India: Opportunity in Adversity

By M H Ahssan

This opportunity, if seized in the right manner, can catapult the Indian economy into adifferent orbit altogether

The world has changed. Less than six months of painful realisation is all it took to push the gigantic American economy ( living beyond its means, off leveraged excesses) to its knees. As if on cue, the rest of the first world ( Japan, UK and Western Europe) caught the flu.

And the emerging market legends- in- the- making ( China, Brazil, India and Russia) tumbled like ninepins in a domino- like pattern.

Rather than recount what economies and markets have gone through, I want to make what sounds like a ridiculous claim. That this is India’s moment of truth. That this is actually an opportunity that we might not get for many decades again.

And that this opportunity, if seized in the right manner, can catapult the Indian economy into a different orbit altogether.

Surely you think I’m mad? You’re probably wrong. Here’s why India can use the global recession to become economically stronger precisely when other countries are floundering.

OPPORTUNITY ONE: LOW COMMODITY PRICES
After oil’s ignominious fall, the oil import bill ( at $ 150/ bpl this could have been 10 per cent of GDP) stands reduced by 70 per cent. Can you imagine the good that this does to our balance of payments problem? The related benefit is that the government’s finances, too, will dramatically improve as it saves on all the subsidies ( diesel, fertilisers, LPG) that would otherwise have to be ‘ monetised’ out of thin air.

Likewise, falling coal prices mean that large quantities of coking coal for steel making will come in cheaper.

Yes, steel prices are also down, but Indian steel makers are globally competitive. The point here is that two expensive commodity inputs that drive economic growth within India are now cheaper. And these are not the only two commodities caught in a downward spiral.

Name a commodity — copper, aluminium, zinc, urea, sulphur, corn or wheat — and you will see it’s fallen below all imaginable supports. I think it’s time to stimulate demand, so that India buys these commodities for its people, now that they are really cheap!

OPPORTUNITY TWO: CREATE DEMAND – SPEND CAREFULLY
It’s one thing to reduce excise duties on cars as we liberalise the economy. But it’s a totally different thing to have actions that result in trickle down benefits for a wider cross section of our working population. For example, what stops government from initiating mega projects ( such as MRTs/ LRTs/ bus corridors) in the public transportation space in our large cities? If there is a public- private partnership flavor to these projects, so much the better.

And why just public transport? Why not spend on drainage, roads, ports, water supply and public health projects– a little more effectively and quickly, if you please? Note that none of this has got anything to do with the global recession. But it can spur the order books of construction, capital goods, steel and cement companies beyond imagination.

As commodities and basic inputs are cheap today, much of this infrastructure will get created at historically low prices after several years of high prices. My tilt towards urban spending is well intentioned, driven solely by the realisation that it is our cities where much of the GDP growth is happening.

But that should not deter our government from spending equally, and indeed, more meaningfully on rural development.

Whether it is on irrigation, rural electrification or roads, this is the big chance to achieve more bang for every buck spent in improving rural India.

OPPORTUNITY THREE: NUDGE CONSUMPTION
There are at least 300 million ( or is it 500 million?) middle- class Indians out there willing to spend on a lifestyle that their forefathers studiously avoided.

But most of them are confused and frightened right now. And adopting safety tactics — avoiding all discretionary spends, like the plague. Once they see government spending picking up and driving their employers’ prospects, they’ll come out and spend more confidently, improving prospects for mega sectors like telecom, retail banking, insurance, FMCG, real estate, healthcare and automobiles.

Some of this boost is already in place with the government’s largesse on its own employees, via pay hikes. Or to marginalised farmers via the loan write- offs.

But surely eliminating the small and irritating tax loads on items of basic consumption would surely make them cheaper and spur demand? Tax reform, especially on the indirect taxes front, is still far from complete. For example, do you know that diesel and petrol still attract state- specific taxes well in excess of the mandated ceiling for ‘ declared’ goods, and that this is getting in the way of a meaningful nationally consistent VAT structure ?

OPPORTUNITY FOUR: GOVERNANCE & LEGISLATION
Encouraging long term capital formation is important, now that foreign capital is more reluctant. Infrastructure calls for long term funds, and the government should provide stronger incentives for savers to put their money into insurance, infra- bonds and ELSS products.

Tax is not the only area where government needs to usher in reforms. Labour, land and legal reforms are crying out for action.

These are monstrous and difficult challenges for any government to take up, especially during or after election season. The Mumbai terror attacks have brought into sharp focus the poor quality of government administration. Ironically enough, it is the terrorists who have galvanised public opinion towards better governance.

With a Union Budget that adds up to a sixth of our GDP, it’s not surprising that government is the only real hurdle to our progress. And with our socialist past, it shouldn’t take much for us to figure out that government spending and actions can today spur the Indian economy back to good health. In spite of the global recession.