India is stepping into a challenging period. The government has at best only one and a half years to act before the election fever rises in anticipation of the 2014 national election. In the short term, economic activity may receive a boost from lower interest rates, a trend likely to begin soon. A cheaper rupee may help stimulate exports. However, the bigger challenge before the nationis to prevent the economy from getting locked in a porlonged period of policy inaction, leading to a vicious spiral of low growth, high inflation, unsustainable fiscal deficit and slack in business confidence.
Amid the global financial and economic crisis in 2008, India prided itself for remaining relatively unhurt. Now, however, the Indian economy is slowing down to 6-7% due to global uncertainty and slowdown and the domestic policy and governance environment. Blame is put on the excessively tight monetary policy, which has caused a decline in investment. It is being argued that a cut in interest rates can prove to be panacea for the problems of the Indian economy and provide a fillip to growth.
Today, the Indian economy is facing a macroeconomic slowdown, with low investments coupled with high inflation. The high, volatile inflation is, in itself, a major problem that is holding back investment. The macroeconomic instability has left the private sector scared, leaving it risk averse and afraid to invest, particularly for long-term projects.
A roller-coaster 2011
The year 2011 proved to be a roller-coaster ride, with a greater degree of negativity. The year began with the anti-corruption campaign, which attracted unprecedented support from the middle class, creating a Hero in Anna Hazare! But the year ended with the compromising ‘Lokpal Bill’, which is far from the expected success in terms of creating a strong institution that can solve the corruption cancer in the country.
The year was marked by economic slowdown across the globe, with the Euro crisis being the highlight. The Indian economy, despite its resilience, was not immune. The falling rupee, widening fiscal deficit, double-digit inflation, 13 interest rate hikes in a year, crucial policies like FDI in retail with strong backward linkages going on the back burner, the dismal feeling of policy paralysis in the country, all these marked critical developments in the course of 2011.
Despite the above-worrisome backdrop, the Indian economy remains fundamentally strong due to its entrepreneurial people, rising young population, some initiatives in agricultural and infrastructural reforms, and investors only delaying their decision to invest but remaining hopeful of better times to come. The single negative factor is that despite over two decades of economic reforms and fruitful results, the economy has been unsuccessful in divorcing economic decision-making from political idiosyncrasies. Somehow, if this can be accomplished, then India’s growth story could certainly shine.
Outlook for 2012
The economic concerns would certainly take some time to go away. Inflation worries are likely to lighten, with food inflation declining steadily. However, the proposed Food Security Bill will widen the fiscal deficit further. There are many important policy reforms in the pipeline in 2012, such as land acquisition reform, new manufacturing policy, deferred FDI in retail, among others. This is also the year when the government has set its targets to achieve its ambitious goal of total electrification of villages. Therefore, the year ought to be definitely an action-packed one from the perspective of economic development.
The most pressing task for the government will be to get the investment cycle buoyant again. Higher public investment appears unlikely given the tight fiscal situation this government finds itself in due to the uncontrolled revenue spending which has led to uncontrollable inflation. However, many public sector companies seem to have excess cash, which should be deployed for new capacity rather than to cover the budgetary gap.
Private investment activity ahs been slack due to numerous uncertainties facing corporates. The large Indian companies are sitting on a pile of cash which they are refraining to use to build fresh capacity. The animal spirits have dampened due to the recent policy paralysis. The obvious way would be to rebuild corporate confidence, and that can be achieved only through the implementation of a well-studied actionable agenda. At least, the government would do well to focus on some reform initiatives that are already on the table, such as Direct Tax Code (DTC), Goods and Services Tax (GST), and licenses to new banks, among others.
The few sectors that have a significant multiplier effect on the rest of the economy could be given special attention. These include construction of new roads, a reinvigorated national highway programme, or construction of affordable housing for the masses, which will generate jobs as well as demand for cement, steel and engineering equipment among others. Energy is another area crying out for attention. It will also be politically less controversial than getting foreign direct investment in retail.
The fiscal deficit is an elephant in the room. It seems highly unlikely that there will be significant progress towards fiscal discipline right now. There are already fears that the government will move towards populist policies, such as farm loans waivers, unsustainable subsidy regime, among others.
Vision for 2012
The vision for 2012 include: (1) India should become power surplus in the country; (2) inflation should get back to single digits; (3) India’s statistics should become more reliable; (4) strong on policy, with a pro-governance perspective; (5) apt implementation of economic policies; (6) major breakthrough in the global economic scenario with Euro-zone consensus.
Incredible India is the oldest civilization, with the largest democracy and the second-fastest growing economy. However, the realization of the country’s true potential is somehow escaping our grasp due to implementation and governance failures. These need to be tackled on an urgent footing.
Disclaimer: The views expressed in this article are the personal views of the author. They do not necessarily reflect the views of the Karvy Group or the organisation that the author represents.
Kiran Nanda
Corporate Economist
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