Indian Economy: Help! Spinning Wheels Need Traction

Indian Economy:  Help! Spinning Wheels Need Traction

Crude oil at just $27 a barrel, all 159 litres of it, making a good size Norwegian salmon available at the same price of its oil, is a wonder to behold. It is a phenomenon that is shifting geo-political fault lines.

Petroleum prices will stay down in the short to medium term, along with a host of other metals and commodities. It is India’s once in a lifetime opportunity. Should we then be dithering on the edge of Carpe Diem, or  be boldly hitching our policies to the prevailing wind?

Finance minister Arun Jaitley, soon to table his third budget, speaks blithely of 8.5% growth in GDP going forward, even without the structural legislative reform such as GST and Land/Labour/Bankruptcy laws blocked in parliament.

But maybe there is a clue in how this might come about, from Columbia professor Arvind Panagariya, now heading up Niti Aayog.

Panagariya knows our banks are riddled with bad debt, racked up by some of the best known companies. The NPA’s are hovering at some 5% of GDP, many long-gestation infrastructure project related, and compounded by flawed business models.

Still, Panagariya, on balance, wants to press on. He wants the government to ease the fiscal deficit targets, open the spigots, and pour borrowed government money into rapid infrastructure development. He knows this chance may not come again.  

Raghuram Rajan at the RBI disagrees. He does not like profligate debt-fuelled growth, here in India or elsewhere, and wants to clean up the PSU bank books and recapitalise them instead.  He also wants the ‘crony capitalism’ of the best known Indian companies defaulting on huge borrowings with impunity to be stopped. But, as yet, an efficient bankruptcy law is still not operative, and rich people can happily defraud the tax payer and the nation.

Meanwhile, prudent as this is, and more solid in the long run, the ship of immediate opportunity will surely sail without us!

The prime minister on his part is going all out to attract foreign investment as equity, not borrowing, and cutting-edge technology as know-how to improve our skilling. India is a promising place to invest in a despondent globe is the pitch. But, yes, it continues to be riddled with policy and implementation problems, even as he unties as many knots as  fast as he can.

It is a unique moment in time too. There are many bigger economies today, but only the US is growing its mighty $17 trillion economy at 2.5%.  

India, called the ‘bright spot’ amongst large economies, even at just $ 2 trillion, has been shrinking to 2013 levels. Its industrial growth, exports, services, the stock markets, are all worsening month to month, partially buffeted by external pressures. There is little bank credit. The currency is eroding sharply against the ever strengthening US dollar.

And infrastructure, roads, power projects, railways, ports, defence manufacturing, mining, though they are activated and thrust areas, are not being implemented fast enough.  This coming budget will probably have massive governmental allocations, in the absence of private sector initiatives, but when will the spinning wheels of the economy find traction on the ground?

Food inflation, despite vastly cheaper oil, is rising, on the back of several  consecutive droughts and floods. Governor Rajan at RBI will therefore not be cutting interest rates very much. And yet, despite a moribund construction sector, the home-loan business, backed nicely by collateral, is beginning to pick up. Still, the basis of calculation of the GDP projected into the 7.1-7.5% range for fiscal 2016, is being questioned by the RBI too.

The glaring macro issue is that our ambition far outstrips the quaint financial, analytical, policy/ideology and process infrastructure we have put in place. There is a typical funneling and bottle-necking effect that hampers India’s ability to rapidly absorb huge investment it both needs and wants.

The good thing is that the scale and size of the pent-up task is vast, and one five year term, even at full tilt, can only serve to lay several of the foundations. It will be a decade or two, at least, assuming a strong pressure on implementation is maintained, before the transformation of the country, from its present state of inadequacy, to that of a developed nation, becomes evident.

That this government is dedicated to the developmental task is well appreciated. But, equally clear is the need to turbo-charge its ready-steady -go schedules to meet the aspirations of hungry investors, and the youthful public that elected it.  

For:   The Quint

(746 words)

January 28^th, 2016

Gautam Mukherjee