Keeping faith

Despite lack of reforms and looming drought, the market is not ready to write off the India Growth story


By Mohan Sule

  The contrast could not be more striking. Even as China, the euro-zone countries, and the US Federal Reserve are scrambling to get their economies back in shape by cutting interest rates, putting together a bailout package, and easing liquidity, the attention of the UPA-II government is focused on survival by writing off debt of states ruled by its mercurial allies, putting on hold reforms like FDI in multi-brand retail, or dithering over reducing fuel subsidy. So any hopes of restoration of our fiscal health, which would ease pressure on interest rates and spur investment, have been dashed. No wonder the Reserve Bank of India refused to relent last fortnight. In fact, the first thing that our new president did was to order an austerity drive in his mansion. Perhaps locking up the grounds and shifting to a more modest abode would produce better results. The staff could be dispatched to rural regions for 100 days of guaranteed employment. Pranabda’s symbolic act also illustrates that our policy makers have still not shed the mindset of the 60s era, when industries making profit were viewed with suspicion instead of being encouraged due to their potential to create jobs, stringent curbs were placed on foreign exchange usage to conserve reserves instead of boosting exports by providing a nurturing business environment, and crackdown on public distribution outlets was considered necessary to ensure availability instead of removing mandatory quotas. In fact, some of the quick-fix solutions have proved to be counterproductive. Increasing the minimum support prices for agriculturists every year irrespective of surplus or deficit benefits the FMCG and consumer durables players but incorporates inflation in food prices.

The story is similar in other sectors like energy and fuel. In the absence of freedom to price electricity, investment in power generation is not a lucrative proposition, resulting in chronic outages: The national grid in the north tripped for two consecutive days end of last month allegedly due to excess withdrawal by some states. Many industrial users have circumvented the shortages by spending on captive generation, thereby locking up investment in an activity that is not their core business. Private refiners prefer to export rather than sell to the domestic market at administered prices, leaving PSU oil marketing companies to take on the subsidy and thereby making no dent on usage. Policy makers who cut their teeth in the socialist era need to realise that the solution to shortages in not capping demand but permitting producers to sell at competitive prices, which would boost investment and supply. The issue of putting the country’s finances in order is assuming urgency in view of the famine conditions in four states: Maharashtra, Gujarat, Karnataka, and Andhra Pradesh. The chorus for drought relief will widen the fiscal deficit. The surge in prices of cotton, sugar, edible oils, coffee and rice could blunt the positive effect of cooling crude oil due to tapering of global demand. A prominent casualty will be the banking sector. Not only will paucity of kharif crop stem any softening of interest rates and thereby hurt banks’ treasury income, there will be pressure to write off farm loans or make available cheap credit to farmers.

Besides India will be importing inflation if it buys food grains from overseas, whose prices will reflect the fall in the country’s output. To make matters worse, even the US is bracing for drought, which has triggered increase in prices of corn and livestocks. The rising prosperity in the emerging markets as reflected in demand for protein-rich food was the main contributor to the worldwide spurt in food prices last year. Principal adviser to the Planning Commission Pronab Sen has said rate cuts are not the remedy for India’s growth slowdown. Weak confidence in the economy, and not a shortage of credit, is hurting growth. Many Indian companies are sitting on piles of cash. Some are borrowing cheaply from international markets. Right now the government should be facilitating companies to carry on capital expenditure. What is needed is a stable climate with no surprises. The bizarre happening at Suzuki’s Manesar facility in Haryana is a setback. Perhaps this could be the fallout of the current turmoil going on in the country due to slowdown in economy, resulting in dwindling job opportunities and cooling wages on one hand and heating inflation due to inadequate supply of essentials on the other. Social programs of the government have increased demand for goods and services. The silver lining is the market is holding steady. The BSE Sensex is up 12% in the first seven months of 2012. What it is waiting for is decisive action by the government to break out.

Mohan Sule