Are we seeing the green shoots?
Oct 07 2013
It is with a lot of apprehension that I consume news these days. Besides the political drama and debate, everyone’s favourite job appears to be to thrash the Indian economy. Whether it’s downgrading by a ratings agency, release of economic data by the government or a bankers survey, they all spell doom and gloom. I feel a twinge of sympathy for the finance minister, who seems to be the only one trying to infuse a spark of brightness in the picture. Is that spark for real, or it is political posturing? Is there a fundamental problem in the fabric of the economy; is there a threat to long-term growth? Have the expectations from India been unrealistic?
As with most other emerging markets, there is no doubt that it’s a tough time for the economy. We all get emotional about currency devaluation. It hurts not just our pockets but also our sentiments to see the rupee slide. But the free fall of the currency has ended. The RBI governor got into a good start, radiating brisk purpose and optimism. He unveiled a short-term timetable on what he wants to do to ensure more dollar flows, accelerate the process of issuing new banking licences, expand banking services and tackle rising NPAs. I agree with his opinion that the slowing economy and its massive current account and fiscal deficits are not structural problems and “can all be fixed by means of modest reforms”.
Thus reforms are back on track. A virtuous cycle is about to begin, as the government seems set to bring the economy on track. The measures taken now will begin to pay off in some time. Tackling the fiscal deficit is the prime objective of the prime minister and the finance minister. They have made a commitment and they will stick to it. It is not going to balloon because the food security bill has been passed. The primary factor responsible for India’s current account deficit (CAD) to expand to record levels in the 2013 financial year to $88 billion (4.8 per cent of GDP) was the collapse of India’s exports growth. As global growth rates took a beating, exports growth fell to -1 per cent year on year in 2013. In FY2004-07, the rate of growth in exports was an average of 24 per cent. This has obviously had its impact on India’s current account deficit. But the tide is turning; India’s export climbed 13 per cent, thus helping trim trade deficit to $10.9 billion compared with $20 billion a few months ago. The global economic environment has started improving; hence today’s India is so much stronger than that of 1991.
The prospects of agricultural production (likely to increase GDP by 2 per cent) are good because of timely and well-distributed monsoon. This will also temper the high food inflation. Rural value addition in agriculture and infrastructure have started happening, which, in due course of time, will lead to rise in rural incomes and prove game changers for the economy. Inflation is fast reaching its comfort level of around 5 per cent. Even consumer price index (CPI) has started declining from its near double digit levels.
It is likely that the target of income tax collection will be met. Indirect tax has had a slow growth but the revenue department and the government are chasing companies for service tax to improve collections. Caution, of course, is advised in ensuring that the targets are genuine and companies do not face an injudicious demand, as this will increase the negative sentiment amongst investors. Another encouraging development is the goods and services tax (GST), which is almost ready for implementation.
Sale of the government’s stake in public-sector undertakings (PSUs) can further help fiscal deficit to be contained. The government has to look at divesting from its blue chip companies where it has large holdings. Another factor which any government, that takes on the mantle of ruling India has to look at, is to bring in the black economy. When few people pay taxes, public finances are hurt. The RBI has little or no control over a large segment of the economy, which makes it tough to fight inflation. The pace at which we are extending the reach of the financial systems has to be quickened. With advanced telecommunications and technology, this may be humungous, but not an impossible task to achieve; giving entrepreneurs access to capital and in turn bringing them into the taxpaying economy. If one could estimate the current size of India’s informal economy, the GDP rate would be much bigger and the current crisis will appear much smaller.
A recent McKinney global institute report that looks at the reality on the ground says that a majority of the 7,000 companies that are likely to cross $1 billion in sales by 2025 will come from countries such as China, India and Brazil. It is also interesting to note that although China’s growth rate has outgrown India’s over the past 20 years, the Indian stock market has performed much better than the Chinese counterpart during the same period.
Let us, therefore, focus on the positives. Whether driven by an economic or a political agenda, the government has got out of its complacency and seems to be on the right path. Times will change, but only if all stakeholders remain focused. Business in India has always been a long-term game. We now need to breathe some optimism into the economy, as there is merit in not being a cynic. Jodi Picoult had written, “There were two ways to be happy: improve your reality, or lower your expectations”. Let us each focus on improving our reality.
(The writer is CEO of KPMG India)