The delayed take-off of the Indian economy

The sense of exuberance that was in the air in 2014 has disappeared a year later
There is the general impression that the Indian economy has failed to take off because the amended Land Acquisition Bill 2014 has been stalled, the amended Goods and Services Tax (GST) Bill has been delayed, in Parliament, and Reserve Bank of India has not cut the interest rates. Finance Minister Arun Jaitley believes that these three have been the main roadblocks, and many in the Modi government as well as in the Bharatiya Janata Party (BJP) too believe in this. Quite a few of the pro-free market pundits believe in it too, though their emphasis would vary. Some of them think that the RBI refusing to reduce the interest rate is a greater reason for the sluggishness in the economy than even the not passing of the Land Bill and the GST Bill. This line of reasoning passes political, but not economic, muster.

The perception of industry and business is quite different. They seem to feel that government is not friendly enough and that it is not playing the pro-active facilitator sufficiently. Of course, they have not yet articulated their differences with the government openly, so far. But the negative sentiment about the government in the private sector circles is unmistakable. Industry and business which had high expectations of Prime Minister Narendra Modi are disappointed.

Even as the Modi government would not be justified in blaming the opposition for the problems in the economy, industry and business too cannot pass the buck on to the government for the unsatisfactory state of affairs. They have to blame themselves for their risk-aversion and not the BJP and Modi. They should not expect the government to mollycoddle them in what is supposed to be a free market economy.

Then there is the lament on the one hand, and exhortation on the other, of the economic pundits. They blame the government for not ushering in economic reforms. What they have in mind is simple privatisation of the public sector and they believe, rather innocently, that it is the way to unleash the energies lying dormant in the economy. And they advise and exhort the government to bring in reforms. They blame the political opposition for not allowing the reforms to happen. It looks like the pundits are as simple-minded as the political players, and they do not want to take a look at the real state of the economy in the country and in the world. Compared to the experts, the industry and business seems to have a better grasp of the situation.

The problem with the Indian economy and its inertia goes beyond the blame game. The truth seems to be that everyone is quite unsure as to what is to be done. The economists are as much at sea on this question as the government and the investors. Quite plainly, the economy both at the national and the global levels is not doing well. There is no market exuberance. Everyone seems to be waiting for things to clear up because no one is sure what anyone can do to clear up things.

As far as India is concerned, it is a matter of concern as to what has happened to the buoyant market spirit, the rising investor confidence that had  filled the atmosphere from May 2014 to May 2015. It is true that there has been an impressive rise in foreign funds inflow in the last one year, and it has turned out to be a good cushion to withstand the currency volatility arising out of the devaluation of the Chinese yuan. But foreign exchange reserves are meant for other productive purposes.

It is only partially true that the Land Bill, 2013 as passed by the UPA needed to be tweaked as one went along to speed up the execution of infrastructure projects. But the opposition to the amended bill from the Congress, the Communist parties and others is not really holding up the projects. There are other reasons. The private sector players are not showing much enthusiasm to get into the infrastructure sector. Part of the reason could be that the public sector banks (PSBs) are not in a position to extend large credit because of the existing non-performance assets (NPAs) on their balance sheets.

The implementation of GST would greatly boost industrial and business activity as well as the government’s tax collections. But it will be sometime in 2017 and beyond before the real positive effects of GST will be felt in the economy. The failure to pass the bill is not the cause of present economic inactivity.

The issue of rate cut is both interesting and complicated. RBI Governor Rajan has put forward some sensible arguments. He said that rate cut cannot be done on the basis of “public pleading” and it cannot be used as a “booster shot” for a wobbly economy. The decision on interest rates has to be based on more substantial assessments. Inflation rates have indeed dipped but the inflationary pressures have not disappeared. It is quite clear that it is not the high interest rates that are inhibiting credit offtake. It is the pile of bad debts of the PSBs that is making it difficult for them to allow liberal credit flow.

The real indicators of the slowed-down economy can be seen in some of the key indicators. The Index of Industrial Production (IIP) for May, 2015 is 2.7 compared to 5.6 in May 2014. Imports  and exports have shrunk considerably. While the imports figure for 2014-15 stood at 0.6 per cent, it was minus 2.8 for exports for the same period. Imports for May 2015 were minus 16.3 compared to minus 11.3 for May 2014, and minus 13.4 for June 2015 in contrast to 8.6 for June 2014. The exports figures show a clear deterioration: minus 20.5 for May 2015 while it was 12.2 in May 2014, and it is minus 15.8 for June 2015 to that of 7.6 in June 2014.

Does it make sense in this situation to believe that China’s febrile economy and the market blues in Europe and North America throw up a great opportunity to India to emerge as a dominant player on the global stage? There is an element of delusion in this. India remains an attractive destination for foreign investors but that alone is not sufficient to activate the economy. The Indian market is not in a position to consume the goods and services that the investments will produce.

The author is consulting editor, dna

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