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Is the finance minister looking for a free ride or is he just echoing his helplessness. In an interview to CNBC,P Chidambaram said that 'people must consume goods so that industry will produce the goods; without consumption there is no production.'
The finance minister wants you to spend on consumables while he will hold on to money with clenched fists. One might say that he is doing so in order to balance his budget and keep the fiscal deficit low. But the same logic is true for everyone. Why should one overstretch their own budget in uncertain times?
Rising inflation means that consumers are now spending more on their needs rather than on their luxuries. Add to this high interest rates (some of the top banks have again raised interest rates) and rising unemployment and we are left with a scenario where there is lesser money left to stack up for the uncertain future. Just like the finance minister, everyone is holding on to their money.
FM expects you to spend which will help growth rates and he can take credit of it. In the same interview to CNBC, he reminds us that when he was a minister between 2004 and 2008, growth rates were around 9%. But those were times when everyone in the world was spending including governments (Indian too). But in the present scenario, almost all governments have clamped down on expenditure. They are busy printing money and flooding the markets with liquidity hoping for a trickle down effect on the economy.
In India too, the only benefit of the liquidity has been restricted to the stock markets, which have touched a new high, without the economy supporting it. Consumption continues to be low. For the month of October, which was a festive month and had the benefit of a good monsoon, auto sales were lower.If that was not enough, two-wheeler sales, which is a reflection of the strength of the rural economy also posted negative growth. A month that should have seen high growth rates on account of multiple tailwinds, auto sales numbers have been depressing, to say the least.
Companies have managed to show growth mainly on account of higher exports, thanks to the fall of the rupee. It's equivalent to wild celebrations on clearing an exam when the passing marks have been lowered. Benefit of a weaker currency is to companies that are exporting, benefit of it to the economy at large will take more time.
RC Bhargava, chairman of Maruti Udyog, the largest car seller in the country, with presence in some of the smaller towns, says that he does not see a turnaround in the near future. In other words, looking at a larger canvas, he is saying there is unlikely to be an increase in spending.
There are few who believe in the optimism of Chidambaram, fewer still who would want to help him by going out and spending, not because they do not want to, but because they can't. Unlike investments, which need a stable environment to reap riches later, spending on goods is a sunk cost and this can only take place when visibility of future is a lot clearer. Current environment is engulfed in a fog of uncertainty, not a good time to speed up on spending.
