Crossroads Blues

Redressing investor-related concerns and restoring lustre to the India growth story will take a lot more time than UPA II has at its disposal 

N Chandra Mohan Delhi

La affaire Agusta Westland is only the latest of the big-ticket corruption scandals that have bogged down the UPA government in its second innings in power. Policy paralysis has been its defining feature, barring a brief flurry of economic reforms since last September to avoid a ratings downgrade. The biggest casualty has been the growth story. During UPA I, India was one of the world’s fastest growing economies, with GDP growth averaging 8.5 per cent per annum from 2004-05 to 2008-09. This pace has sharply slackened thereafter, with growth expected to plunge to 5 per cent this year.

True to form, the UPA government is in denial that growth has entered a downward spiral. Top policymakers insist that this 5 per cent number — put out by the Central Statistical Organisation (CSO) — does not take into account turning points in recent economic performance, with the reality closer to, say, 5.5 per cent. Such a low number is inconvenient as it adversely impacts tax revenues and makes budgetary aggregates like fiscal and revenue deficits higher than they would otherwise be as a share of nominal GDP at market prices. 

P Chidambaram, who is back as Union Finance Minister for the third time, truly has a challenge on his hands as he does not have the conjuncture of rapid growth that provided a favourable context for his earlier stints in the job. The faster pace of expansion during UPA I led to booming tax collections, which enabled him to fund flagship welfare schemes and adhere (not successfully) to the deficit reduction regime mandated by the FRBM Act, 2003. Now, with lower growth and less buoyant revenues, he has to bolster the UPA’s electoral chances in 2014 with giveaways while remaining fiscally responsible. 

No doubt, it is true that even with a 5 per cent growth rate, India is still growing faster than the most powerful economies like the recession-hit Eurozone, US and Japan. But the pace of expansion here is nose-diving as fresh investments have ground to a halt. The recent reforms haven’t dispelled the mood of negative pessimism that has gripped investors — domestic and foreign — thanks to the policy paralysis during the first three years of UPA II. Corporate investment intentions have dried up. Major projects to build steel factories, roads and power generation facilities have been stalled. 

Before stepping down as chairman of the $100 billion Tata Group, Ratan Tata, one of the most respected business leaders in the country, bemoaned the fact that investors are being driven away to outside geographies by the long delays in getting the requisite approvals, stretching for seven or eight years for a steel plant. This is also the fate of South Korea’s project to build a 12 million tonne steel plant in Jagatsinghpur district near the port town of Paradip in Orissa. The Memorandum of Understanding has lapsed and hasn’t been renewed. A protest movement has stalled the process of land acquisition. 

Investment as a share of GDP has shrunk to 35 per cent in 2011-12 when compared to the high of 38 per cent in 2007-08. Even this fiscal, industrial output shrank for the second consecutive month in December 2012, thanks to weak investment. The capital goods industry’s output fell annually by 0.9 per cent, more sharply than the index of industrial production. Infrastructure companies like Larsen and Toubro, BHEL and Hindustan Construction reported poor sales during October-December 2012 and “their order books showed little hope for a turnaround”, according to the International Herald Tribune.

Investments need to be financed by savings, domestic and foreign. Domestic savings have declined much sharply than domestic investments to decadal lows of 30.8 per cent of GDP in 2011-12 — largely due to a reduction in household savings in financial assets. In uncertain economic times, their preference is for splurging on physical assets like gold and real estate rather than at the bourses. The country imported 864 tonnes of this precious metal in 2012 despite higher import duties and sharp rise in prices according to the World Gold Council. Gold imports alone worked out to 3.5 per cent of GDP. 

The massive investment-savings gap in 2011-12 obviously implies foreign savings of 4.2 per cent of GDP are required to finance the investment requirement. Another term for this gap is the current account deficit that is the broadest measure of the country’s imbalance in goods and services trade with the rest of the world. Reserve Bank Governor Duvvuri Subbarao has cautioned that India is headed for the highest ever current account deficit in 2012-13. The rupee has sunk like a stone in this milieu. Worse, this gap is being financed by volatile capital flows instead of foreign direct investments. 

A 5 per cent growth rate may be bad for budgetary magnitudes but is a disaster for distributional outcomes. Policymakers should instead be worried that such a plunge devastates living standards and worsens poverty in the countryside. Slackening growth leads to an even greater widening of disparities between richer states and poorer states. Worrisome indeed is the prospect of such poor growth also being accompanied by widening disparities of income between the rich and poor. Unemployment is set to rise even further as the process of economic growth itself is jobless in nature.

This prognosis of jobless growth cannot be dismissed lightly as it bears the imprimatur of a recent occasional paper by the Institute of Applied Manpower Research, a think-tank of the Planning Commission. A 5 per cent growth rate is bound to translate into fewer opportunities for gainful employment for the people who shift to big cities for work. When organised sector employment is shrinking, the brunt of adjustment is borne by the low-paying unorganised sector — self-employment and casual odd jobbing — where work conditions are outside the pale of unionism or labour legislation.

It is true that even with a 5 per cent growth rate, India is still growing faster than the most powerful economies like the recession-hit Eurozone, US and Japan. But the pace of expansion here is nose-diving as fresh investments have ground to a halt

Salvaging the growth story clearly must be the priority of UPA II, above all else. Unfortunately, the policy space it has for doing the needful is narrow as its energies are diverted to fire-fighting a never-ending series of corruption scandals. Reviving the animal spirits of investors is easier said than done. Especially when they face tremendous difficulties of doing business here, which has led India Inc’s leading players to seek out opportunities abroad instead of at home. Foreign investors have their own tales of woe, some of whom, like Vodafone, the telecom major, confront an adversarial tax administration.

The recent economic reforms that allow Wal-Mart and Tesco into the economy and FDI in civil aviation will certainly help to improve the climate. But they are not enough. Multi-brand retail so far hasn’t attracted any big-ticket FDI. Prospective investors have a lot of clarifications to ask of policymakers, especially as various states have the option whether or not to allow FDI in this sector. Neither will the civil aviation sector fare any better as it is beset with high operating costs to attract more foreign players from West Asia, for instance. Redressing these investor-related concerns and restoring lustre to the India growth story takes a lot more time than UPA II has at its disposal.   

The writer is an economics and business commentator based in Delhi.