Artificially increased growth leads to side effects.

"Tuesday brought a bout of nervousness to the Indian financial markets -- stocks fell, the 10-year bond yield moved above 8% and the rupee crossed the 71.50 to a dollar level," wrote M Chakravarty. The fear is that contagion from falls in Turkish and Argentinian currencies may affect the rupee. Why? Because, "According to projections by the International Monetary Fund (IMF), India's current account deficit this year is going to be worse than that of Indonesia, as well as Brazil." "If capital formation picks up, as it is widely expected to do, the deficit will widen further." "Simply put, if we have a higher growth, we will have a higher current account deficit, which will weaken the currency further, stoke inflation and lead to higher bond yields." "If you look at how growth is being financed, this year as compared to the last couple of years, growth has been increasingly financed by borrowing abroad," said J Aziz. "In a situation like this there is no other option but to bring down the current account deficit by the old fashioned method, which is by reducing growth." That, unfortunately, is not an option 8 months before general election. Already there is a childish argument, as in that old song "Anything you can do, I can do better", regarding GDP growth. The GDP grew by 8.2% in the first quarter of this financial year, ending on 30 June. BJP politicians immediately started crowing about how the prime minister has made India the fastest growing economy in the world. That is nothing, sniffed the Congress. The GDP grew by over 10% in 2007-08 and in 2010-11 during the Congress led UPA government. These figures were arrived at by back series calculation using the base year 2011-12. Much of the higher growth rate in the June quarter is because of base effect, wrote Chakravarty, but while agriculture and industry gained from a lower base, growth in services shrank because of a higher base. The high growth rate was due to high private consumption, resulting in a price-earnings ratio of 52 for FMCG companies. Sales were higher in rural areas. Compare this to Apple which is the first company in the world to reach a market capitalization of $1 trillion. The price-earnings ratio of its shares were just above 20 yesterday. Increased private consumption results in increased imports which increases our trade deficit, increases the current account deficit and pulls the rupee down, resulting in higher prices. The weakening of the rupee, which was overvalued anyway, is good because it will make our exports cheaper and reduce imports by making them more expensive, thereby protecting local industries, wrote R Kumar. More worrying is the increasing fiscal deficit and increasing price of oil. Growth by borrowing abroad is no good. It is only good for boasting.