Time to Accelerate
India’s economy continues to falter despite brave pronouncements from the Government. It is facing the threat of downgrades from international rating agencies such as Fitch yet again. Fitch has stated that it can’t see things improving much over the next 12 to 24 months, or, in effect, the remaining period of this Government’s tenure. This is, of course, not necessarily true, because this Government can, if it has the will, accelerate things and go to the elections in a blaze of glory.
We need trillions of US dollars to upgrade our infrastructure and some fractional achievements in this regard would prove to be a powerful stimulant to the economy. The money can come to our domestic players via external commercial borrowing (ECB) at a very competitive price. Mr. Uday Kotak of Kotak Securities and the bank that bears his name has suggested this.
It makes sense as our domestic industrialists and developers are much more in the know of things here and would be naturally committed to a greater extent to this country. And if we were to attract just a few million short of a billion of the US greenback additionally, we would see our economic figures jumping. And in the long term, plentiful and good quality infrastructure can unleash the creative potential of millions of Indians.
But right now, the finger-wagging may not be pleasant to countenance but is entirely justified. Fitch cites our sharply slowing growth, declining trend lines, burgeoning inflation, fiscal deficit, including that on the current account which is putting pressure on our foreign exchange reserves, policy confusion etc.
However, the irony is in the fact that most of our economic woes are self-inflicted wounds. This holds true across the board with our misguided attempts to choke off credit and financing and deliberately slowing down the economy lest it “overheat” after 2008.
Inflation however has been imported substantially along with the 75% or more dependence on foreign petroleum. And this petroleum fuelled inflation has affected the manufacturing sector generally and the transportation sector more directly. But over time, such lop-sided pressures tend to distort the entire economy, as intrinsic values are swamped by the cost of inputs.
But food inflation, which affects the poor more than others, has also been stubborn. Apart from seasonal vagaries, this is due to a largely primitive farming methodology and stagnating agricultural output.
There are some fanciful explanations on food inflation extant which suggest it is happening because of rising incomes and a greater demand for protein rich foods. This is absurd given our pathetically small growth rates in agriculture and appalling storage and distribution problems which provide the more obvious cost push factors.
Almost half of our farm produce spoils and goes to waste even as food prices rise, and we don’t grow enough anyway in absolute terms. Our animal husbandry too suffers from low quality and yields. We have little or no food processing capacity and only a rudimentary to non-existent cold chain.
Compare this with the US, where 5% of their some 250 million people are farmers and turn out mountains of produce. American farm production is subsidised because otherwise the glut would ruin their farmers. And America gives away a large portion of its agricultural produce to less fortunate countries in its orbit.
Policy anomalies in India however has us exporting the choice farm produce and even our goats to the Middle East and the West when we don’t have enough to service the domestic market. This phenomenon must be a throwback from the days when we didn’t possess enough “foreign exchange”. Now it is all based on market demand and better prices obtained abroad. So it is difficult to blame the exporters taking advantage of a policy framework that actually encourages export of farm produce.
On the growth side too we are facing major challenges. The infrastructure bottlenecks have been ignored for years. This has always choked off all but the most sedate growth of a couple of percentage points in GDP. The 8 to just under 10% growth in GDP that we have seen since 1985 has come about with the growth of the Services Sector which does not need any substantial infrastructural support.
People like Mr Narayana Moorthy, now retired from executive duties at Infosys, have complained about the lack of fiscal support by way of tax breaks. Besides there’s a lack of policy support to promote the IT industry towards greater value-addition.
It is overall fortunate that the Indian Service Sector economy now accounts for some 56% of its total with industry claiming about 20% and less than that for farming which nevertheless supports over 70% of our population. And the growth rates too were about 100% in the IT business till the downturn in Europe and America, with only 20% odd for the manufacturers and less than 5% for the farmers.
But, since we have a lot of catching up to do against our potential, nothing is really lost yet. Still, the engine of growth, the Services Sector, is also largely stagnating at present relying on domestic demand to pick up the sag from the US and Europe.
In fact, along with China, we were in an ideal position to grow strongly while all the Western economies were imploding post 2008. But neither India nor China were able to stimulate their domestic economy enough.
China is however a larger, stronger economy, already some 20 to 30 years ahead of us as we stand. But theoretically, we could catch up in perhaps a decade, if, and it is a big if, we figured out a way to pull out all the stops and be pragmatic as decision makers.
The economy has grown central and pivotal to our survival and progress. This is true not only of India but is being painfully borne out in the UK, Europe, Japan and the United States. Political policies that attempt, Indian style, to ignore the market place are unable to get away with it any longer.
But somehow we never seem to realise that the route to all our ambitions is a booming economy, even as one financial scandal after another rock the country. At a personal level we fully realise that money is the key to everything aspired for. At the collective point this clarity is obscured by cold feet and vote bank calculations. Kicking the can down the street and postponing essential decisions is tying us up in knots of our own making. We need to make more than welcome speeches and promises. We owe it to our selves to deliver some speed of resolve and execution.
(1100 words)
9th January 2013
Gautam Mukherjee
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