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State of The Economy

Sustained economic revival needs a slew of measures, at regular intervals, over a period of time, and in a coordinated manner By Alam Srinivas

Last week, a friend accosted me at a Delhi club. He asked me, “Why don’t you write a book on the slowdown in the Indian economy and when the good days are likely to arrive? Everyone I meet – from a mid-level manager to owners, big and small, from an auto rickshaw driver to a construction worker – wants to know the answers.” The conversation set me thinking. My friend was right. As a journalist, I am asked the same questions by almost everyone I meet.

So, what’s happened to the “achche din” that Prime Minister Narendra Modi confidently promised during and after his election campaign. He made us dream big, and convinced us that the economy will take off within months after he became the PM. What’s gone wrong? What else is likely to break down in the near future? More importantly, when will the economy recover? All that we hear is that the government has initiated steps that will yield results within months. But after 14 months of being in power, a string of bad news seems to still outweigh the good ones.

Intent and promises are important. But most of the economic downturns are reversed by a combination of several factors, which are interlinked to each other, and also to peripheral issues. An econometric model of a nation, especially a large one like India, will require powerful computers to yield any results. Therefore, to expect one individual – Modi – or two – PM and Finance Minister Arun Jaitley – or even a full cabinet – NDA-2 – to come with quick-fix solutions is idiotic and unfair. However, our expectations are high because we were sold a dream.

It’s the Sentiments, Stupid

A few days ago, Apple, which had a market capitalization of over $750 billion, announced its third quarter results for this fiscal. Its revenues, at nearly $50 billion beat the street’s expectations. Its profits, at almost $11 billion, were up 38 per cent compared to the same period the previous year, and represented the fastest quarterly growth in the past three years. The average selling price of its iPhone range shot up from $99 to $660 in 12 months, which proved that consumers were enamored by the more expensive iPhone 6 Plus that was launched recently.

Yet in the after-hours trading that day, the stock plunged by over 8 per cent and lost over $60 billion in market capitalization within three minutes. Why did this happen? Negative sentiments gripped the investors only because Apple sold 47.5 million iPhones in the quarter, which was 3 per cent less than what the market analysts had predicted. A whiff of bad news amidst a plethora of good ones was enough for the investors to virtually dump the stock within minutes.

The same is true for any economy. The government in power can shout from the various rooftops that it has taken steps to improve the business and investment climate in the country. It can claim that it has laid out a new red carpet for domestic and foreign investors. It can say that it has achieved a fiscal balance. But no one will take out even a rupee out of his or her pocket unless he or she feels good about what’s happening around. Everyone will wait for another one to bite the bait, or unless he or she has seen positive changes on the ground.

Theoretically, smart businessmen will invest when the economy is at the cusp of an upswing. When they feel that the worst has happened and the outlook can only be positive from now on, they will accelerate their investment and growth plans. However, the reality is different. Most wait for the ‘achche din’ first, and then put their money on the table.

Not a Fool’s Paradise

Any government can fool all the people for some time and some people for all the time. NDA-2 has realized this the hard way. It tinkered around with the formula to calculate economic growth and, voila!, India’s annual growth crossed the 7 per cent. Jaitley proudly claimed that his regime has turned around the fortunes of the nation. But not many people were fooled, and not for very long. They saw that the scenario around them hadn’t improved. The buyers hadn’t flocked to the markets; both the urban and rural consumers were still unwilling to spend.

The same is true with the inflation figures. Within months, NDA-2 claimed that inflation was down considerably and that prices of several products had reduced. But the consumers realized that this wasn’t true. Lower inflation figures don’t imply lower prices. The former only mean that the rate at which the prices were going up has come down; prices still go up. In addition, while the government focused on wholesale inflation, the buyers were more worried about retail prices. The truth is that over the past few months, wholesale inflation is down but retail inflation is up.

For years, the BJP criticized the UPA 1 and 2 regimes for being shamelessly corrupt. It then cited the examples of successful auctions of spectrum and coal blocks during its tenure that generated Rs 400,000 crore (including the blocks given to stateowned entities). This showed how NDA-2 had reduced corruption, which would result in effective governance. Even the die-hard BJP loyalists aren’t sure if the auction of coal blocks was good or bad. Some critics contend that the public sector banks could lose Rs 200,000 crore of loans extended to the previous owners.

Investment Conundrum

One of the most-touted mantras of NDA-2 is ‘minimum government, maximum governance’. One of the objectives of it is to kick-start the investment cycle. In his first Budget, Jaitley claimed that his policies will woo private investments, especially through Public-Private Partnerships (PPP). Modi went on a whirlwind tour to dozens of countries to woo foreign investors. The PM grandstanded on his ‘Make in India’ scheme that would transform India into a China within years. In his second Budget, Jaitley largely forgot about PPPs and said that public funding would lead the investment cycle.

Modi and Jaitley forgot two critical issues. First, when a regime woos investors, the latter clamor for more, especially when they feel that the government is stuck in a corner. The same happened this time. Knowing that NDA-2 had to achieve higher growth to survive politically, potential investors asked for additional incentives. ‘Yeh dil mange more’ became their mantra. Foreign institutional investors said they did not wish to pay taxes on their profits through tax havens. Manufacturing firms insisted on a stable tax regime and the removal of ‘tax terror’.

Second, any investment cycle has a lag time. It cannot be accelerated like an automobile – from zero to 100 miles per hour within a few seconds. This is especially true of public spending, which requires several clearances. The only way in which investment cycle can rejuvenate faster is through spending in welfare schemes and altruistic measures that leave larger disposable incomes with people, who then use it buy additional products. The additional demand helps firms to use higher capacities, and cajole them to invest in additional capacities.

Thus, within two to three years, the nation is back on a higher growth path. This government has done the opposite. It has indeed initiated policies to attract investments. It has forced the state-owned entities to invest more. But it has reduced the money spent on welfare schemes, especially in areas like education and health. More importantly, it has pushed the onus of such investments on the respective states. It may be a good idea in the long run, but it can lead to higher corruption in the short run as the states clamor to pocket this huge largesse.

In the end, there are no short cuts to solve economic problems. There are no five or six things that any government can do to improve the economy. It needs a slew of measures, at regular intervals, over a period of time, and in a coordinated manner. The first thing one requires is a ‘grand vision’ and that is something one hasn’t seen in the case of NDA-2.

Written By:  Alam Srinivas

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