Turning the Corner?

Turning the corner?

What does the recent Moody “Stable” rating given in its “credit analysis on India” mean; quite apart from the euphoria of a 305 point rally on the Sensex?

I am not speaking of the reasons and justifications already advanced by the rating agency in its report, but the ripple effect its bottom-line verdict is already having, within the week after, on the mood and economic perception of India.

After all, it also saw, on the same day as the Moody report was released, the rupee slide to an all-time low of almost Rs. 58 to the US dollar, apparently on the back of fleeing Foreign Institutional Investor (FII) funds and the scarce US dollar in our financial system!

Moody’s report dutifully points to the challenges of the yawning fiscal deficit, the high Government debt, poor and bottle-necked infrastructure, both physical and social, political uncertainty,  stubborn inflation and other issues. And yet, it seems to suggest, the Indian economy is not headed downwards in a ruinous and out of control spiral.  

But does the Moody rating harbinger the end, or at least the beginning of the end, of the precipitous slide down the slippery slope of our economy?

Will others, such as Standard & Poor (S&P) chime in with similar guarded optimism along with the expected bushel of ifs and buts? Probably, because the international rating agencies tend to follow a similar matrix for its analyses. Happily therefore, at least in this instance, the past suggests the foreign rating agencies seem to be the first to indicate which way the wind is blowing economically. And they tend to be taken more seriously too than our desi, largely Government-owned economy watchers.  

This sort of foreign observed prescience spills over into other areas as well. In the old days, if one wanted the truth about the news in real time, for example when Mrs Indira Gandhi was assassinated in 1984, you turned on the radio and tuned into the BBC.

To lend credence to this statement, remember the famous picture of that fateful day which had the just bereaved Rajiv Gandhi standing by an SUV of the time, on a road- side in Orissa, tuning into the BBC on his independent little Sony radio. He was trying to get the unvarnished status on his mother, not really forthcoming on either Doordarshan or All India Radio (AIR), till much later, no doubt after being allowed and cleared to air the accurate reports.

 So, maybe we can look forward to a much economically healthier 2013. You and I may be forgiven for our lack of optimism at this time about the Indian Government’s ability to stimulate the growth that always seems so elusive. And also the pessimism one tends to feel because of our profligate lack of policy consistency.  And also on the legions of economists in our ministries and central banks who tend not to take the need for growth as seriously as they might.

Also, notwithstanding our precarious finances, we are reportedly also about to embark on a direct to- the-poor cash-back policy on subsidies, likely to cost the exchequer thousands, no tens of thousands of crores!

So, how does Moody arrive at its optimism? Frankly, I don’t know, despite the reasons given, except to say that perhaps things are not as bad economically as they seem. And perhaps we gain in comparison to the crumbling economies of large parts of Europe.

At least, we in India definitely possess almost bottomless demand domestically, and that is nothing to sniff at. Any classic economic analysis has to concede that having the demand is half the battle won. All that remains theoretically is the supply side of things. But in India we have a talent to make everything as difficult and complicated as possible, so nothing necessarily happens in logical progression.

The other point, among the many made in the Moody report, is with regard to our inadequate and over burdened infrastructure, which curtails our progress more effectively than the vagaries of our political process.

And in this, the point is hampered only one part by lack of finance and administrative inertia. The other part is to do with inadequate know-how, and perhaps an embedded reluctance to acquire it from elsewhere.

In this connection the recent initiative to collaborate with the Chinese to develop high speed Railways for both passengers and freight is most welcome. Among our inheritances from British times, the Railways are amongst the most valuable, but we have not been able to seriously modernise or upgrade the network to current day standards. We have extended it and converted gauges, yes.  And we were able to go from steam to diesel to electric gradually over the years. But our rolling stock, signalling systems, track technology, railway station infrastructure, catering and cleaning systems and so on, all still belong to a bygone era.

The Chinese have built the spectacular Beijing to Lhasa Railway in record time overcoming major challenges, as well as many other high speed train links to rival the famed bullet trains of Japan or the TGV of Europe. They can certainly guide our efforts, and it is most pragmatic of the Government to think of asking them to do so.

And those who feel that the best way to right the balance of trade with China is to actually engage in more of it, are naturally delighted. It may also contribute to a lessening of tension and suspicion between the two nations, despite the border disputes and other outstanding claims and counter claims of territory, the controversial and colonial McMahon Line and so forth. 

Our economy has suffered since the world economy crashed in 2008, not from a lack of opportunity to grow, but from too much caution in the face of turbulence. We choked off our own growth rate by raising interest rates and making credit unaffordable, without however being able to control inflation imported with our ballooning oil bill.

It is an obvious indictment of our incipient Socialism, still lurking just below the surface, that we think nothing of sabotaging growth whenever we want as a first option. But wrecking a nearly nine per cent per annum momentum in the GDP to serve the cause of controlling “food inflation” was, and is, arrogant and short-sighted. To build it back from five per cent will not be so easy. 

But perhaps now, in the final years of the present Government’s tenure, we will rectify the imbalance in our over-reactions and promote growth afresh. The Prime Minister, the original Mr. Reform of 1991, has declared his intent in plain terms. The West seems to believe him.

(1,105 words)

28^th November 2012

Gautam Mukherjee