Alright, India’ GDP grew at an applauding rate for few years now. They talk of Bangalore– the Indian Silicon Valley, the telecom revolution, BPOs and Slumdog millionaires. We started acquiring western companies almost boding reverse colonisation. “India Shining” had become a cliché. And then, something started working against it all. We now talk about – nine year low GDP growth (5.3 percent in Q1-2012), corruption scandals, stagflation, rupee touching new all time lows, policy shocks that make foreign companies run for cover and of course blackouts! What can explain this turnaround? I pen down few thoughts in the capacity of an active observer at best.
The tightening of the monetary policy focused on the demand side and failed to curb the inflation that was largely because of the supply side shortcomings. Prolonged interest rate hikes (13 times between 2010 and 2011) targeting inflationary concerns have increased the borrowing rates across the board. Home owners, corporates and infrastructure projects are forced to deal with higher domestic debt costs affecting both the demand and the supply side economics adversely. And yet, inflation today continues to be a concern. From a vote-bank perspective inflation remains a higher priority than growth to the ruling parties. Thus, a monetary policy rescue to boost growth seems questionable in the near future.
It is no coincidence that lower growth rates reflect in lower investor confidence in the country. S&P rates India at BBB-. Any further downgrade means India will be the first of the BRICs to lose investment grade status. This is bad news for Indian foreign currency borrowers. Investor unfriendly policies are not only threatening returns that attracted foreign money but are also throttling the much needed investments to fuel our growth. Retrospective tax and FDI policy failure amongst other things, exacerbate a euro zone triggered bearish sentiment amongst the investment community.
The Twin deficits (current account and fiscal deficit) that were last seen in 1991 are back. Massive populist schemes like NREGA, food security bills and fuel/fertiliser subsidies contribute to a larger than expected fiscal deficit of 5.75 percent (as on March 2012). State Electricity Boards are severely buckling under subsidy burden curbing the power required to catch up with the industrial growth – partly causing the half-country blackout this late July. Oil and gold imports coupled with falling service sector exports widened our trade deficit. These deficits alongside grim foreign investment outlook percolate into the forex markets as severe downward pressure on the rupee. No surprise, it is the worst performing currency in Asia at the moment leaving us to deal with the costly imports.
The demographic political dynamics, coalition compulsions, rent seeking loopholes inherent to our democratic system forbid an expeditious counter to these quagmires. The majority poor vote-bank is bound to electorally prefer the populist schemes. While the power perpetuating efforts from the polity pander to such demand at the expense of long term growth. While the populist schemes fail repeatedly due to the implementation deficit, the announcing parties might get re-elected at the expense of massive splurge of tax payer money. It is this cost of imperfect democracy that squarely falls on the religious tax payer- “the middle class”. Other classes either earn too small to pay or are too wealthy to be bothered.
Coalition governments formed by identity politics and forged with disconnected agendas have become a recent reality. The resultant political instability means procrastinated policy making with myopic vision and regional focus. Lack of a clear national leader is now felt more than ever. Further, the license raj hangover still persists in several areas and most prominently in the allocation of resources. The massive scale corruption scandals unearthed in 2G scam and coal resource allocation bear testimonial for it. This is now being coined as the “Resource Raj” by the economists.
The world outlook does not help either. Economists like Nouriel Roubini have long been warning about an economic ‘storm’ in 2013. The shift in trajectory of Indian growth rate from 5.7 percent in the 1990s to 8.6 percent during 2005-2010 was largely due to the service sector growth shift from 7.5 percent to 10.3 percent in the same time period. Global economic doom puts India’s service led export growth story in jeopardy.
There is a glimmer of hope that reassures there is light at the end of the tunnel. That’s an impending 1991 like ‘Crisis’ (“twin-deficits”?) that will shake the governments out of their stupor to reform. Second generation reforms are long overdue that will set to finish the job we have started in the 1990s. These should eliminate all rent seeking avenues, increase investor confidence, facilitate infrastructure build-up, make resource allocation transparent, make subsidies work, revive labor laws and much more. Further, our middle class awakening witnessed during Anna Hazare’s protests is encouraging as well. Will this convert into active political participation by this class is arguable, albeit, is strongly desired.
Amidst this deafening noise of narratives and rhetoric it takes a deliberate effort to do wishful thinking. Hope is not collective action but it will surely lead to one someday when enough people talk and write about it. I try to do my part.
Pratham Jahoorkar is an entrepreneur in financial services industry and is based out of Mumbai.