While we wait for Godot!
Aug 27 2013
As our inflation rises, rupee plunges, current account defi-cit widens, GDP growth rate heads south, stock markets tumble and onion prices skyrocket, we Indians are busy creating storms in teacups, cursing the government, investigating scams and pointing fingers as we wait for a Godot. We do not know if that Godot is Narendra Modi, Rahul Gandhi, P Chidambaram or Raghuram Rajan.
An avalanche of policy prescriptions is pouring in from “economists without frontiers.” They range from those who have won Nobel prizes to those who wish they had. There is one problem with this flood of advices. Even those economists, who have the advantage of looking at India from a detached distance, are in violent disagreement with one another on both the diagnosis of the ailment and the line of treatment.
It is important to ascertain the facts first. The first fact: with the US economy improving, vast amounts of funds have moved back from emerging markets to the US. It is important to understand that it is not just the rupee that has taken a hit. The Brazilian real, the Indonesian rupiah and other emerging economy currencies, too, have devalued. In the last three months, the rupee has fallen 13.9 per cent against the dollar. The Brazilian real has, in the same period, fallen 17.2 per cent and the Indonesian rupiah 13.03 per cent.
Second, India was growing at around 8 per cent. The rate has dipped to between 4 and 5 per cent. Inflation is inching towards 10 per cent. The consumer price index inflation was 9.64 per cent in July, fuelled by high food prices.
Third, our fiscal deficit is close to 10 per cent of GDP. Fourth, our current account deficit (CAD) in this financial year is likely to be just under $70 billion or about 3.7 per cent of GDP.
While we wait for Godot, shall we do nothing? There is no doubt that some of our woes are due to the global troubles (particularly in Europe). But many of our wounds are self-inflicted.
The first step that we need to take is to bring back speed to our decision making and implementation. Red tape and indecision are hurting our industries. Power plants are suffering from fuel shortages. Greenfield projects are stuck because environment clearances are not forthcoming. There is no green or red light, only an amber light signalling an indefinite wait. We cannot possibly blame Greece or Ireland for these predicaments.
The second move ought to be to accelerate the flow of foreign investments to India. Economists have estimated that India needs to attract at least $250 billion. Announcements of policy reforms in retail, insurance and banking are not enough. They must result in real investments. Foreign investors need assurance of stability. They must be convinced that we will not resort to knee-jerk actions like capital controls or freezing of foreign funds.
The third measure should be to recapitalise our public sector banks. Standard and Poor’s has estimated that non-performing assets (NPA) will constitute about 4 per cent of PSU banks’ loan portfolios. In that scenario, between Rs 16,000 crore and Rs 20,000 crore will be needed to recapitalise PSU banks. If our banks are required to comply with Basel III norms, the figure will be even higher. Recapitalisation is critical to preserving trust in our banking system.
The fourth action would be to calibrate and prioritise the implementation of the food security initiative. No Indian in his right mind will argue that poor people should suffer or die of hunger in order to reduce India’s fiscal deficit. The bill is very ambitious in its promise and aims to touch the lives of 800 million people. Promotion of health and nutrition is critical to our long-term economic growth, but it should not create economic chaos. There are thefts, scams and corruptions in our public distribution system, which must be controlled before launching a scheme. It will cost taxpayers $14 billion, which is nearly 1 per cent of our GDP. Perhaps we should roll it out in carefully planned phases. The first bunch of pilot projects should be targeted at poor tribals and the disadvantaged in the north-eastern states, who aggregate about 20 million and are most in need of assistance.
Last but not the least, we need to improve our CAD position. We keep complaining about our oil import bill and Indian women’s obsession for gold. Both these are not new things. We have always been importing gold and oil. The nettle that we need to grasp with both hands is exports. How can we stimulate our exports — both goods and services — now that our exports have become more competitive owing to a significant devaluation of the rupee?
Doomsayers are drawing a contrived comparison between 1991 and 2013. Others are waiting for new Reserve Bank of India governor Raghuram Rajan to come and wave a magic wand to take all our economic woes away. That is unlikely to happen.
We should brace ourselves for a marathon of determined and deliberate actions. It is not going to be a sprint. A turnaround of an economy the size of India’s is always a process, never an event.
(The writer is managing director of Deloitte Consulting, India. These are his personal views)