As the year 2010 draws to a close today, it is not so happy new year for the 'aam admi' of India as the new year threatens to take food prices to an even more elevated level.
With the onion prices burning a BIG hole in the pockets, India's aam admis are finding sheer survival as a gigantic struggle. With food inflation a tad closer to 15% and no signs of softening soon what with unseasonal rains acting as a spoilsport now, the mandarins in the government are moving around with a poker face. Of course they have an excuse to flaunt - unseasonal rains - for yet again eating the crow with their prediction of the likely movement of food prices.
Nobody, however, is talking of the obvious and making ammends. That of arresting the trand of continuous under investment in the agriculture sector. For the past two decades, India's foodgrain production has lagged behind the population growth rate. In the decade of the 1980s, the population grew at a compounded annual growth rate (CAGR) of 2.1%, while foodgrain production rose by 3.1% CAGR. Thereafter, the growth rate of foodgrain production slowed down considerably, so much so that during the current decade (till financial year 2009-2010), the growth rate of foodgrain production was way below that of population increase.
According to RBI data, while CAGR of foodgrain (kg/hectare) productivity peaked at 4.41% in the 1980s, it started to slide ominously thereafter. The growth rate fell to 2.36% in the 1990s, and to 1.06% during the first eight years of the current decade.
Given this situaiton, its but pipedream that food inflation in India will be contained at a low single digit level.
The Celtic Tiger, the erstwhile miracle that it was , seems to have been bearded. Altough the economy was in doldrum for a long time, the Irish officials were in a denial mode, till their bad policies came back to haunt them. The undoing of the economy was the innate desire to save the banking system from collapse, what with the government guaranteeing their debts which were built up due to reckless lending at the height of their property boom. In one single move, the govenrment converted private debt into public obligations. As the economy wilted under the debt burden, the Irish government had to accept bailout rather than facing the ignominy of sovereign default.
The final bailout amount approved was €85bn, which is more than 50% of their 2009 GDP (€160bn approx). The average interest rate on this loan works out to 5.8%, assuming a full drawdown immediately. Even if the final interest comes to 5%, post the full drawdown, the economy needs to grow by atleast 2.5% to service this amount. To add to their woes, the austerity measures adopted by Ireland is expected to lead to slower (if any) growth and further shrinkage of revenue. Clearly Ireland is in for a long lasting slowdown.
India’s Q2 FY 10-11 GDP surprised on the upside. While I will come out with detailed analysis post the release of the latest IP number, I think it is important to realize that the latest number, while being very positive, has some statistical element to that, rather than a substantial improvement in the actual performance.
Readers might remember that very recently India revised the way the WPI is calculated. As per the new methodology of calculation, the inflation turns out to be lower than what it would have been under the old methodology. This adds a positive deflator effect to the final GDP numbers. In fact, if the readers go through the press release of MOSPI, they will find that the Q1 numbers have also been revised upward, and that is because of the deflator effect. But that that is only a small reason. The bigger reason is quality of data dished out by the government.
After the Q1 numbers were released, there was a lot of hue and cry raised by the economist (yours truly included) on the quality of the number. While the GDP growth at factor cost (read production side) was up by 8.8%, GDP growth at market price (read expenditure side) was a mere 3.7%.
The next day, the government acknowledged the fact that their number was wrong and that they used a wrong deflator. As a result, Q1 GDP by expenditure side was revised upward substantially. Within that, growth in private expenditure (read consumer demand) was also revised upward. Mind you, consumption exp account for more than 55% of India’s GDP. Hence, slowdown in consumer demand (as was reflected by the data all these time) should be a major concern. Finally, production should be matched by demand. Assuming that the latest data is correct, now there is increased evidence that demand is better than what has been assumed earlier. Hence, the 8.9% growth is understandable.