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Perched on a cusp

Whilst introducing an IMA CEO Forum session with TN Ninan, I may have inadvertently set a pessimistic tone on India’s economic and business environment. With one scandal unfolding after another, the government is trapped in a limbo and the mood amongst investors is far from encouraging. Ministers and administration officials refuse to put pen to paper in fear of future investigations and progress on government sponsored projects has effectively reduced to a crawl. Policy reforms remain suppressed in the absence of any initiative and civil society, armed with wider public misgivings of politicians, continues to pester the government on many fronts. Finally, the economy is undeniably slowing, amply demonstrated by a falling trend in the industrial production index. Tight liquidity and expensive money have derailed investment plans by business enterprise. Many businessmen are now more openly expressing longer term misgivings on the India plot and investing larger sums overseas.

Of growth and buoyancy

Mr Ninan, fortunately, seemed less despondent than the tone I set for his opening remarks. His presentation examined five aspects of the environment – economic growth; inflation; corruption; leadership and policy reforms. The Reserve Bank had under-estimated the slowdown (when it remarked in 2010 that growth might surprise us on the upside!), and the economy continues to face the aftermath of the 2008 crisis. The world around us seems to be falling apart – the US is in a debt crisis and risks a downgrade by rating agencies; the Euro is unlikely to survive in the form that it was envisaged, with several countries, starting with Greece, on the verge of default. The monsoons, despite earlier claims of normality by the Met Office, are looking increasing dodgy and at the time of writing this paper several parts of India remain rain deficient. This has wider implications on rural output and therefore consumption. Finally, there is, Mr Ninan acknowledged, a loss of confidence amongst investors and buyers on worries about where growth is heading. But, there is a clear flip side to this story. Credit growth is strong and exports have held up. The current account imbalance will turn out much better then previously anticipated. Tax collections are robust and the HSBC PMI (purchasing manager’s index) despite falling consistently (now at 55) is still in the positive, indicating an element of buoyancy within the business environment.

Coupled with these factors, going forward, there is evidence of a downward trend in the commodity cycle. For a few years now, commodities have become a speculative asset, not dissimilar to equities and gold, and over the past one year had risen by 25-30%. More recently, however, (in the last two weeks, really) investors have unloaded hoarded stocks on the market with a consequent fall in prices . Falling commodity prices are good for checking inflation and boosting economic growth amongst countries like India which are significantly import-dependant. Based on these factors, Mr Ninan, appeared more optimistic about growth then several forecasters (including IMA ) which he believes will be in the region of 8+% in this fiscal year. In the longer term too, Mr Ninan believes, India’s economy is structurally oriented to sustain growth in the 8% range and not the 9-10% which many analysts (including Mr Ninan, as it happens!) had determined a year ago.

The inflation worry

The question of inflation, Mr Ninan argued, is somewhat harder to answer, largely as the data keeps changing and is therefore prone to inaccuracies. In fact the Reserve Bank Governor D Subbarao confessed recently to follies in data sources which constitute the basis of determining monetary policies. However, the fact remains that if commodity prices show a descending trend then industrial inflation should fall. On food prices though, things are a little different. The government, in a desire to help the farming community and effectively gain political mileage, has consistently hiked the minimum support prices of food products for several years. On the other hand, it has made no progress in reforming the distribution and marketing system, as a result of which large demand-supply gaps exist across the country even when the Food Corporation of India is sitting on a 28-mn tonne foodgrain stock. Food inflation is consequently a fall out of these mis-judgements. But on the whole, Mr Ninan remains convinced that the headline inflation number will stabilise.

Corruption and loot

Corruption scandals, Mr Ninan rightly observed, that are exposing themselves now, are really an unravelling of what went on in the previous term of the UPA administration – 2G; Maxis; the near destruction of Air India, etc. There appeared to have been “open-loot” in the system and nobody cared a toss about accountability. The Prime Minister and his government did little to respond. It was clearly the admission to the media by the Comptroller & Auditor General’s office, in a radical break with tradition that set the cat amongst the pigeons, to so speak. The unorthodox intervention and prodding by the Supreme Court of India ensured better investigation by agencies that led to subsequent arrests and indictments. The judiciary clearly senses the pulse of the Indian people and seems adamant in pushing matters to their rightful conclusion. The government on the other hand remains out-of sync with the country’s mood where “corruption has caught the public imagination”. Be that as it may, Mr Ninan believes that corruption will fall to ‘normal levels’ as he so honestly described, from the open loot of 2007-9.

In a recent meeting with some of the country’s senior journalists, Prime Minister Manmohan Singh’s message was not so much to clean things up but rather to keep a cap on them. Dr Singh oddly seemed annoyed with the CAG and its break from protocol in going directly to the press. CAG audits are usually filed with Parliament and rarely given the attention and hearing that they deserve. Frequently, misappropriations are hushed up and then lost in dusty archives never to be seen again. But now through the Right to Information Act (RTI), it is possible to unearth frauds and corruption. A recent example concerns a series of letters written by Mani Shankar Aiyar, a former Sports Minister in the UPA Government accusing the Chairman and members of the organising committee of the Commonwealth Games of considerable corruption. When asked about these letters Dr Singh previously responded that Mr Aiyar may have had ideological reservations with the Games themselves (which was also true!) but refused to acknowledge the observations about corruption charges that the letters alleged. Following a petition by an RTI activist, the letters are now in the open and a cause of some embarrassment. Therefore, as Mr Ninan believes, in so far as corruption is concerned, the worst may finally be over.

Leadership and conflicting agendas

On the leadership issue, Mr Ninan acknowledged that Dr Singh is clearly in an awkward situation when trying to manage the conflicting demands of coalition politics, party agendas and the economic necessities of his government. Perhaps he may have made too many compromises to stay on in South Block. Despite all of this Dr Singh still remains the best option, as a leadership vacuum has enveloped Delhi. A weaker Congress and a fumbling BJP would lead to instability in the aftermath of the 2014 elections. The seat count of both national parties may see a decline in Parliament.

Reforms are now the casualty

On reforms, there are strong headwinds to counter. The GST is stuck as the BJP, in a desire to back-foot the government, has simply refused to play ball. This single most important legislation is unlikely to happen anytime soon. Other policy and implementation initiatives such as those involving mining, power, etc equally remain stuck. The target for roads at 20 km per day is being under-achieved by as much as 75%. The government’s intent to up the quantum of manufacturing within the various constituents in the economic pie, from 16% to 25%, in 12 years seems arduous to achieve. Infrastructure and people skills, essential for rapid growth, are dreadfully short with little hope of transformation. Mr Ninan suspects that lack of leadership and reforms will hold the economy back from its true potential. On a more positive note, though, Mr Ninan believes that the UID will be a serious game changer as it would enable cash transfers directly to the people that it intends to serve without the substantial mediation losses that currently occur. This would ensure better delivery of government services.

In conclusion

I have some misgivings about Mr Ninan’s optimism in the short term on growth and inflation. I suspect that the decline in commodity prices, which he alluded to, will take longer to have an effect on reversing the declining trend in the industrial cycle. Tight liquidity, the terribly awkward behaviour of banks in disbursing funds to industry, etc will undermine growth prospects within the private sector of the economy. New investment has fallen to a drip and the sales ledger of the major engineering and capital goods companies remain shallow. The private sector now accounts for the bulk of new investment in India. The main worry in the longer term remains managing the balance of economic wisdom against the political essentials of social sector spending. The Food Security Bill, leading a host of other social sector welfare spending programmes, will burden the treasury to commit as much as 25% of GDP when its own revenues hover around 18% creating significant imbalances in the government’s P&L. Hopefully, things may turn out well for India as her political masters may yet see reason. The coming months that provide an indication of the broad direction of economic and social policy are critical to determine longer term growth and stability. The economy is perched on a cusp.


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