The last few weeks have been pretty gloomy if you have been following the Indian Economy. There has been a potential downgrade of rating, lower GDPfigures, lower industrial output, inflation seems to be up, interest rates are up, fuel prices are going up. And that is just the stuff we get to see – stuff that is out in the public space. Underlying all this is what is popularly called policy paralysis. If it was paralysis it would be better because atleast then some level of status quo would be maintained. This was more policy yo-yo – confusion in terms of economic direction, chaos in terms of goals, too many people working at cross purposes, too much grandstanding , too much ego and too much double guessing, too much dogma and too few conversations between opposing factions.
To top it all, as though behaviour like this can be topped, there is absolute non communication on any aspect of the economy by the person who is most likely to have an impact on a jittery market, a stressed out business class, and a nervous foreign investor – the Prime Minister. While various ministers have assured you that ‘all is well’ with the economy – it is a bit difficult, if not impossible to take them seriously. There were these slew of gloom and doom stories – the Economist, WSJ, Reuteurs and the rest all ran stories that asked some very critical questions, and rightly so, on the India growth story.For all intents and purposes this became the general perception about the economy
This spending binge is not only misallocating resources, but also crowding-out private-sector credit. Over the coming year, the government will borrow around $110 billion to fund its revenue shortfall; it plans to front load most of the borrowing in the first six months. Since Indian banks are required to hold government notes, the success of the bond sale is guaranteed.
The Congress-led coalition government, with Brezhnev-grade complacency, insists things will bounce back. But India’s slowdown is due mainly to problems at home and has been looming for a while. The state is borrowing too much, crowding out private firms and keeping inflation high. It has not passed a big reform for years. Graft, confusion and red tape have infuriated domestic businesses and harmed investment. A high-handed view of foreign investors has made a big current-account deficit harder to finance, and the rupee has plunged.
Local business confidence in India has deteriorated for various reasons, including perceptions of “policy paralysis” within the central government. India was able to boost public and private investment in infrastructure in recent years, sustaining high GDP growth of around 8%-9% during the three years leading up to the recent global slowdown (in 2008). However, a perceived slowdown in government decision-making, failure to implement
have all been blamed for the crisis. Unlike the west where the Government and various agencies speak in one voice to reassure the market and investors at large, India has been true to form and has had everyone and their idiot cousin postulate on what is ‘wrong’ with the economy. That is everyone except those who should.
And suddenly that has changed. The last week or so there have been a set of articles and interviews by leading industry & business heads who are leading the fight back on behalf of India. While there is a lot that needs to be fixed in the economy it isn’t flatlining. The doomsayers may find support in those who oppose the government tooth and nail because it suits them to highlight what a terrible government this is (and it is). But, for a lot of us who have to run businesses, enterprises, attract investments, pay salaries, meet tax demands, a downward spiral based on a ‘tom tom’ drum effect is scary. It is not political brownie points to be scored, it is a matter of our own survival.
By no stretch of imagination are these people saying ‘problem, what problem?’ but they are far more measured in their view of the problems and possible solutions. After all, business leaders don’t want a loss in confidence in the economy either. Last week Aditya Puri of HDFC started the ‘let’s build back the confidence in India’ ball rolling. He said
If you sort out the issues on power, you don’t have to import iron ore, you sort out some of the issues on food, you sort out the issues on pricing of petrol…I strongly believe that India’s structural story is still intact.
Kochar and Kamat of ICICI, said something very similar
The issue is not being critical of the Government or wonder about the economy. The problem arises when that is the dominant narrative. Kaushik Basu, the government’s chief economic advisor in today’s ToI
There is reason to believe that India today is caught in a pessimism spiral. When this happens — and this is well-known in psychology — we tend to filter information, picking up the bad news and overlooking the good. If we resist this propensity and do some serious structural analysis it will be seen that, while some missteps did occur and there is room for self-criticism, there is also reason to believe that the Indian economy has, over the last few years, deve-loped deep strengths which it did not have ever before. Hence, as far as medium to long-term prospects for the Indian economy go, we have reason to be upbeat
I am somewhat upbeat. The prospect of a new finance minister or the PM taking over the finance function, makes me hopeful of a lot of the plans my company wants to get operational . It has been a virtual standstill for the last one year in terms of people having the confidence to invest in new areas. It is different when you run a business, you are responsible for jobs and salaries and an economy with some measure of confidence is always better for a small business than an economy on the verge of a nervous breakdown.
Finally, by no stretch of imagination is India out of the woods. There needs to be well stated intent, clarity of purpose and decisive action. Forget elections, you can’t let down 1.2 billion people and their aspirations. IF the road to reform, and the road to recovery are not set upon immediately – we are heading towards chaos and turmoil – not just economic but political and social.
Some interesting data points can be found here.