Growing disquiet on state of economy

By R.C. Rajamani. Dated: 1/7/2016 2:11:50 PM

The government has gone into Budget mode and begun seriously preparing for the year's most crucial financial exercise amid disquieting developments on the state of the economy. As a major security step, the government has made the offices of the finance ministry in North Block off limits for media persons. Electronic sweeping devices have been installed and private e-mail facilities to most computers in the ministry are blocked.
Finance Minister Arun Jaitley, unfazed by corruption charges thrown at him by Delhi chief minister Arvind Kejriwal, has already begun burning midnight oil, examining the scope and reach of possible tax proposals and other salient features of the budget. It is his second budget, third if the interim budget of 2014 is counted
Jaitely is likely to focus on steps to accelerate economic growth that seems to have stagnated around 7 to 7.5 per cent ranged on account of global factors like slowdown. His Budget team comprises Minister of State for Finance Jayant Sinha, Chief Economic Advisor Arvind Subramanian and NITI Aayog vice chairman Arvind Panagariya.
Hardly did the budget preparations begin than came some disturbing news for the nation's economy. The country's manufacturing sector took a turn for the worse at the year-end.
Severe rainfall and flooding caused widespread destruction in late November and early December, constrained manufacturing output to its lowest since the global financial crisis.The output sub-index fell to 46.8 from 50.4, its lowest since early 2009.In this dismal backdrop, the new week naturally began (January 04) on a markedly bearish note. The depressing domestic scene, the Chinese market crash and tensions in the Middle East, together plunged Indian equity markets Monday last m Jaunary 04, to their steepest fall in the last four months. Sensex, a barometer index of the Indian equity markets closed the day's trade deep in the red receding by 538 points or 2.05 per cent.
Asian bellwethers declined on the back of the Chinese markets' crash which was triggered by a lower-than-expected purchasing managers' index (PMI) data. Apart from equities, the rupee was battered in Monday's trade. It weakened by 48 paise to closed at 66.62 to a US dollar from its previous close of 66.14 to a greenback.
Weak growth will only make the clamour for further easing of Reserve Bank of India policy louder.
Inflation remained within the RBI's January target range of 2-6 per cent, enabling the apex bank to cut125 basis points. After four move sin 2015, the benchmark rate currently sits at 6.75 percent.
An industry survey showed output prices continued to rise, driven by higher input costs. It noted the decline in manufacturing sector production was largely owing to a contraction in incoming new work for first time since October 2013. Around 18 per cent of survey panelists reported lower levels of new orders, which they commonly linked to heavy rains weighing on domestic demand. The continued depreciation of the rupee against the US dollar pushed inflation higher, with PMI price indicators pointing to stronger increases in both input prices and output charges.
Given a sharp deterioration in manufacturing output in China as well, the global headwinds can make things even worse for the Indian markets, which will add to the pressures on RBI to keep rates low when it holds its next monetary policy review in February. Significantly, three out of four rate cuts in 2015 were effected outside the planned reviews.
The US Fed rate hike and expectations of further increases may only lead to further weakening of currency, which, experts say would add strain to industry's dollar-priced debt and import costs. No doubt, the rickety rupee boosted growth of new business from abroad, but corporate earnings can't solely depend on this alone.
Experts warn that the weakening manufacturing sector can further hurt economic recovery. Government has already lowered its economic growth forecast for 2015-16 to 7-7.5 per cent from 8.1-8.5 per cent. mid developments that tend to weaken economy, it is rather surprising that the government has indicated that the coming budget will have proposals that would make health and social security benefits accessible to the labour force in the unorganised sector - like construction workers, migrant labourers, and volunteers of different schemes including Anganwadi workers.
Though government has not revealed any details, it has said in circumspection that "mechanisms can be thought of wherein social security benefit contributions to workers can be made by employers at a single window for all workers." This may mean that the private sector in labour intensive activities like housing may be asked to chip in with its contribution to the welfare of the unorganised labour force.
The present framework of social security is structured for different groupings -organised, unorganised and those not employed/BPL. There is a need to ensure a convergence of benefits for all these groupings, above a minimum threshold., the government has told trade uinon leaders in a pre-budget meeting.
Much was made of the black money stashed abroad by Indians during 2015. If they were brought home, the money would help a vibrant turnaround of the economy.However, some eighteen months after receiving reports on black money from economic research bodies, the government is still examining the quantum of black money stashed in India and abroad.
Whether the government will be able to achieve better results in its efforts to bring back black money in 2016 is a debatable question.
The previous UPA government had in March 2011 commissioned studies, by Delhi-based National Institute of Public Finance and Policy (NIPFP), National Council of Applied Economic Research (NCAER), and National Institute of Financial Management (NIFM) at Faridabad, on estimation of unaccounted income or wealth both inside and outside the country.
The government has collected Rs.16.69 crore as taxes and penalty till 26 November, last year from those who have disclosed illegal wealth under the black money compliance window. With the budget session seven weeks away, the government has come out with an enigmatic statement of optimism on the much delayed GST Bill getting parliament approval.
After being frustrated in its efforts by an unyielding opposition, especially the Congress party, throughout 2015 to pass the GST Bill, the government has claimed that "numbers" in the Rajya Sabha will tilt in favour of the new indirect tax regime during the Budget session slated to begin in the third week of February.
"The next session is going to be extremely important. And half way through the next session, the numbers of the Upper House are also going to change. So I am reasonably optimistic, as far as the next session is concerned, that we may be able to push it through," union finance minister Arun Jaitley said. He, however, did not explain how the "numbers" in the Upper House are going to change in favour of the Bill. One hopes that instead of indulging in optimistic speculation, the government will build bridges with the opposition to narrow differences on the GST legislation so that it can be passed during the Budget session.



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