[Cover Story] All quiet on the economic front

Illustration: Sudeep Chaudhuri

ONCE THE ‘I’ of the BRICS apple, India has disillusioned its proponents by remaining a forever ‘emerging’ nation and led its economy to under-confidence. As we start 2013, there is less optimism and more doubt. There is also the misperception that because the stock markets have surged to new peaks and a tax anti-avoidance rule pushed back by a few years, India’s growth is back on track. In reality, the fundamentals of the economy have been hit by a series of setbacks, derailing the development agenda and the potential growth prospects.

India is not in need of any colossal change, nor is it desperate for any more immediate economic reform. Incremental and improved execution to allow functioning of all the restructuring laid out in the latter part of 2012 should be the Manmohan Singh government’s main aim.

Economist Haseeb Drabu puts India at the cusp of five key deficits — fiscal, raw material, energy, skill and governance. But a possibly populist Budget, widening fiscal gaps, slow clearance for big projects and the 2014 General Election countdown make for a chequered backdrop for the government and policymakers to operate in. Given this, what is the India prescription for 2013?

First, the growth engines have slowed and promise no real signs of speeding up this year. India is all set to deliver its lowest GDP growth in a decade. For now, the two men who know India’s real potential have discarded surging growth prospects. World Bank Chief Economist (and former chief economic adviser to the finance minister) Kaushik Basu foresees no bounce back in the economy and expects the Eurozone crisis to persist till 2015. Current Chief Economic Adviser Raghuram Rajan has estimated GDP growth of 5.7- 5.9 percent in the fiscal year that ends in March, against the 7.6 percent growth forecast in the 2012-13 Budget. “I think it is too early to say confidently that the economy has turned the corner…” he remarked at a FICCI event.

HDFC Chairman Deepak Parekh admits that 2012 has been a most challenging year and expects 2013 to be better for company bottomlines and industrial growth. However, JK Group’s Harshpati Singhania puts some riders on such optimism: “Much will depend on factors such as implementation of policies announced, inflation level, interest rate scenario and recovery in the global economy.”

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The first RBI credit policy of 2013 is due this month and the bank is expected to start cutting interest rates. Thus far, the industry has blatantly blamed the RBI for stemming growth. “The government has been using inflation as an excuse to not sort out bigger issues of supply side within the government’s domain,” says Harsh Mariwala, who runs consumer goods giant Marico.

With the fiscal deficit threatening to be close to 6 percent of GDP, the Indian economy runs with the material fear of rating agencies downgrading its rating. Just days ago, the government announced its first increase in rail fares in a decade in a bid to prop up some finances, but it’s going to take a lot more boulders worth of revenues to move the needle.

Growth is a factor of investments, and the past 18 months saw a complete flight of capital away from big projects and new factories as corporate captains stayed away from spending safe cash. A mix of controversies, scams and policy flip-flops also kept otherwise risk-taking company owners outside the capital formation cycle.

If the government acts on the reforms announced by ensuring smoother execution, there is hope that deals will return. Singhania says the implementation would depend on individual state governments because they will have to provide all the necessary approvals and clearances. “Therefore, it may be unrealistic to see the impact of these reforms immediately. It takes time for the projects to take-off, and for the financial impact to be felt,” he says.

Even on the capital market front, the government has managed to dodge further embarrassment within the global investor community by postponing the anti-avoidance tax proposals to 2016 which, if implemented, would have been a big blow to India’s reputation of being a high-return stock market. While in the short term this has removed the uncertainty, it has once again displayed the fickle nature of policy making in our country.

In its last report for 2012, Goldman Sachs called India the most complex of the five BRICS nations “with its demographics giving it the best potential GDP growth rate, but its inability to introduce effective policy change is a persistent source of disappointment”.

If one goes by the theory that a typical business cycle lasts about five years, then there may be no more of what Dani Rodrik calls “growth miracles”. Rodrik, who teaches at the Harvard University’s Kennedy School of Government, wrote in a piece for Project Syndicate, “Without the industrialisation drive, economic take-off becomes difficult. Without sustained investments in human capital and institution- building, growth is condemned to peter out.”

Institution-building is where India seems to have got a long way to go. We don’t yet have clarity on mining laws, and use of other natural resources, a slight but nebulous headway on land acquisition, and unfinished tasks on how to tackle widespread corruption. Creating a framework of progressive and independent institutions is a need of the hour.

India is ranked 132 in International Finance Corporation’s Doing Business 2013 survey, citing hurdles in setting up new businesses, getting construction permits and even in investor protection.