By S. Sethuraman
UPA-II may have at last reached a turning point – recognising its own follies thus far and resolving to provide a new burst of efficient governance and result-oriented growth reforms to merit a third term in 2014. It is proximity to the critical survival test ahead that has, more than anything else, impelled the Congress, at the head of the ruling coalition, to shake off complacency and start putting their hands to the wheel.
The motivation, after a long period of denial of things going wrong and blaming everything on global environment, international crude prices and tight monetary policy, has come from the Congress party’s highest forum (leading UPA-II) on June 4, chaired by Ms. Sonia Gandhi. The self-introspection laid bare the official apathy to high inflation and policy inertia, not even pushing for easier reforms, all of which detracted from the international image of India as a fast-growing investment destination.
Ms. Gandhi cautioned that more of what has gone wrong politically so far – groupism within the party and factionalism reaching into the Cabinet – would expose the party to the risks of forthcoming elections, despite its self-satisfied record of accomplishments over a eight-year period of UPA rule. It is another matter that even among BRICS, India has taken the lowest place on both economic and social indicators as reckoned in IMF and other reports.
Moving briskly, the Prime Minister Dr Manmohan Singh has set the tone, sending out the right signals to the country and abroad, of Government’s determination to launch galvanised actions on a wide front, especially infrastructure, the critical pre-requisite for a strong revival of investment, the lack of which contributed significantly to the industrial slowdown and growth downturn to 6.5 per cent in 2011-12.
What is absolutely essential is to ensure demonstrably that the ambitious infrastructure targets for the current year (2012-13), set at the inter-ministerial meeting he had summoned on June 6, are achieved. These include 9500 km of highways, two major ports, three greenfield airports (Navi Mumbai, Goa and Kannur), expediting work on freight corridors on railways, and expanding power generation by 18,000 MW, which means the power projects should get the requisite order of coal supplies.
The challenge, the Prime Minister said, is to work together to achieve the targets, overcoming the bottlenecks or turf battles on the way. Infrastructure development is only one part of the growth story but, as he pointed out, achieving key infrastructure targets would “inspire confidence about the overall economic growth rate”. However hyperpolitical it may sound given the current state of economy, we hold fast to getting back soon to growth to 9 per cent, as a matter of entitlement, and make continued assertions of “strong fundamentals” in the face of deficits, fiscal and current, high inflation, rupee slump, and decline in corporate investment.
Dr Manmohan Singh has rightly emphasised the need to revive business and investor sentiment, giving thrust to investment, public and private, and creating a conducive atmosphere for investment. But the post-budget situation is one of growing foreign investor disenchantment with the kind of tax changes incorporated, and the lack of reform measures, besides the adverse macro-economic variables. Perhaps it is in this perspective, the Prime Minister has said government is committed to taking necessary measures to reverse the situation and revive India’s growth story. Would these be forthcoming in reasonable time?
Given the time lag for implementing new measures decided on infrastructure and removal of coal supply constraints for power generation, and possible readjustment of diesel and LPG prices during the year to cut subsidy burden, growth could be fairly assumed only at around 7 per cent in fiscal 2013. This again is dependent on a normal monsoon and agriculture and manufacturing doing better over the low base in 2011-12, and inflation getting subdued. But the latest UN mid-year update to its earlier global forecasts makes it more depressing even for developing economies including India, whose growth is revised down by one percentage point to 6.7 per cent in 2012 and also lowered to 7.2 per cent in 2013.
Apart from making sure that power projects, existing and new, get timely supply of the increasing quantities of coal required, Government has, reforms relating to FDI apart, several prickly issues to tackle with a sense of urgency. Inflation has remained all along as the most serious challenge for which Government cited supply constraints without credibly addressing them. Food inflation in April was 10.26 per cent while CPI itself was higher by 10.22 per cent as against the 7.23 per cent increase in WPI.
Prices are not falling and while RBI has kept itself open to a possible cut in policy lending rate from its present level of 8 per cent, in view of the tumble in GDP, its mid-quarter policy announcement on June 18 would be guided more by the level of core inflation in May (to be known on June 14). RBI hopes it would have some room for rate reduction if lower growth has a moderating impact on core inflation.
According to the Prime Minister, the eurozone situation is the cause of concern all around for both developed and emerging economies and a flight to safety was taking place globally. He took note of the “the persistent problem of rising international prices of petroleum and other commodities” and said, domestically, rising demand, along with supply side bottlenecks had contributed to inflationary pressures “All these factors combine to constitute a formidable economic challenge.”
By way of sending a strong signal abroad, the Prime Minister said his Government is committed to taking the necessary measures to reverse the present situation and revive and revitalize India’s growth story. “We are aware that we have to act on multiple fronts to achieve this and we will indeed do all that is required of us”. While India’s estimate of infrastructure spending over the next five years (2012-17) is one trillion dollars, the Prime Minister has spoken of the need to involve private sector, through Public Private Partnerships.
India’s growth slowdown is, however, ascribed mainly to the fall in corporate investment as a share of GDP to about 10 per cent – 4 percentage points lower than that in 2007-08, according to an IMF working paper which says the inadequate supply capacity has become increasingly binding constraint in power, coal and land and reduced India’s growth potential from 8.5 per cent to about 7 per cent.
While a confluence of factors can be held up for the overall growth slowdown – which looks like a medium-term trend for the next few years – the IMF paper, on an examination of investment data from national accounts, refers to the decline in corporate investment between 2006-07 and 2010-11 as the principal factor for growth slowdown while inflation and its volatility also contributed much more than the global economic conditions. Real interest rates were lower in 2010-11 than in the earlier years of high growth and therefore must be ruled out as one of the main causes of slowdown. It said.
The conclusion from IMF analysis is that both macro-economic factors and business environment affected corporate investment. High and volatile inflation, and heightened global uncertainty may have dampened corporate investment while monetary tightening since early 2010 may have started hurting corporate investment at the margin. The policy implication, according to this paper, is that lowering and stabilising inflation is critical for sustained investment growth. And stimulating corporate investment requires improving business environment by cutting costs for doing business and improving financial access. (IPA Service)