For a long time now, India has taken pride in being largely insulated from the global economic slowdown. True, Indian exports suffered, but it was also an opportunity for the exporters, especially software firms to diversify into markets other than the north american markets. India Inc was still hiring during the worst of the crisis. The Reserve Bank of India had a broad smile as the merit of years of regulation of the financial markets once thought of as unnecessary chaining of the economy was now vindicated. There wouldn’t be a sub-prime type crisis in India, despite exposures to North American markets India was still strong. Growth would not be badly affected. Then came news of the European slowdown and suddenly nobody was too sure anymore, India wasn’t going to stay immune to the global slowdown forever.
Indian growth is now at 7.7 percent. On an absolute scale a wonderful number, but not enough for the young nation to grow out of poverty. The RBI is not optimisitic.
However, can we blame the Indian slow down on international markets ? No doubt international effects are being felt in India, but it would be very dangerous to brush aside serious defects in the home economy by pointing the finger at the outside world. For one, Indian exports have been gaining momentum despite these slowdowns. New markets are being found in West Asia, Africa and South America. What is the problem then ? The answer is Inflation.
No, The RBI is not printing a lot of cash to fund government expenditure, infact the opposite is happeneing, monetary policy being followed is pretty tight. Where does the problem lie then ?
Maybe the traditional women of India who still do the bulk of the cooking will have an answer before the ones who meddle about with economics. The prices of commodities are increasing. India is suffering from severe supply side bottle necks. We must realize that despite everything that happened from the 1990s, India still has a large agrarian economy. A media or a middle class that ignores this fact doesn’t make it go away. The manufacturing sector too is ignored while focusing on the services boom. Growth has been dull in both these sectors. Food prices keep increasing, especially basic vegetables most used by the Indian middle class. India needs to wake up to the harsh reality that so much of its economy directly depends on the monsoons! Structural reform in agriculture and also manufacturing is what is required. Tighter monetary policy is what we get.
All economists agree that in the long run money is not a part of the real economy. Agreed short term monetary policy is essential, but what is the use if we do not combine it with a long run vision of improving the underlying problem ?
Demand is another key issue, demand has been increasing in India ever since the middle class got richer. This includes the demand for food. More Indians eat out today than ever before. Rising tomato prices havent stopped Bangalore from having a Tomatina of its own. Population doesn’t decrease either, neither does agricultural land increase. Monetary policy is not magic to solve a long term issue though it may ameliorate the temporary warning signals.
Bangalore needs to realize its a part of India, fed by Indian farmers.
I am totally for a booming service sector, but keeping in mind what is needed in the ground level to sustain it.