Upward Trend In Economic Growth - A Discussion On India's Economic Growth During Q2 2014

Upward Trend In Economic Growth

GDP Growth in this quarter has been 5.7%, the highest growth registered in 9 quarters. Clearly there is a good feeling and people are saying ache din are around the corner. How do you see this upswing in the economy and do you see it as really ache din aagaye?

Part of this quarter has been under the previous regime i.e., pre-may, June result that came in the first quarter of the FY 15, but there’s been some upswing expected. Any case, industry had already reached its rock bottom and there’s only one way from there where it could go up. So industry has begun the mild recovery, it’s not yet a full recovery it is a mild recovery. Agriculture luckily performed reasonably well in the last financial well. The harvesting done during this quarter is also reasonably performed well. So there was upswing expected in any case. We may now say with more optimism, more positivism that the coming days will have a more transparent, faster investment decision making process etc. Corporate sector and industry in particular looking more optimistically. One caveat though is that this monsoon is erratic so far. Sometimes we get a feeling that the rains efficiency can be made up etc., but then the meteorology says, still quite a significant part of the country, particularly the grain bowl of the country i.e north-west wherein the maximum productions takes place has been deficient and that has dampened the agricultural growth a little. But with the recovery of industry and services, with optimism, GDP this year should be higher than what it was last year.

When you talk about the upswing in the economy, you also talked about the sentiment. As you rightly pointed out, part of it also came from the last government’s and corporate sentiment has reached rock bottom. But even after the new government has formed, people had been talking about how prices have been how price had risen. Not just that people are talking about the rises, we realize it even when we go to buy things in the market. Government now says that the inflation has come down and given what you just said about the agricultural situation and the inflation situation, where do you see the economy going?

The prices, essentially have been going up for quite some time and there is a limit to which inflation can continue if income falls, the demand has been falling for the last few  years specially non-agricultural growth coming to a very low end and agricultural growth has been comfortable. So sooner or later, the prices would have to come down. Luckily, we have enough food grain stocks with the FCI. When this year’s procurement is not up to the usual standard, we still have sufficient food grains, so that is not a problem. The main shortage is in the high quality food consumed by the middle class. That is why when you see the urban consumer market prices; they have increased faster than the rural production etc. Coming back to the issue, Monetary Policy has been tightened recent period, after lots of concern shown about and so money supply growth has been stopped. The fiscal deficit still is a matter of concern, the budget speech of the FM has mentioned it. But hopefully they are going to curb it a little more.

But they say that they are going to meet the FRBM targets?

FRBM target fixed is higher than what was expected. But even then it is much better. The critical question now is, inflationary momentum to be curbed in a sustained manner in the urban consumer market, market must feel more optimistically. Because we know that the bulk of the inflation is expectation. The market optimism will come today when investments decision had to be taken when production is coming tomorrow.  So the relationship between corporate sentiment, industrial recovery and the overall market is a lag process. Sentiment revival now, investment decisions to take place and then over a period of time, the production is expected to take place. So prices we hope will now gradually come down and stabilize. But there will be little more lag. Because initial investment is expenditure and takes time for production or goods to come and so we may have to witness a some more period of moderate to high inflation rates. Critical issue is we must not allow it to go very high. Typically in a bad monsoon, somehow the market gets adverse sentiment and start pushing the price high. That sentiment is the responsibility of the government. Like how effectively the government will be able to control the sentiment of the market as far the inflation is concerned.

Given that the GDP growth has been the highest in the nine quarters, lowering down of the inflation at least now. Do you think that sentiment the optimism that the industry and market will show could help handle the inflation?

Yes, it could help inflation control as well as the overall growth sentiment but I must here however caution that the last 2-3 years have been very bad. So even a small change would also look as good recovery. What we are looking for is GDP growth rate to go back to 7-8%, that’s what we believe, is India’s capability. We’re also looking at Inflation rate to come down to 3-4%. Right now it is in the reverse direction with inflation rate being 7-8% or more and the GDP growth rate being below 5% and all that. It takes a bit of time. So we must not also be in a hurry expect too much and then forcing the government to take too tighter monetary policies. Sometimes the government tightens the money so much that the liquidity crunch, investment will be stalled and banks all these things. So, there should be a steady state changes allowed in the economy. Over a period of one year, if things stabilize, I would say that itself is a good achievement and then step forward for long run roads. For that however, the government will have to initiate bigger changes. What are the obstacles of investment growth? Mining policy, land policy, labour policy and the environment clearance policy etc., these bigger challenges will have to be tackled by the government one by one. Because in short term we can clear the obstacles but in the long run, these become structural issues.

Interesting thing you raised are structural issues on mining policy which of course needs an overhaul. The previous government worked on a bill but in never made it anywhere. The Land Acquisition Bill which many in industry kept saying as too much for them but of course the then government claimed it as a balancing act. Labour I think both the previous government and the incumbent government claim there are outdated rigid laws. As far as Environment is concerned, it is a rather tragic situation as for almost 20-25 years of its existence, the ministry became as a rubber stamp.  Things changed but it finally became some kind of a new license raj. But those are not because of environmental concerns as we know there are other concerns. How do you see this balancing happened? Because we can’t go to what industry wants, which is like free for all.

This is where I would feel the PM Modi has an advantage as well as a responsibility. After 30 years, we are having a stable government in the Parliament i.e. absolute majority to the ruling party. The previous government all the time on all these issues gave excuses of having a coalition regime. This is one advantage Mr. Modi has.  He can push at least in LokSabha, even if the Rajyasabha might take a little time. Not all bills have to be automatically passed in Rajyasabha. But here comes the challenge for Modi. Some of these are structural as you have pointed out. Land decision is a structural decision making going down to the state and the local governance level. Mining is another such issue. How effectively he can tackle these issues is to be seen. Corporate sentiment here is one of optimism because now they know that in case of the previous government, even if the PM promised it was nothing. We now have a Prime Minister who is not only dynamic but also an effective power to force his decisions.  So the whole economy is looking towards the government on how bold decisions he can take and how quickly he can take. We are waiting for the next couple of months before the next budget that each of these issues have to be translated into a concrete policy action balancing between equity, welfare and future concern. We can’t be going only by the corporate culture that free for all, no concern for environment, no concern for labor etc. But at the same time, the growth matters. So the tight rope walking is visionary balancing. That is where the country is looking towards a new leadership and they have given a clear mandate to the leadership. Now it’s a challenge and the Modi government has to take it over and give a bold directive and that’s why the corporates are right now very optimistic. I would say the Modi government will be able to do but some of these unfortunately will go down to the state level. Take for example the taxation of GST, already some of the states are saying no. Even the governments close to the NDA in the center like AIDMK of TamilNadu are saying that they are not going to sacrifice etc. So it requires some bit of  housekeeping like managing some concessions, some bit of political concessions, some economic concessions, but keeping the directions right.

You were talking about  the sentiment and as you mentioned, we can’t look away from equity, welfare, access as well as growth, because growth is very important. How do you think that the steps like the Pradhan Mantri Jan Dhan Yojana (PMJDY) that the government has launched and which seems to be done at and showing that out banks and PSUs can actually do things, how do you see that impacting the larger sentiment  ?

It is infact a very good idea. Remember it is the one Reserve Bank Governor Rajan has also been talking about for some time i.e., the financial inclusion. It is very welcomed. What happened was after the misguided loan melas of 1980s, Public Sector Banks became shy of opening accounts for the poor people. On the one hand, they were under pressure to improve the balance sheet and make profits. So they wanted to shun all the small accounts and concentrate on the middle class and above. That lead to the inequity in the financial system and the poor people have been left out of the banking system. So the Modi government has rightly initiated this. Give them credit like you are giving to industry up to a limit but don’t make them as sort of free for all. The other end of the corporate culture, the loan mela culture, you just somehow borrow the money  and never repay. That will give a bad sentiment and the banks are recovering so don’t disturb the banks’ balance sheets. So how the Modi Government has done is though they have been just asked to open, they will be given debit cards, but restricted amount and they will be observed for six months how they are repaying etc. Here it is implicit that all those defaulters maybe asked to payback whatever it is. So let’s see the experiment how  banks are able to handle it. Now this time around, the challenge lies with the banks. Inclusive financial policy is a challenge for the banks.  

But it helps the sentiment. The economic growth is also about the sentiment. When you are talking about the banks, the other end of the conversation comes, we always think of the small account holders as the defaulters. But as we know traditionally, the NPAs are with the big buys. The big guys do it deliberately, but the small fellows may sometimes do because say the farming this year. Some farmers may be unable to repay the loan due to bad monsoon etc. There comes again a challenge for the Modi government again. Some corporates are deliberately not repaying, we should go all out to punish them. Give the banks the right signal. Why should some crony capitalists be get away by deliberately by not replaying the loan? That will give a big message to the all corporates also.

It is also like balancing the both ends. Now to come back to the big question, we don’t exist in the world by ourselves. Let’s talk about the global economy, recovering etc. Do you think how the global situation is playing in and there’s also this aspect of how we react to the changes. In the past, we didn’t react too well. For instance, in changes like the dollar strengthening etc., we didn’t react well. We are now in a better position because the RBI governor said that the Current Account Deficit is down and the forex reserves are high. How do you see that?

Current Account Deficit down is not a new thing in India. We always had a Current Account Deficit negative. It’s a question of magnitude like how much down etc.,? When gold imports were revitalized, it went very high. After the gold imports have been restricted, the CAD had come down to the closure. But that’s not the issue. What the really issue is if the Fed Reserve Bank of US gets back all the stimulus and the money, then the money would start flowing back and to the dollar account, interest rate in US etc will rise by 0.5%-1% and that means FII in other capital which are coming to India may go back. I don’t think that will be a that serious challenge even if the stock market booming is restrained. The real economy is the one that matters. As long as FDI keeps coming, our economy will be booming and the real sector starts doing well. So we can ignore that part of it.

Well, actually Raghuram Rajan has said exactly the same thing you said, that we don’t have to worry.

“Upward Trend in Economic Growth”, was broadcasted by All India Radio via the program “Money Talk”.