India is going through rough turbulent times. Growth is tapering off. India is expected to grow at around 5% this year. This is a far cry of the days of 9% growth. India was not too long ago the darling of FIIs (Financial Institutional Investors). Europe was beleaguered with the sovereign debt crisis and USA was struggling with the aftermath of the subprime crisis. Japan’s stock markets had not given any returns for nearly twenty years. The FIIs chase growth and money poured into the BRICS countries (Brazil, Russia, India, China and South Africa). But the story is very different today. America is showing signs of recovery and FIIs are pulling out of India to pick companies at cheaper prices back in America. The slowing down of the economy from 9% to 5 % has made this decision very easy for them.
There is policy paralysis in the country. This has been a chant for the past couple of years and with the next general elections being held anytime between the end of this year to April 2014, nobody expects any big bang measures being taken to boost the economy and revive the engine of growth and exports which have been declining during the recent past. The UPA II has been plagued by corruption scandals of scale and magnitude not seen in the history of this country and the very top brass of the government bore the brunt of public anger when these corruption scandals came to light. To make matters worse, there was high inflation in the country. The last 3-4 years has seen double digit CPI (Consumer Price Index) and this retail inflation still hovers at more than 9 %.
This is despite numerous rate hikes by the Reserve Bank of India – It raised the repo rates (rates at which scheduled commercial banks borrow from RBI using government of India securities as collateral, over and above the SLR limit (Statutory Liquidity ratio) holdings) and the reverse repo rates ( rates at which banks park their excess surplus with RBI). It also hiked the CRR (Cash Reserve Ratio) i.e. the amount of cash which a scheduled commercial bank holds in its current account with RBI. This is a percentage of the NDTL (Net Demand and Time Liabilities) of the scheduled commercial banks. This currently stands at 4% while the repo rate stands at 7.25% and the reverse repo rate stands at 6.25%.
These rates are after the RBI lowered rates when inflation was seen to be moderating after a series of rate hikes. But there is a flaw in this logic. India is witnessing cost push inflation so what really needs to be done is that Government builds cold storage and transportation facilities to ease the supply bottlenecks which in itself could provide a big relief. According to a Yahoo Finance news, India wastes fruits which is equivalent to what Australia produces.
Similarly, wastage in vegetables and other food articles is very high. Can you think of where the prices will dip if storage and transportation are given the right attention and push? The Government could think of the PPP model (public private partnership). India exports mangoes, oranges etc. The sound of dollars pouring into the country will surely be very sweet music to all if we could build the infrastructure to augment the produce. On top of it all was the Government’s MGNREGA scheme (Mahatma Gandhi National Rural Employment Guarantee Scheme). This scheme is a total disaster. It is like throwing money from helicopters.
Cheap labour is a thing of the past. Factories in Kolkata and Howrah face steep increases in wages and even at higher wages there is a shortage of skilled labour. Increased money in the hands of the public without GDP growth and capacity building is both undesirable and dangerous. The MGNREGA scheme has not built ports and highways and infrastructure. All it can boast of is kuccha roads which get washed away with the monsoons. This leads to a sense of complacency and does not inculcate the spirit of hard work and entrepreneurship if 100 days wages are given without showing the infrastructure development. The stress should not be on wages for hundred days but infrastructure creation for each panchayat, each village, each tehsil and each district. Jobs creation should be a corollary to infrastructure development.
Yet the Government in all its wisdom continued with the MGNREGA scheme and did nothing to build cold storage and transportation and infrastructure. They are on the other hand coming out with another political gimmick, which is the Food Security Bill. The Food Security Bill is something which the UPA II is pushing and is racing against time to implement before the next general elections. Under this scheme, nearly two thirds of the Indian population would be entitled to cereals at highly subsidized rates. And who do you think will pay for the Food Security Bill which is estimated to cost the exchequer Rs 2 lac crore every year.
The middle class of course! With the fiscal deficit estimated to touch a high of nearly 6.1% of the GDP, there is no way that the country can afford the Food Security Bill. This is the same government which a couple of years back said that Rs 35/- a day was enough to sustain oneself. The same UPA II is now moving heaven and earth to introduce the Food Security Bill. Maybe we should have elections every second year instead of five years !!!!. To top it all, research has shown that majority of the population has moved to proteins with limited cereal intake. Not only that my domestic help reports that wheat and rice being sold in the ration shops is not edible.
Not only that, almost all infrastructure projects is stalled due to one reason or the other. The rupee is in a tailspin. It touched a high of Rs 61.21 and the authorities were very concerned. So did the Government scrap the Food Security Bill- Nope! the NREGA- nope again !!!, invite PPP for cold storage and transportation facilities ?? Nope again !!
They chose instead to hike limits to bring in Foreign Direct Investment (FDI). In its July 16th 2013 meeting , the Government of India chose to hike FDI limits across sectors. This was a desperate bid to bring in dollars. The rupee is in a precarious position. It touched an all time high of Rs 61.21 to a dollar. This means an ever widening current account deficit (CAD). Oil will become costlier as we pay dollars to import oil and petrol prices have already jumped up. The curbs on gold import and hikes in import duty did little to ease the situation.
FII money is considered hot money- It comes and goes as FIIs chase growth and macroeconomic fundamentals across the globe. But not FDI (Foreign Direct Investment). FDI is considered a stable long term source of foreign investment. FDI is investment by a foreign company in an Indian company with a view to run it for a long period of time. FDI means being invested for the long term with an intent to be involved in the day to day operations of the Company.
What is required as of now is to build up the manufacturing sector and build up the agricultural sector. China clocked impressive 10% GDP growth year after year on account of its emphasis on manufacturing which became vibrant. India’s manufacturing sector on the other hand was a different dismal story. India’s manufacturing sector is dwindling and losing its sheen. Agriculture in India needs to be strengthened as it is the livelihood of more than half the population. Service sector in India is vibrant but we export software services so recession in Europe and USA is bound to affect this sector.
Sometime back BHEL (Bharat Heavy Electrical Limited), Crompton Greaves and Birlas approached our Prime Minister Dr. Manmohan Singh. China was exporting goods notably switchgears of superior quality and much cheaper prices so they feared they would not be able to meet the competition. So they requested Dr. Manmohan Singh to impose duty on the Chinese imports and a 15% duty was imposed. While this may work in the short term what needs to be done is to bring in superior technology so that our manufacturing sector thrives and becomes competitive. Imposing duties can at best be a short term protection measure.
Similarly in the power sector, the Chinese have developed a gas based model of substations. These substations will be imported into India and set up. This will lead to elimination of the now existing methods of production and orders will dry up for a lot of contractors and sub contractors.
This shows India lags far behind in technology and research and development. Brazil which is an emerging economy like ours started to mix ethanol with petrol to the extent of 5%, forty years back. Today there are at more than 15%-20% threshold levels. India does not mix ethanol at all. They debated this for more than 60 years and this June they decided to mix ethanol with petrol to contain our crude oil bill thereby saving precious dollars. We need fuel efficient engines.
Why cannot the Government not put emphasis on education and skills development? This would lead to an educated and skilled workforce who would be able to earn its livelihood and not depend on the MGNREGAs and the Food Security Bills of the world which does not add to the productive capacity of the population, to say the least.
The government could put emphasis on water harvesting. Gujarat has done some exemplary work in this arena. This would lead to bumper harvests and good harvests besides bring down cost push inflation, help bring in dollars via exports.
The Government had earlier this year allowed 51% FDI in multi brand retail. But not a single company has set shop till date in India. In the present form, this FDI entails a specified percentage of the procurement being made locally and also back end infrastructure developments like cold storage, transportation etc. Since, not a single company ventured into India, the Government is mulling tweaking these very provisions which were supposed to help protect the local farmers and help the economy.
IKEA the furniture giant had shown keen interest in setting up shop in India but is yet to roll out its first store. In the very week of FDI norms being liberalized, two giants- POSCO and Arcelor Mittal have announced that they will not be going ahead with setting up of steel plants in Odisha and Karnataka respectively. They waited and waited patiently for land and for captive iron ore mining blocks but when nothing moved they decided to exit. Arcelor Mittal headed by Lakshmi Mittal was to set up a plant worth Rs 50,000 crore. Posco was supposed to set up a plant worth Rs 30,000/- crore. Imagine the jobs creation in these companies and in ancillary units and further demand of goods and services being created by employees of these giants. It is heart breaking to calculate how much percentage points would we have added to GDP growth which is now lost and which in turn will influence industries coming into India.
Today, on 22nd July 2012, newspapers are reporting that Zuari has shelved a Rs 5,000 crore project in Karnataka on land acquisition issues. On the ease of doing business index, India ranks very low (132nd on a scale of 185 countries) and on the corruption index, India ranks extremely high. These need to be corrected if we hope to attract foreign capital.
What is required is lubricating the growth engine. Equipping our workforce with skills and education. GDP should grow on the shoulders of services and manufacturing and agriculture. We cannot have an either or option. FDI and FII will follow GDP growth. Dollars will pour in if there is prosperity in the country. Rupee will stabilize. What is needed is all inclusive growth.
