P Chidambaram fades out, happy with himself

On Monday evening, the finance minister, as ever, claimed all's well on the economic front. But the fact remains India will have to grow by 8.1% in January to March 2014, for it to hit a target of 5.5% during 2013-2014. It's unlikely to happen, Vivek Kaul explains.

An important part of finance minister P Chidambaram's job for a while has been to keep telling us that "all is well" on the economic front.

He continued this on the last day of the financial year when he said "the Indian economy is now stable and the fundamentals have strengthened." The statement was in response to 18 questions posed by former finance minister and BJP leader Yashwant Sinha on the economy.

So, how strong is the Indian economy? "We have contained inflation. Our biggest success is containing fiscal deficit," said Chidambaram.

But how do the numbers stack out? In February 2014, inflation, as measured by the consumer price index, was at 8.1%. It has come down from levels greater than 10%. The primary reason has been a rapid fall in food prices.

Food products make up for around half of the consumer price index. The question is: how much credit for the fall in food prices goes to the government? Not much. Also, don't forget the damage to crops from the unseasonal rains and hailstorms in parts of the country. This is likely to push up prices again.

If we look at non-fuel, non-food inflation, or what economists refer to as core inflation, it stood at 7.9% in February 2014. This number has barely budged for a while now. Non-fuel, non-food inflation takes into account housing, medical care, education, transportation, recreation etc.

What about fiscal deficit? "We will end FY14 (period between April 2013 and March 2014) with a fiscal deficit of 4.6%, as planned," Chidambaram said. Fiscal deficit is the difference between what a government earns and what it spends.

But how has this target been met? A lot of expenditure has simply not been recognised. Oil subsidies of Rs 35,000 crore have not been accounted for. Estimates suggest that close to Rs 1,23,000 crore of subsidies (oil, fertiliser and food) have been postponed to next year. A March 4 report in this newspaper pointed out that the central government owes the states Rs 50,000 crore on account of compensation for the central sales tax.

On the income side, public sector banks have been forced to give huge dividends to the government, despite not being in the best of shape. Coal India has paid the government a dividend and a dividend distribution tax of close to Rs 19,600 crore. India has the third-largest coal reserves in the world, but still imports coal. Shouldn't this money be going to set up new coal mines?

Neelkanth Mishra and Ravi Shankar of Credit Suisse point out in a report titled Elections: Much Ado about Nothing, on March 19, 2014: "True utilisation in thermal power generation is below 60%, near 20-year lows (reported plant load factor is 65%)." This is because we don't produce enough coal that can feed the power plants.

Getting back to Chidambaram, he said: "The CAD (Current Account Deficit) has contracted. We have added to reserves. The FY14 CAD is likely to be about $35 billion." CAD is the difference between the total value of imports and the sum of the total value of its exports and net foreign remittances.

This has largely happened because of two things. The government has clamped down on legal gold imports. But anecdotal evidence suggests gold smuggling is back. This has a huge social cost. Also, over the last few months, non-gold, non-oil imports have fallen due to sheer lack of consumer demand. And that surely can't be a good thing.

Chidambaram also expects "spirited growth, going forward". The finance minister has been spinning this yarn for a while now. In early February, he had said the economy will grow by 5.5% in this financial year.

Growth during the first three quarters of the financial year has been less than 5% (4.4% in the first quarter, 4.8% in the second and 4.7% in the third).

A back-of-the-envelope calculation shows the economy will have to grow by 8.1% in January to March 2014, for it to grow by 5.5% during 2013-2014. You don't need to be an economist to realise that this is not going to happen.

Interestingly, in July 2013, Chidambaram had said: "People should remember India continues to be the second fastest-growing economy after China." By January 2014, this statement had changed to "India remains one of the fast- growing, large economies of the world."

What happened in between? A whole host of countries in our neighbourhood have been growing faster than us. This includes Cambodia, Philippines, Indonesia, Sri Lanka and even Bangladesh. Given these reasons, it's fair to say that Chidambaram was cracking an April Fool's joke, a day early.