How to hedge against a slowdown

This kind of growth has never been achieved by India in the past but it is quite possible to sustain it into the future. Going into the new fiscal year, the factors that sustained this growth rate are still strong. These are high rates of domestic savings and investment, strong corporate performance and, based on those, a high tax mop-up which has turned around the finances of state and Central governments. The last is particularly important as this means the Government does not have to dip into the citizen’s pockets as taxes to pay for its own existence.

This is the biggest downside risk that the Indian economy faces. Alan Greenspan, former governor of the US Federal Reserve, said at a recent seminar in New York that the only reason why the US economy was still not in recession was the muscle built up by US business in the long period of growth post-9/11. The implication is, without that muscle, the recession would have already been a full gale.

Looking at the Indian economy at an inflection point, it is clear that in the last few years business in some sectors has not built up those muscles. A big reason is government inaction. Describing the phenomenon, the economic advisory council of the prime minister says: “There are some downside risks that can stem from not being able to take much needed decisions.” Among them, it lists the reluctance to change prices in fuel sector and absence of a long-term fertiliser policy. Not changing the prices has not helped the people. In this fiscal the government has issued bonds as off-budget liability of over Rs 1,00,000 crore on these two counts. We will pay for them later as taxes, when the government redeems the bonds. Meanwhile, the Oil marketing companies will bleed, since they are short of the cash they need to invest in improving their network. Since they cannot stretch their networks further, the queues for LPG cylinders in cities and for kerosene in villages have begun to lengthen.

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