Saturday 25 January 2014

Indian policy paralysis and Abenomics: A case in contrast


All policy decisions taken by the Governments around the world when it comes to their economies, invariably focus on 'GDP Growth'. There is speculation that India is unlikely to hit even a modest 5 percent GDP growth number this year. On the other hand, it seems a turnaround is in the offing for Japan, an economy that had been struggling to come out of an economic rut for more than two decades. It took just an year of 'Abenomics' to bring about a sea change in Japan's fortunes. This may well be an year of highest economic growth for Japan in many years.


Before we move any further into this discussion, let me just define GDP here, for the uninitiated. Gross Domestic Product for an economy refers to the market value of all final goods and services produced in the economy during a given period. The stress here is on the word 'final'. These are the ones that are meant for consumption or use by the end consumer and are not subject to any further transformation for sale. GDP at nominal value refers to the Gross Domestic Product at current prices. To facilitate comparison among GDP values across the years, prices from one of the years are taken as a base and the GDP values for the rest are calculated using the prices for that year. This ensures that we assess the real GDP growth which happens on account of increase in production and not just increase in prices.


Getting back to the contrasting fortunes of the Indian and Japanese economies in the last fiscal year, discounting the fact that our problems are completely different, as Japan struggles with deflation and India with the opposite, the Inflation; How much of the turnaround in Japan can be attributed to political vision? Is there anything in this for India to learn? While analysts claim that 'Japan is indeed back', Is India falling off the radar?


Abenomics, as of now, has been about quantitative easing and a surge in spending by the Government in order to boost consumption. India needs to keep interest rates high in order to tame inflation. This is again debatable as our inflation problems are perhaps more due to supply side issues. This holds particularly relevant for food inflation which requires investment in storage capacities to stem the wastage in food supplies emanating from the lack of facilities for storage. Japan took years to figure out what exactly it needs to do to return to the path of growth. With its huge population, Indian can ill-afford to suffer economic stagnation for decades but we can perhaps do with clear policy initiatives in this regard. If it is GDP growth that is required, should we not be boosting consumption? If it is supply side issues that underscore inflation in India, should we not focus on capacity building. Where will the money come from? Well, if we can afford Food Security bill and a myriad other subsidies, Why not something that builds the base for a better economic growth in the future?

The case in contrast comes in the backdrop of dipping fortunes of Ranbaxy, an Indian Pharmaceutical company acquired by a Japanese firm, Daiichi Sankyo, in 2008. US FDA has placed an import ban on a Ranbaxy facility in Punjab, India. Last year as well, some of Ranbaxy's facilities suffered a similar fate. Food for thought?


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