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From
Tehelka Magazine, Vol 9, Issue 23, Dated 09 June 2012 |
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| CURRENT AFFAIRS |
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MANDARIN JUICE |
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Is India’s Growth Story Over?
The economic engine is fast running out of steam as potential investors, both Indian and foreign, look for greener pastures
By Nitin Desai
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Charts: Ashish Naorem |
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THE INDIA growth story is fast turning into a tragic tale of lost opportunity. The mood has changed from boom to gloom. A fragile and crisis-prone global financial system is the government’s favourite defence. The commentariat here and abroad is talking about the paralysis in decision-making and rampant corruption as scams break out on a weekly basis. Business leaders are running scared from minister to minister, trying to get them to act or, as often, undo the effects of ill-considered actions.
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Photo: Vijay Pandey |
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Nor is the corporate sector free of blame in this growing pessimism in global circles about India as an investment destination. The recent high-profile frauds in some MNCs, the sorry experience of foreign partners in many a recent takeover and the growing friction between foreign and Indian partners are also factors that worry potential investors.
The government believes things are not so bad and keeps trotting out figures like 24 percent growth in exports during this fiscal year, the flow of FDI — which was as much as $46 billion — the fact that GDP growth at 7 percent is still very high by global standards, and so on. All this is very well, but the fact is that the picture looks much gloomier when you look at the monthly and quarterly trends and how they have been behaving in recent months. The latest data released on 31 May show that GDP growth in the fourth quarter slowed down to 5.3 percent.
The charts (above) show how GDP growth is slowing down and fixed investment growth has slowed down even more. Industrial production has stagnated badly with a decline in mining, a measly 2.9 percent growth in manufacturing and a sharp fall in capital goods production. Exports grew rapidly till about October 2011, but since then the growth rate has dropped sharply, despite the supposed advantage of a falling rupee. FDI flows were high at the beginning of the fiscal year, but are slowing down.
In fact, we have not yet seen the full fallout of the thoroughly short-sighted decisions in the Union Budget that would greatly increase the discretionary powers of a notoriously corrupt Income Tax department to question the complex modalities of FDI. One can add to this list of danger signals; the persistence of inflation despite a good harvest and the precipitate fall in the value of the rupee, for instance.
The growth engine is running out of juice and losing speed rapidly, while the driver in charge tells us that the average speed over the previous hour is not bad, not seeing that the engine is threatening to come to a grinding halt.
The big risk factor is on the external economy front. The current account deficit is growing, and the sources of finance that we have relied on like foreign investment and commercial borrowings are coming down, not just because of disturbed conditions in Europe but also because of growing global concerns about the India growth story. We need private foreign investments of the order of $50-75 billion for a viable balance of payments. If these dry up, we will have to drastically revise our growth ambitions as we will be forced into emergency measures to preserve our solvency.
It is not just growth in the short term that is in danger. What is much more alarming is the erosion in the base for future growth and employment creation. Look at what is happening to investment and the disastrously poor performance of the capital goods sector. Indian corporates are already putting projects on the backburner and looking more to overseas opportunities. The Twelfth Plan, which has just started, estimates $100 billion of private investment in infrastructure. Neither that nor the equal amount of public investment that is needed is anywhere in sight.
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The key lies in restoring investor confidence — of the retail investor, of corporate boards and of foreign investors |
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The key lies in restoring investor confidence in every sense — of the retail investor in the stock market, of corporate boards and of foreign investors. This is at least as important as the prudential goal of restoring fiscal balance and monetary discipline. Fiscal prudence that cuts waste and controls mindless subsidies is good. But choices have to be made, for instance, on interest rates or on public spending on infrastructure, education and health. And in doing this, macroeconomic prudence must be tempered by the absolutely urgent need to revive the investment boom that gave us high growth in the recent past.
THE OTHER thing that we must do is to recognise the potential for effective governance in several states, and give them space to innovate and deliver infrastructure and public services. The Centre’s interventions in policies on infrastructure, education and health almost always lead to controversy and delay action. The weak Centre can help by focussing its efforts on measures like GST, agricultural marketing reform and improving logistical links between states.
The onus lies with the UPA government at the Centre. They may well lose the next election, and lavishing money on ill-considered and poorly implemented populist schemes will not avert this. However, they may be remembered kindly, and who knows may even win the election, if they leave behind a robust economy with entrepreneurs eager to invest and grow and states energised and empowered to deliver public support for development with the same élan that we saw in the glory days of planning under Jawaharlal Nehru.
If we fail to do this, India’s growth story will end on the crossroads of conservative finance and dysfunctional politics.
The views expressed in this column are the writer’s own
letters@tehelka.com
An eminent economist, the author is a former Planning Commission member and has worked as Chief Economic Adviser in the Finance Ministry. He was also the Under-Secretary-General for Economic and Social Affairs of the UN. This is the first in a monthly series |
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