The third quarter of the financial year has seen sluggish activity on the economic front. While discussions around the fiscal cliff measures by United States took the front seat, the on ground situation showed some good signs. Rising non – farm payroll employment, home sales and house prices along with revised GDP numbers for third quarter indicated some positive signs. Fed supported it by continuing its quantitative easing and longer – term treasury purchases.
Euro zone had contrasting results during the same time. The economy of Euro zone contracted for second consecutive quarter. The retail sales have been declining at even faster pace starting January 2013. Japan had to announce a fresh round of stimulus following the economy contraction during the third quarter. Owing to festive season, Indian industrial activity recorded satisfactory numbers after a long time. The Chinese economy has shown recovery signs by posting good Industrial production Numbers. But the high inflation rates remain a concern. The underlying geo political impacts of the currency wars are yet to be seen. But as per the current scenario, it looks like US Dollar will win the day.
The month of December witnessed different views and many discussions surrounding US Fiscal cliff deal. Many were concerned that the automatic spending cuts and high tax rates would drive the recovering United States economy into a recession. The fiscal cliff deal agreed upon during the last minutes of year 2012 were nothing but delaying the inevitable process of reduced spending. Though the burden on middle class was reduced by just increasing the tax rates for super rich, the spending cuts were postponed. A simple logic of money management says, if you want to improve your financial situation: increase your income and decrease your expenses. United States took the step of increasing income by implementing special tax rates for super rich; the decreasing expenses part i.e the spending cuts has been postponed. Many Keynesian followers would argue that the above statement holds good for an individual and fails for an economy like United States. But how longer are we going to pile on the deficit? Who is going to pay off all this debt we are accumulating over the years? By keeping spending cuts at bay, we are just increasing the likelihood of long term crisis by averting a short term one. Either we take a call now to pay off our own debt or happily pass it on to the next generation. Time has come for co existence of both Keynesian and Austerity methods. Austerity at a defined level is necessary in recognizing the unnecessary leakage and plugging it .
Europe continues to reel under the impact of the financial slowdown. The unemployment rates recorded new highs and the inflation rates are virtually at null. The Euro zone’s economy hasn’t grown since the third quarter of 2011. Change of guard in France would not make it easy for a German – France unified front to deal with the situation. Changing political equation of Italy forced the austerity favored government of Mario Monti to step down. The Mario Monti government started comprehensive reforms with pension, regulatory and labor – market changes after taking over from Silvio Berlusconi in November 2011. Since the future of Euro zone is highly dependent on its third – biggest economy, Italy, the outcome of coming election remains crucial. It is to be seen if the people of Italy choose between populist and anti austerity stand of Silvio Berlusconi and make the long term perspectives of growth bleak or they stand supportive to the good work done by Mario Monti.
In Asia, Japan’s new Prime Minister Shinzo Abe has made his intention of keeping the yen low clear. He also cleared the deck for a new Bank of Japan Governor who can support his policies. Bank of Japan has set an inflation rate target of 2% and committed to unlimited quantitative easing. Over the past few months Yen has fallen nearly 13% against the dollar. The policies of BOJ and Abe are a strategy to devalue yen in order to attract more exports and achieve an export driven growth. This is not the first time Japanese are trying the tactic of Yen devaluation to spur growth. During the 2001 to 2006 they tried the same strategy by increasing
the monetary base. The suppliers and consumers of Japanese products can turn out be winners because of the yen depreciation. The competitors for Japanese export goods like South Korea may see the ripple effect of the devalued yen.
The Indian monthly data of growth and Inflation surprised positively during the month of December. Index of Industrial production for October surged for the first time on account of festive season consumption. WPI Inflation eased to 7.2%during November and core inflation was at its three year low of 4.5%. There was positive news from the winter session of parliament which approved FDI in Multi Brand retail, Banking Amendments bill and Companies Bill.
The Indian government started the year 2013 with policy announcement like: De – control in diesel prices, deferment of revise GAAR, and hike in import duty on Gold. India’s current account deficit still remains a major concern. Currently India is highly dependent on the foreign inflows to bridge the current account deficit gap. But with U.S and Euro zone finding themselves in troubled waters, there is every chance of global investors backing out from taking any fresh positions in Indian Equities. Unless India finds a way to increase its imports, India remains dependent on foreign inflows. The growth prospects in coming year are highly dependent on whether the Union Budget to be announced in last week of February.
The government is to choose between sticking to fiscal consolidation or a populist budget which may further increase government’s spending.During the January monetary policy review, Reserve Bank of India cut the repo rate and CRR by 25 basis points each. But lower interest rates are not good enough to revive the sluggish economic growth. The investment cycle has to be revived. There are not enough new projects coming up. Bottlenecks choking the growth prospects and new investments are to be addressed. There is a huge coal shortage which is directly affecting the electricity production. Many underlying government policies are also making it difficult to start any new ventures. Such conditions are going to negatively affect the GDP growth rate in the coming year.
RBI has cut the CRR to support the repo rate cut in order infuses more cash into the system and allow the banks to cut their lending rates. But if banks have to cut their lending rates, they will have to cut the deposit rates as well. Provided the high inflation rates, cutting deposit rates is not a viable option for the banks.
Though the demand pressure has eased a bit, the supply side issues still remain. Added to this we have high food inflation rates and diesel price hikes over coming months. Under such circumstances, curbing the inflation rates in near future remains skeptical. On the ground the government of India is faced with a dilemma of increasing revenue, while the industry is struggling. The next few quarters are expected to be tough and would force India into a more reformist path.
