Slow climb out of morass

Stimulus measures mitigate backlash

Sourced from The Telegraph: JAYANTA ROY CHOWDHURY

A year ago, when New York’s Lehman Brothers failed, Debjit Chakravarty lost his job with Hitkari, a firm specialising in packaging exportware.

Chakravarty, 46, was commercial manager with the fast expanding firm. Today, after nearly a year of unemployment, he is picking up the pieces of his life after turning into a language trainer at a Gurgaon-based BPO. But life isn’t the same for him. “I had to take a huge pay cut, pick up a different profession altogether ... one big bank crash in the West and that’s all it takes to make life tough for millions of Indians,” he said, bitterly.

The Lehman crash — prompted by the failure of toxic bonds, because of failed mortgages, and with it a string of Wall Street bank failures — saw the western world tumble into a nightmarish recession. And with it, India’s export story unravelled rapidly, forcing exporters to take huge losses and lay off lakhs of employees.

The knock-on effect on India’s firms, engaged in textiles, gems and jewellery, handicraft and light engineering businesses, which ship large chunks of their produce to western markets, was beyond what the country’s economic Czars had imagined.

An official labour ministry report prepared earlier this year said around 5 lakh jobs were lost in the export sector in October-December.

India depends on exports for just about 20 per cent of its production, compared with exports accounting for half of China’s production. Yet, the impact of the export crash was felt far and wide across industry.

Buyers of houses, cars, television sets, furniture and other big-ticket goods hesitated, and this spelled a further disaster for the country’s manufacturing industry.

India’s economic mandarins pressed the panic buttons by December, when they realised that mere cuts in interest rates and attempts to talk up the market would not succeed in putting the real economy back into shape.

Three economic stimulus packages were announced since December, involving a total tax giveaway of Rs 40,000 crore.

Excise rates, or factory gate taxes, were cut on most goods by at least 4 per cent and on some by as much as 6 per cent, while service tax was slashed by a sixth to 10 per cent. Interest subsidy programmes were announced for small industry and exporters.

The government then started pouring money into its flagship social programmes —a jobs guarantee scheme that promised 100 days of employment to farmers. It also started spending big bucks to build infrastructure, including airports, and create inner city transportation, sparking a surge in jobs.

The spending programme was topped up by a budget passed in July, which provided for a Rs 10,20,838-crore expenditure.

“It is this fiscal expansion which will go a long way in reversing the impact of economic slowdown and accelerate our growth revival,” said finance minister Pranab Mukherjee.

“India’s economy will stabilise in the next six months,” agreed planning commission deputy chairman Montek Singh Ahluwalia.

Industrial growth remained strong for the second successive month in July, clocking 6.8 per cent, following up on an 8.2 per cent growth in June.

Car sales expanded 31 per cent in July and followed up with an impressive 25 per cent growth in August.

“Consumer goods output and sales increased sequentially for three months in succession,” said A. Prasanna, head of research at ICICI Securities.

“The figures give further evidence of a recovery in the industrial sector,” added Amit Mitra, secretary-general of the Federation of Indian Chambers of Commerce and Industry.

But is the growth rate sustainable? Poor monsoon rain has raised the spectre of a drought for the first time in five years.

Lower farm growth could mean lower overall economic growth as agriculture accounts for a quarter of India's produce.

A 4 per cent fall in India’s farm output could shave off a percentage point from the gross domestic product.

More importantly, a poor harvest will mean a lower demand for manufactures from India's teeming villages where two thirds of the population live.