The Governor Relents

The Governor Relents

It is indeed a relief to see Governor Raghuram Rajan at the RBI beginning to ease up on the liquidity. This is essential for growth, even as the IMF expects barely 3.8% growth in GDP this year, down from its earlier estimate by a dramatic 2% points, but going up to 5.1% next year. Of course, even 5% odd was a 10 year low when it happened last year, and therefore the current dip estimated is all the more significant. It shows the Government’s economic policies are just not working.

If the RBI keeps easing up on liquidity like this, and bringing interest rates down, and the Government makes some growth- friendly reforms, we could be rolling once again. Most commentators have warmly welcomed the RBI’s latest initiatives, and are urging Mr. Rajan to do more as soon as possible.

The RBI however is saying this easing is not a change in its stern stance with regard to inflation, hovering around 11% per the IMF this year, and expected to remain at around 9% next year, but since the rupee has appreciated some 8.76% from its nearly 69 to the dollar, some easing of the stranglehold imposed in July has been made possible.

And the deficits are indeed coming down; the CAD is expected to be contained at $70 billion, down from $85 billion last year, ostensibly because of less gold being imported. Exports are growing and trade deficits are also down on top of some core sector growth. But this is still good in so far as things are not getting worse, but hardly good enough.

Any jolt from the US, either by way of a looming default on its debts after its current ‘shut-down’, or the beginning of ‘tapering’ of its stimulus, could set off another round of currency crisis and sharp disinvestment by the FIIs. We will just have to keep our fingers crossed on these external threats beyond our control.

The Government that will make the difference in terms of growth strategies will have to be the new one after the elections in 2014, and hopefully run by the market friendly Narendra Modi.  NaMo will not need to be goaded into development. It is pretty much his calling card and claim to fame.

But to make a dent in our poverty statistics, we need to get back up to 8% per annum, and try and go into double digits and sustain it for a decade or more, China fashion. It is eminently possible, again per the Chinese model, provided we open up and sweeten the deal for the infrastructure sector that needs trillions of dollars in investment.  

Mr. Rajan says he will build the financial structure to attract these trillions of dollars into infrastructure over the next three years of his tenure. And the Government also must see to it that land acquisition for infrastructure development, always a major stumbling block, is done at a fair market price, and does not get mired in controversy and litigation.

Of course, some of the Chinese growth has come from exports, and there our future possibilities are good, even if our track record has been very modest so far as a whole. Software, BPOs and diamond polishing and re-export has done well for the main part, as has automotive parts, but much more can happen.  

Especially given our ample and intelligent work force, both skilled and unskilled, our educated white collar resources,  and familiarity with the English language.

India can become a manufacturing hub for many things, given the infrastructure, roads, rail, port and airports, metro- rail, power, water, and communications. The Japanese certainly think so, and are working with us already in the Delhi-Mumbai Industrial Corridor (DMIC), and so do the Koreans. And their eye is not just on exports, but the sizeable domestic market also.

In Defence Production, the Americans, The Israelis and Europeans know there is a massive manufacturing opportunity and some of the largest domestic demand in the world.

The area of agricultural services, and value addition, where we need to sweep up everything from statistically insignificant growth percentages of 2 or 3% to about 10% per annum, is, as yet, in its infancy, with much wastage to contend with.

Many agriculturally advanced countries of the West are interested in helping us grow this market, given that India is already a massive producer of vegetables, fruit, wheat, rice and cotton.

The future is bright as long as we stop our navel-gazing and malingering, and take bold steps to fast track growth via a new and energetic government that is strict on corruption. It is also good to find that the RBI is making some moves to facilitate this outcome.

(784 words)

October 9^th, 2013

Gautam Mukherjee