Friday, 14 June 2013
The Indian Growth Engine: A Hobson's Choice
The recent news on the economic front has brought little cheer with IIP numbers, Current Account Deficit, Inflation, Exchange Rates all being dissatisfactory. Market sentiment continues to be abysmal, and charges of misgovernment abound. There seems to be little cheer on the global horizon either with Europe in the doldrums, BR(I)CS being questioned, and the grand-daddy of them all (USA) having serious problems of its own. This, in a nutshell, is the scenario that confront our policy makers, planners, corporates and the common man
The reaction from at least the policy makers is clear, as is evident from the Hon. FM's statements of recent days: FDI! Attract foreign inflows! The reaction of corporates is also crystal clear, at least externally - wait'n'watch. And the common man is way too occupied in meeting his own targets of meals for the family 2 times a day to worry overmuch about anything. And, at the end of it all, no one is actually doing anything, in reality hoping that this is a cyclical downturn, and the wheel of time will bring the economy churning back to full speed in the due fullness of time.
Well, I hope they are right and I am wrong; that would be great, for it means minimal damage. But my analysis tells me otherwise. First, there are serious structural issues in the Indian Economy that are the major hindering factors. These problems - unconscionably high Fertilizer and Oil Subsidy bills, policy uncertainty, investment slowdown and flight of capital, fiscal deficit, infrastructure issues, project delays at both clearance and implementation stages etc - are not ones that will correct without affirmative action. Therein lies the rub; and all this is being played against a backdrop of corruption.
The action that is being taken currently is far from affirmative - we have been hearing talk of breakthrough reforms for time immemorial with little or no actual substance in them. Yes, the fuel price correction was a step in the right direction; but the vehicle of reforms got stuck in a traffic jam after that step. There is nothing concrete in evidence, or in the pipeline (going by news reports I have read) that indicates a genuine series of steps that tackle the structural issues relating to the economy listed above. Let alone political hot-potatoes like Fertilizer Subsidy - which is admittedly easier to talk about than actually reduce; even some of the simpler, easier structural issues lie unattended. The biggest pity is that we have in power tried and tested politicians whose skill at running an economy is well-known by all; furthermore, given all that has transpired these past 2 years, they have nothing to lose - and consequently everything to gain - by taking hard decisions. And yet, we have a stasis in the overall politico-economic scenario.
The issues I am referring to are policy uncertainty; flight of local capital; project approval delays; project implementation problems and corruption - all leading to investment slowdown. For investment to improve, sentiment (expectations of growth, ROI etc) will have to be positive; for it to be positive - we have to give a certainty to investors in terms of climate, and lack of hurdles. In short sentiment will have to improve if we are to get back to those halcyon days of 8% - 10% growth. And for growth, you require capital. First off, any economy that is dependent on foreign capital is not exactly a dream economy; we should be asking ourselves what can we do to ensure local capital stays inside, and is used to generate local strengths and growth. As regards foreign capital - why should it come to India in these times, with the attendant political risk it entails - of which we have seen plenty of evidence in the past year alone? Furthermore, the lack of clarity in policy matters - think of FDI in retail - is a further dampener.
We can thus look at this in 2 parts - foreign and domestic capital; or to simplify matters - we can look at steps to be taken to ensure investment climate improves - which brings us right back to the issues highlighted above. For the nature of capital is such that each - foreign or domestic - will flow to the area of least resistance and optimal returns. And for that to happen, we will have to ensure policy clarity, remove implementation hurdles and reduce red tape.
Much has been written about policy clarity in the financial press; almost too much. But on implementation, there is little that is written that deals with the core of the issue. And that is the true sad story that is sweeping across India - Cobrapost exposed the underbelly of the Indian Banking sector, embroiling Axis, ICICI, HDFC and IndusInd banks (among others) in the resulting furore; the recent drug scandals that have rocked Ranbaxy, a slight google search will reveal other drug companies facing some objection or the other, with Wochardt, Dabur India, Hospira (to name but a few) receiving alerts or being placed on watch. Telecom is yet another case in point, which needs no details - having been covered threadbare in the news. Mining has also been exposed as a hotbed of corruption and crime. Connect the dots - and the picture that is forming is not a happy or indeed a comfortable one. All these - and more - and going to ensure that there is a negative pull on the India brand image and global sentiment. Combine this scenario with the policy stasis that is in evidence- and you are looking at trouble with a capital T.
Now take all of this, and add to this pot-pourri the top-heavy nature of India's development with the poorer sections of society having been bypassed in the growth from the 1980s onwards - The per capita income of the bottom 20% of India's population has not changed (as a percentage share) since 1978. That means, the bottom 20% of our population has not benefited at all from our economic boom. This is also confirmed by consumption patterns: with the consumption by the bottom 20% of the population being static @ between 0 - 1 growth%, in complete variance with the 3% growth registered by the top layers. Not only are the interventions targeted at the poor not reaching them; there is also an absence of opportunities for them to grow out of their hopeless situation in terms of healthcare, education and other HDI parameters, where we are among the poorest in the world. Unless this latent potential is tapped, real growth is well-nigh impossible; but that is another story, which I shall connect up in the second part of this article.
One could almost be forgiven for assuming that we are looking at India in a state of implosion - were it not for the activities of the pillars of modern India as identified by Shashi Tharoor in his landmark work "The Great Indian Novel". I refer to the Media and The Judiciary specifically, whose activism has brought all of the above cases to the public eye.
This is the backdrop in its entirety; in this scenario, it can be readily seen that there is really no choice in front of the powers that be; in other words, a Hobson's choice. Steps to tackle all of these problems have to be taken; uncertainty, policy matters, corruption etc everything has to be dealt with. Working on any one parameter alone will not suffice - since the threat of exposure will remain; the hindrances to implementation will remain; the problem of bribery and corruption will remain. This is bound to act as a dampener - as corruption makes implementation of projects cumbersome. The increasing activism of US Government on their companies' bribe-giving world-wide is a case in point. To improve sentiment the requirement is making business easy in India, which will not happen unless corruption is tackled on a war footing. Not anymore; not after sector after sector of the economy is embroiled in controversy. That will only further capital flight - which already seems to have begun, if you take into consideration investments by Indian groups abroad.
For, if the hope is that we can kindle real growth by tinkering around with some issues without addressing the real problems in their entirety, then this is a stillborn hope. Without addressing both sides of the equation - namely, policy stasis and implementation - we will not be able to take Brand India to where it was 5-7 years ago. The reason is evident- for in those halcyon days of hectic growth, we did not have the additional baggage of crippling scandals rocking just about every sector of the economy. Those were the days of a virgin territory, if you will; this is a luxury we dont have anymore. And neither can we realistically expect to shove these exposures under the carpet and hope that things will continue as before - our active pillars of Media and Judiciary will ensure that a percentage - hopefully a large percentage - of unsavory deals will get ruthlessly exposed. Furthermore, we cannot expect the global anti-corruption flair (esp US Govt) to wane. That is why this is a Hobson's Choice - we have to look at both stasis as well as implementation hurdles...
In the next part, I will take a deeper look at the implementation aspects; and why it is fallacious to blame our political class for everything... and why passing the Lokpal bill alone will not be the panacea it promises to be; and why the left-behind people need to be looked at. Lokpal is vital; but it is just one in a series of steps...