Opinion Waiting for the rainmakers
The high cost of UPA 2s listlessness and inertia: the real possibility of growth below 8 per cent.
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When the UPA government came back to power without the support of the Left parties,in May 2009,the stock markets were so overjoyed the Sensex soared 17 per cent in a single day. But after two years of being in power the government has done precious little to push through reforms and even with the state elections out of the way,reforms dont appear to be the governments priority. Little wonder then that India Inc is feeling somewhat let down and that the mood in the markets is distinctly downbeat.
The Sensex has gone nowhere since foreign institutional investors (FIIs) drove it up to its lifetime high of 21,005 in early November last year. Theyve been sitting on the sidelines in 2011 so far,whereas last year by this time they had already shopped for stocks worth about $4.5 billion. Fund managers are concerned that high inflation will keep interest rates elevated,hurting consumption; and also that policy inertia will delay capacity addition,which in turn would pull down growth. A recent meeting with the finance minister and his team has done little to reassure them that they are wrong,and that the growth momentum wont slip faster than it is just now. A just-released survey shows India is among the least-preferred markets in the Asia Pacific region.
Their apprehensions so far have been justified. As we saw in the three months to March 2011,the growth in investment decelerated sharply to just 0.4 per cent year-on-year,and it was consumption,which grew 7.5 per cent,that helped GDP rise by 7.8 per cent. Moreover,factory output grew at just 6.3 per cent year-on-year in April,a seven-month low,while core sector growth slowed to 5.2 per cent y-o-y in after turning in 7.4 per cent y-o-y in March. And wholesale inflation for May has come in 9.06 per cent,way above the expectations of 8.7 per cent. Had the government foreseen some of the food inflation,the Reserve Bank of India (RBI) would not be readying to raise policy rates for the tenth time since March last year,even as it knows that sales of cars and trucks is slowing down. And while its true some of the inflation is imported,a fair share has been the result of government spending,not always productive.
Moreover,even as the central bank has urged it to pass on the increase in crude oil prices to the consumer,UPA 2 continues to dither on deregulating fuel prices,though it has upped petrol prices. Its critical that the government moves quickly to pass on the burden of high oil prices,because it runs the risk of running up a much higher deficit than it had planned for,given that it also needs to subsidise food and fertiliser. That could have the deleterious consequence of crowding out private-sector investment the last thing we can afford right now,when confidence is already low. Indeed,there is little time to be lost and the two dozen or so new pieces of legislation that were promised when the UPA came to power need to be in place soon; so far only the Right to Education has come through.
To begin with,the government needs to convince the state governments and that Goods and Services Tax (GST) can only benefit them. Next,it needs to usher in the Direct Tax Code (DTC) as also finalise changes to the Companies Act. Most crucially,though,the government needs to convince corporates that it will facilitate the acquisition of land,though of course taking care to see that the land-owners are not exploited. It also needs to speed up environmental assessments and other clearances,so that projects take off quickly and also clarify about regulation,such as that for mining,where it has been proposed that profits be shared with locals. India Inc isnt really asking for too much; all it wants is less lethargy when it comes to clearing projects,greater clarity on regulation and a reasonable level of interest rates so that they can add capacity and consumers can leverage.
That should not be difficult to do. Its hard to understand why UPA 2 is dragging its feet on upping the FDI limit in insurance to 49 per cent even though the Left is not a partner in the coalition. Also,even after it has acknowledged the benefits of having FDI in multi-brand retail,theres no indication that this would be allowed soon. While there seems to be enough debate on subjects such as reforming pension schemes or attracting foreign funds through infrastructure funds,theres been little follow-up in the form of guidelines. And while the debt markets have been opened up to foreign buyers,the rules are way too restrictive to attract meaningful amounts of money. Its also surprising how instead of focussing on the larger issues of the fiscal deficit the government is discussing the capital structure of stock exchanges.
If the government doesnt move quickly we are staring at sub-8 per cent GDP growth in 2011-12 which is a pity because it need not have been this way. While the common people will bear the brunt of this,the government too stands to lose through lower tax collections and smaller disinvestments. The government hopes to raise Rs 40,000 crore in 2011-12 by selling stakes in companies such as ONGC,IOC and SAIL. If the markets continue to be as listless as they are just now,shares will be sold at prices that are way lower than what the government hoped to get. The rain gods have done their bit; now its the governments turn.
The writer is Mumbai Resident Editor of The Financial Express
shobhana.subramanian@expressindia.com
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