Foreign investors do not have to wait for five years to express their views on the governance of a country’s economy
By Mohan Sule
The question that is puzzling investors is the sudden unraveling of the India Growth Story. Nothing illustrates India’s demotion than the delinking from China and its clubbing with commodity producers and regional Asian players for appropriate comparison. Growth has nearly halved from more than 9% six years ago even as wholesale price index climbed to 7.14% last fiscal. The current account deficit constituting capital inflows and outflows is estimated to have risen five times to 5% of GDP in the meanwhile. The rupee is down over 25% in this period. Despite the perception to the contrary, the deterioration was not sudden. There were warning signs. Though off its peak, crude continued to remain at a higher level despite post 2008 global slowdown due to the strong appetite of China. The partial decontrol of fuel in June 2010 was too little and too late as the subsidy burden of PSU oil refiners and marketers had ballooned during the US$140-a-barrel days a couple of years ago. However, the stock market gaining in 20 months more than half the value lost to a low of 8,160.40 on 9 March 2009 lulled policy makers as well as investors into complacency. In fact, the benchmark index was tantalizingly poised to regain its lost glory of touching 21,000 reached in January 2008 by closing above 20,000 on 27 May 2013 as the WPI made up mainly of manufactured products and commodities hit a 43-month low of 4.7%. The development should have been viewed as an outcome of slowing industry demand rather than taming of ground-level inflation. The consumer price index composed mainly of food grains continued to surge.
With FMCG, pharmaceutical and tech companies constituting nearly 35% of the weight of the broad market index, the pain of infrastructure companies remained hidden. Companies’ problems in redeeming their borrowings in foreign currencies should have been red flags and so also the increasing number of mid- and small-rung promoters pledging their shares to repay debt or source working capital. While the US Federal Reserve is becoming more powerful than the president of the US, capable of moving markets around the world with a hint about the outlook, the Reserve Bank of India is proving to be a toothless tiger. Tightening of liquidity and making money dearer have failed to impress currency speculators. The message of the market is blunt: the fault line originates in New Delhi rather than at Mint Street and the solution, too, has to be in fiscal policies rather than monetary tools. The government has made matters worse by imposing restrictions on certain overseas transactions and raised tariffs on silly imports such as flat TV screens to conserve forex reserves. The market is viewing these steps as an attempt to set back the clock on the economy to pre-reforms era.
Under pressure from Left coalition partners, the UPA-I dismantled the Ministry of Divestment, set up by the NDA government. The 2003-2007 bull-run could have fetched attractive pricing. When PSU shares were once again put on the block in the second term in the fiscal ended March 2009 (FY2009), with the objective to divert proceeds to social causes, the market was reeling from the post Lehman Brothers liquidity crisis. The divestment target has not been met in any of the years since then. In fact, unnecessary projects were launched just to provide employment under the rural employment guarantee plan launched in 2005. The outlay on this project increased 3.5 times by FY 2011 from US $2.5 billion in the first full fiscal of its launch five years ago. The 12th Five-Year Plan commencing in FY 2012 changed the profile of the scheme. Every applicant has to be provided a job within 15 days or put on unemployment wages. The result? Slump in growth but rise in rural wages, boosting inflation. If the fattening top lines of the of FMCG, consumer goods and automobile companies did contribute to GDP’s growth, then the giveaway too participated in the fiscal deficit, which managed to moderate a bit due to the partial withdrawal of petro-product subsidies. A costly food security blanket, without clarity on its financing, has been spread open. Using reforms to perpetuate the status quo of making a select few richer (the 2G sprectrum and coal-block allotment scams) and rising bad loans of nationalised banks are examples of how crony capitalism has taken a toll on the economy. The India Shining branding earlier and the Incredible India story now have been aimed at foreigners. So why moan when they are not buying into the growth fable any more? Domestic constituents can be appeased by subsidies but what matters to overseas investors is the ease of maximization of return. Else, they do not have to wait for five years to vote their disapproval.
By Mohan Sule
The question that is puzzling investors is the sudden unraveling of the India Growth Story. Nothing illustrates India’s demotion than the delinking from China and its clubbing with commodity producers and regional Asian players for appropriate comparison. Growth has nearly halved from more than 9% six years ago even as wholesale price index climbed to 7.14% last fiscal. The current account deficit constituting capital inflows and outflows is estimated to have risen five times to 5% of GDP in the meanwhile. The rupee is down over 25% in this period. Despite the perception to the contrary, the deterioration was not sudden. There were warning signs. Though off its peak, crude continued to remain at a higher level despite post 2008 global slowdown due to the strong appetite of China. The partial decontrol of fuel in June 2010 was too little and too late as the subsidy burden of PSU oil refiners and marketers had ballooned during the US$140-a-barrel days a couple of years ago. However, the stock market gaining in 20 months more than half the value lost to a low of 8,160.40 on 9 March 2009 lulled policy makers as well as investors into complacency. In fact, the benchmark index was tantalizingly poised to regain its lost glory of touching 21,000 reached in January 2008 by closing above 20,000 on 27 May 2013 as the WPI made up mainly of manufactured products and commodities hit a 43-month low of 4.7%. The development should have been viewed as an outcome of slowing industry demand rather than taming of ground-level inflation. The consumer price index composed mainly of food grains continued to surge.
With FMCG, pharmaceutical and tech companies constituting nearly 35% of the weight of the broad market index, the pain of infrastructure companies remained hidden. Companies’ problems in redeeming their borrowings in foreign currencies should have been red flags and so also the increasing number of mid- and small-rung promoters pledging their shares to repay debt or source working capital. While the US Federal Reserve is becoming more powerful than the president of the US, capable of moving markets around the world with a hint about the outlook, the Reserve Bank of India is proving to be a toothless tiger. Tightening of liquidity and making money dearer have failed to impress currency speculators. The message of the market is blunt: the fault line originates in New Delhi rather than at Mint Street and the solution, too, has to be in fiscal policies rather than monetary tools. The government has made matters worse by imposing restrictions on certain overseas transactions and raised tariffs on silly imports such as flat TV screens to conserve forex reserves. The market is viewing these steps as an attempt to set back the clock on the economy to pre-reforms era.
Under pressure from Left coalition partners, the UPA-I dismantled the Ministry of Divestment, set up by the NDA government. The 2003-2007 bull-run could have fetched attractive pricing. When PSU shares were once again put on the block in the second term in the fiscal ended March 2009 (FY2009), with the objective to divert proceeds to social causes, the market was reeling from the post Lehman Brothers liquidity crisis. The divestment target has not been met in any of the years since then. In fact, unnecessary projects were launched just to provide employment under the rural employment guarantee plan launched in 2005. The outlay on this project increased 3.5 times by FY 2011 from US $2.5 billion in the first full fiscal of its launch five years ago. The 12th Five-Year Plan commencing in FY 2012 changed the profile of the scheme. Every applicant has to be provided a job within 15 days or put on unemployment wages. The result? Slump in growth but rise in rural wages, boosting inflation. If the fattening top lines of the of FMCG, consumer goods and automobile companies did contribute to GDP’s growth, then the giveaway too participated in the fiscal deficit, which managed to moderate a bit due to the partial withdrawal of petro-product subsidies. A costly food security blanket, without clarity on its financing, has been spread open. Using reforms to perpetuate the status quo of making a select few richer (the 2G sprectrum and coal-block allotment scams) and rising bad loans of nationalised banks are examples of how crony capitalism has taken a toll on the economy. The India Shining branding earlier and the Incredible India story now have been aimed at foreigners. So why moan when they are not buying into the growth fable any more? Domestic constituents can be appeased by subsidies but what matters to overseas investors is the ease of maximization of return. Else, they do not have to wait for five years to vote their disapproval.
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