It is sheer folly to push banks to continue lowering interest rates.

The US Fed move, albeit gentle, to raise the Fed funds rates from a range of 0-0.25 per cent to 0.25-0.50 per cent, with clear indications of further increases in US interest rates has a major impact on India. If India keeps lowering interest rates while the US continues with upward movements of interest rates, it is obvious that at some stage it will reflect in a massive outflow from India of portfolio capital. What is worrisome is that the Indian official line is that we have enough ammunition to take care of portfolio outflows and that, in any case, foreign investors are comfortable investing in India. The amber lights are clearly showing and we in India must pay heed to these lights.

Implications for the Exchange Rate

It is unfortunate that the political economy of exchange rates is going to be costly for India in the medium-term. Our macho spirits do not countenance any significant depreciation of the rupee vis-a-vis the US dollar. In the present scenario the US dollar is strengthening vis-a -vis other major currencies. But the Indian psyche is stuck on a US Dollar-Rupee exchange rate. We can freely appreciate or depreciate vis-a-vis the Euro, the yen, the sterling and even the yuan but even a small depreciation vis-a-vis the US dollar would not be tolerated. Governor Jalan had provided yeoman service by emphasising that there should not be a fixation to a single currency. It is time the RBI and the government stresses this in their public statements. In the absence of such a campaign we in India will be saddled with a grossly overvalued exchange rate which will be detrimental to the economy.

If, as hinted in the Mid-Term Review, we in India persist with lowering interest rates, accept higher inflation rates and press ahead with fiscal spending to jack up the growth rate, there would be macroeconomic instability. If, in such a situation, we are adamant in holding up the US dollar-rupee rate, economic forces will put the economy into a tail spin. Our endeavour should not be to accelerate growth but to sustain the present level of growth. It is here that the Mid-Term Review gives us cause for worry.

Please Note: This article was first published in The Freepress Journal on December 28, 2015. Syndicated


This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Implications of Government's Macroeconomic Perspective". Click here!


More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

How I Got My Wife To Invest In Mutual Funds... (Outside View)

Jul 20, 2018

PersonalFN brings to you a real-life case of how husband and wife engaged in a sensible money-talk post-marriage to build a solid mutual fund portfolio.

Our Newest "Fixer-Upper" (Vivek Kaul's Diary)

Jul 20, 2018

Bill Bonner talks in detail about US president been accused of treason, biggest debt default in China, the problem of growing inflation and the trade war.

The 'Profitable' Ola and Uber You Can lnvest In Right Now (Profit Hunter)

Jul 20, 2018

Here's is a business in small cap space that is asset-light and yet profitable - A serious contender for the list of future blue chips.

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

ICICI Pru Mutual Fund Tarakki Karega! - The Unethical Way?(Outside View)

Jul 11, 2018

PersonalFN explains how ICICI Prudential Mutual Fund flouted the norms of related party transactions while subscribing to the IPO of ICICI Securities.

PPF v/s Mutual Funds: Which Is Better?(Outside View)

Jul 10, 2018

PersonalFN highlights the key points of distinction between PPF and mutual funds.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 20, 2018 (Close)