Let me start by trying to draw economic inferences by analyzing the
voting pattern in the recently held state elections in 4 states. Firstly, it was a vote by an angry voter
whose voice was loud and clear. Let’s see state-wise what worked and what
didn’t
Delhi – People voted for transparency in governance, against high prices
and perceived corruption. People wanted change and are willing to try out a new
party.
Rajasthan- The freebies in the shape of free distribution of medicines
couldn’t turn the strong anti-incumbency tide. Whether the scheme really didn’t
cut ice with people, whether it didn’t reach to all those intended or it wasn’t
a priority, it did establish that freebies don’t always fetch votes and it
augurs well for the economy if it’s true.
Madhya Pradesh and Chattisgarh – Infrastructure works and good
infrastructure gets votes. Good governance matters.
While these are inferences at a very preliminary level, I do wish to
highlight how the state of economy gets easily reflected in the voting pattern.
Now let’s discuss today’s topic – “the state of the economy – the way
forward” in the Indian context.
India’s GDP growth moderated in FY 2012 and
further in FY 2013, registering an increase of 6.2% and 5.0%, respectively.
This moderation has been carried over to the current fiscal with the
half-yearly growth (Apr-Sep) being 4.6%. Quarterly data indicates that GDP
growth in Quarter 1 (Q1) of 2013-14 at 4.4% (year-on-year), was the lowest
level over the previous 16 quarters (which was during Q4 of 2008-09, the peak
of the global financial crisis).
India’s growth story, especially since the
start of the 21stcentury has been remarkable, with an average growth
rate of more than 8 percent during the period FY2003 to FY2011, much above the
growth rate of other emerging and developing economies and this factor
should not be lost upon in the wake of recent crises. What are the reasons for
slump in growth?
One of the key reasons of the recent flat performance in India’s
GDP has been the deceleration in manufacturing. Manufacturing
growth has lagged GDP growth, often time by a substantial margin, over each of
the last 10 quarters. Consequently, the share of manufacturing in GDP has
witnessed a decline. Manufacturing was the only segment other than agriculture,
forestry and fishing to have witnessed a significant decline in its
contribution to the country’s GDP during this period. The Industrial activity, as a result,
has been subdued over the recent past, on account of weak manufacturing
output growth.
During the 2001-2011
period, trade deficit in manufacturing shot up from US$7.6 billion to US$ 160.9
billion (CAGR of 36%). On analyzing India’s merchandise exports during the
10 year period 2002-2013, it is observed that close to 50 per cent of the
exports constitute agriculture & allied products, petroleum products, and
gems & jewelry products. Most of these products in which India has a
substantial exports does not involve high end technology orientation. During the 2002-12 period, the import of manufactured goods by
India has grown faster than exports of manufactured goods.
Policy logjams
what’s worrisome is that the annual growth rate of
credit to infrastructure sector has dropped sharply from 2010-11 onwards as
compared to the last decade which can primarily be attributed to 2 factors- (i)
several policy logjams such as those relating to environment clearances, land
acquisition, fuel supply and (ii) there was a growing squeeze on fresh
sanctions by banks leading to a decline in investments.
I would like to talk about the specific example of the power sector. At present, owing to inadequate coal supply from Coal India Limited
(CIL), about 12,000 MW of existing power capacity (excluding State sector) is
not operative. Further, about 50,000 MW of capacity which is near completion or
under implementation will face coal shortages on completion. About 12,000 MW of
power projects which are under implementation by private sector are linked to
captive coal blocks, the captive mines allocated to such projects have been
inordinately delayed impacting the project viability. About 20,000 MW of gas
based power capacity has been seriously impacted by non-availability of gas. It
is estimated that total investments of about Rs 400,000 crores are impacted on
account of current affected capacity of 78,500 MW (which is not producing at
the desired PLF due to fuel issues). Generation loss on account of this is
estimated at about Rs 42,000 crore (120 billion units @ Rs 3.50 per unit) which
works out to about 0.45% of Gross Domestic Product (GDP). In case remedial
measures for addressing the coal and gas deficit are not urgently initiated,
the affected capacity will increase substantially as projects currently under
implementation get completed.
International Trade & Current Account
Deficit
Recent trends in global exports would highlight
the increasing importance of India as a trading nation. However, the country’s export growth has not
kept pace with its growth in imports, resulting in expanding trade deficit.
Trade deficit trebled from US$ 64 billion in 2006-07 to US$ 192 billion in
2012-13. The trade deficit as a percent of exports, which was 51%
in 2006-07, increased to 64% in the year 2012-13.
While this scenario is partly because
of imports of coal, oil and gold, the challenge is to make these items
contribute smaller proportion of the country’s overall trade. High oil imports
would remain considering that the current level of per capita oil consumption
(at 3 bbl/day per 1000 persons) is among the lowest – given the annual increase
in India’s population of 10 million, even to maintain this current level
remains a challenge.
India’s share in global services exports has risen from
1% in 2000, to 3.2% in 2012, Nonetheless, growth in
India’s services trade has not been as dynamic as deficits in merchandise trade
during the 2006-07 to 2012-13 period and could only partially compensate the
growing deficit. During 2008-09, the surplus in
services trade catered nearly 46% of trade deficit. This has come down to 34%
in 2012-13.
The slow down sentiments across the world, and
within the domestic economy have catered to decline in capital inflows
(both FDI and FII). While FIIs found India less attractive due to slowing down
of economy, FDI inflows were hampered due to mixed policy signals. As the
capital account could not generate surplus fully to compensate the CAD, there
has been decrease in forex reserves both in 2011-12 and 2012-13. Sizeable
portfolio capital outflows and large external financing requirements triggered
downward pressures on the Rupee from late May. This phenomenon was not
India-specific and most emerging markets with large current account deficit
such as India, Indonesia, South Africa, Brazil witnessing the steepest fall in
their currencies. Though the currency
depreciation makes our exports competitive, it highly impacts our
import bill also, especially oil imports which accounts for one-third of our
total imports. Also, non-oil imports, especially, precious and semi-precious
stones and metals (gold and silver), chemicals and capital goods add to the
cost of manufacturing and thereby nullify the benefits gained in the export
front. Import costs of oil and gas too shoots up, but since it is invariably
not passed on to domestic consumers, the level of subsidies and with it the
size of the fiscal deficit is likely to shoot up
Rupee's depreciation has a direct link with
escalating non-Plan expenditure, two biggest components of which are interest
payments and subsidies. External debt servicing cost in terms of the rupee, due
to the latter's depreciation, shoots up, putting a strain on the exchequer.
According to estimates, 10% currency depreciation brings down growth by at
least 1%, which means further GDP contraction is imminent if corrective
measures are not taken to boost the economy.
Immediate policy initiatives
The government and RBI stepped-up policy actions
and some calming in investor sentiment provided support in the last few months. The
measures include: liberalization of FDI in various sectors, enhanced FII limits in government and corporate bonds
and relaxed ECB norms for NBFCs. RBI also announced two concessional swap facilities,
under which banks can swap dollars raised through foreign currency non-resident
(FCNR) deposits, and overseas borrowings, with the RBI. To contain the
outflows, both in current account and capital account, a set of measures were
taken. Financing for gold imports was curtailed, and gold import tariffs hiked.
In mid-August, the amount domestic private sector firms can invest overseas was
cut from 400% to 100% of their net worth (later rolled back to 400%).
Though there are incipient signs of
recovery, coupled with good monsoon, signs of rupees stability and decreasing
CAD. While the CAD has come down from a peak of 4.8% to 1.5%, it is expected to
be around 3% for the year as above. Fiscal deficit has also narrowed and the
Government is keen it should not go beyond 4.8% during the year.
Medium
terms and long term measures
First and foremost - we need a stable central government post 2014 elections - a government capable of taking decisions even if hard ones and has a vision for the next decade. A weak coalition government would be recipe for economics disaster as the governance is likely to be marred by indecision and weak populist decisions which may not augur well in the long run .
However, most of these are short term
measures and what’s required are series of medium terms and long term measures
to ensure a robust and consistently high level of growth. Let’s look at the
areas requiring focus:
Is there a need to
relook welfare programmes?
India has made remarkable progress in reducing the absolute poverty and
those below poverty line during the last two decades. The average per capita
income has gone up and so have been the savings. In order to ensure more
equitable growth process, Government has launched a number of welfare
programmes. Mahatma Gandhi National Rural Employment Guarantee Assistance Programme
(MGNREGA) provides a minimum of 100 days of assured employment to any
individual seeking it. Likewise, Government provides food subsidy, ranging from
56% to 90% on foodgrains under the Targeted Public Distribution System (TPDS)
to about 120 million families. Subsidy on diesel and Petrol has been in
existence for some time now and so are fertilizer subsidies which incidentally
are extended to fertilizer companies at source and not to the ultimate farmers.
The moot question is – whether subsidies extended under these schemes are
reaching the intended beneficiaries and whether they are leading to any positive
impact on the economy. For instance, MGNREGA is indeed a laudable scheme in terms
of its intentions to create employment but the unintended consequences of
shortage of labour, hiking up the cost of production especially in agriculture
and lack of conversion of this employment into productive assets in a cause of
worry.
Let’s look at the subsidy provision in the Budget 2013-14:
Fertilizer subsidy – Rs 65,971 crs
Food subsidy – Rs 90,000 crs
Petroleum subsidy – Rs 65,000 crs
MGNERGA – Rs 33,000 crs
Add to these major outlays, the subsidy burden on account of other
schemes such as National social assistance program, Rashtriya Swasthya Bima
Yojana etc and the total outlay on account of such subsidies per annum works
out to about Rs 300,000 crs p.a and the capital formation in the country is
deprived of this much amount. Ironically, the annual disinvestment target is in
the range of Rs 30-35000 crores which is about 10% of these recurring schemes
year after year. I personally feel a time has come to take stock of these
schemes and decide what’s good for the nation in the long run and not just
about short term gains.
Quality of
infrastructure –
There’s an urgent
need to clear various bottlenecks which are coming in the way of faster and
sustained infrastructure development. The Cabinet Committee on Investment (CCI)
constituted under the chairmanship of Prime Minister monitors the progress of stalled
projects. As on 11th December 2013, there were a total of 394
stalled projects under review by the CCI (each with an investment of Rs 250 crs
or more) with a total investment of Rs 17.68 lakh crores in sectors like Power,
Steel, Road, Shipping, Coal, mining and petroleum. It has, in the last six
months, paved way for 122 projects with an investment of Rs 4.01 lakh crores. Inter-ministerial
coordination has to improve. Ways have to be found to pave way for these
stalled projects so that cost over-runs could be contained and all the funds
already invested could be put into use.
Increasing
manufacturing activity
As already pointed above, losing out on manufacturing implies not only
lower employment opportunities but also increasing imports as most of the manufacturing
demands are of inelastic nature. There is an urgent need to increase
manufacturing by providing all that what it takes to get the competitive
advantage. MSME sector needs to be encouraged and industrial clusters are a
step in the right direction. Government of India has come out with a Credit
Guarantee scheme for MSME sector which will ensure smooth flow of credit from
banks to the sector.
An obvious blame is often passed on the manufacturing sector and its lack
of competitiveness as the reason for slowdown in growth. However one needs to see
the co-relation between money faceting & GDP growth. The investment rate of
38% in 2009-10 with an ICOR of 4:1 implied a growth rate of 9.5% during the
year. However, the investment rate which has since fallen and is around 30-32%
in 2012-13 should have implied a growth rate of 7.5% but the actual rate is
around 5% implying that slow-down in growth rate is much stronger than slowdown
in industrial growth.
Vocational training & Skill development– Along with the increase in the manufacturing activity, there is an
urgent need to encourage vocational skills and training in a sustained and
planned manner. There is thinking that one needs more skill personal in
vocational trades rather than low or poorly employable engineers. The cabinet
has recently approved a Credit Guarantee Scheme for education & skill
development. Once operational, this will ensure sufficient credit for all
students seeking skill development.
Better business
regulations – Can we have a "SARAL" kind of model for business clearance which would
be a single point clearance rather than going to 42-50 levels of clearances.
The need to ensure proper transparency in approvals will not only cut down time
and costs but will also help minimize corruption.
Better and deeper financial
system –
Finance is not just about making profit availability of credit, need to
encourage savings which is a function of returns, ability to borrow at
affordable rates are some issues which are required to be looked into.
Financial system should not require constraint subsidization.
RBI in order to
create an enabling environment is concentrating on the following five
development pillars:
(i)
Monetary policy framework – RBI in order to set up a clear agenda for monetary policy just one
the lines of what Sukhamoy Chakroborty report did in 1980s has appointed a
Committee under the chairmanship of Mr. Urjit Patel and report is expected by
this month end.
(ii)
Expanding banking infrastructure – RBI has relaxed norms in order to
create better infrastructure facilities among the bank including norms for
branch opening and so on.
(iii) Broader and deepen financial markets – As per CRISIL’s latest estimates, a
total of Rs 26.3 lakh crores of investment is needed which would comprise of Rs
8.1 lakh crs in equity & Rs 18.3 lakhs crs in Debts. Power, Roads, Railways and Urban infra would
account for 85% of this overall investment. While Rupee debts from Banks will
be Rs 8.7 lakhs crs and ECB of Rs 2.6 lakh crs, Debt from Bond market are
expected at Rs 7 lakh crs ie 40%.
(iv) Access to finance especially to MSME
and other needy sectors in the informal, unorganized, rural and small scale
sectors. The use of technology needs to be encouraged. Financial Inclusion and
new inclusion methods including mobile banking, mobile valets, and the Business
Correspondents are some of the steps initiated to create a frugal and
trustworthy Indian model of Financial Inclusions. A Committee has been
constituted under the chair of Dr. Nachiket Mor which would submit its report
shortly on Financial Inclusion.
(v)
Create systems to deal with corporate and financial stress – the total GNPA (gross non performing assets)
at the end of Sept 2013 for all Public Sector Banks was Rs 2.03 lakh crs or
4.82 % of the total credit. Out of these, a total of 9330 accounts (each with
an outstanding of Rs 1 cr or more), in terms of ABC analysis had Rs 1.09 lakh
crs in them and need to be concentrated upon.
The emphasis would be on early detection of the stress and “deal with it
early” rather than ignoring and hoping to tide over at the same time. There is a
need to act strongly against willful and un-cooperative defaulters.
What’s required is an
all out efforts to achieve and maintain an annual GDP growth rate of 8% per
annum consistently for the coming decade. This would mean an increase in the per
capita income from the present $ 500 per annum to about $ 8000-10000 by 2025
making India as middle income country.
It is, as RBI
Governor says, a sober recognition of a healthier, better and educated India in
coming years since ‘catching up’ is always easy than keeping up with Jones.
The idea of conflict of interest has a kaleidoscopic
quality. I guess while most of us do
know the meaning of conflict of interest, we normally choose to keep quiet or
look the other way (“hame kya” or “why should we get into this” mentality). 
Conflict of interest refers to a situation in which a
decision a person takes has the power of enriching him or his relatives or
friends and is because of the position he holds or can influence upon. It
implies a person can’t take a rational decision based on objective criterion,
motivated as he is to nurture his personal interests. A conflict of interest
doesn’t always mean the decision-maker is guilty of financial impropriety. But
it almost always raises the question whether the decision he took had the
impulse personal gains driving him. In other words, the issue of conflict of
interest is pertinent as its absence helps away situations conducive to
corruption. The impulse to earn money is human. But this impulse becomes
illegitimate when you exercise the power vested in you to promote the larger
good, to further your interests. 
Media interests in the subject suggest that we are treating
it as a new phenomenon. The issue has never really troubled anyone in the power
corridors of Delhi. Although questions have arisen from time to time about the
curious overlap between the personal and the public, the ruling elite whether
political or bureaucratic, has always managed to sidestep controversy while
reaping and encashing their power and influence in this game of conflict of
interest. 
