all-time high and the legislature’s inability as well as unwillingness to fix this scourge maybe at an all-time low. Our ability to reform our way out of troubles, by allowing foreign direct investment in retail for instance, may die before the loud voices of vested interests. Our infrastructure projects maybe languishing, from the constantly-rising prices of commodities like coal and iron ore. Our global reputation as a state that honours contracts maybe under siege. Everything that could go wrong with India’s political economy probably is.
And yet, our aspirations are only rising. Even though the slowdown has now come to stay, the two sectors that have shown growth underline a never-say-die citizenry.
When the Reserve Bank of India was busy raising interest rates to control inflation — it did so 13 times in 20 months — in an attempt to squeeze speculative or non-essential demand out, Indian householders were busy doing exactly the opposite. So, while growth in loans to agriculture and industry fell to 7.9% and 22.9% during the March-September 2011 period from 19.3% and 24.4% in the previous year’s period, growth in personal loans rose to 15.2% from 8.6%. Within this, loans for housing jumped to 15.7% from 10.4% and those to real estate to 12.6% from 7.9%. The only place where the slowdown is visible is in loans to consumer durables that contracted by 6.5% from an increase of 12.5% in the previous year.
For all their attempt to curb speculative activity and control a runaway inflation rate, the macroeconomic managers of our country got it wrong. During the period under review in chief economic adviser Kaushik Basu’s Mid-Year Analysis of the Indian economy, the inflation rate in both food and non-food stood close to an unacceptable 10%. True, food inflation has fallen and so will headline inflation in the last three weeks and very sharply at that, which should bring relief to the poor. But is it because of a conscious RBI policy stance and the accompanying lag or because ‘things just happened’, we do not know as yet. Basu hopes to end the year with an inflation rate of 7%, which is still high. This is a rate that Uganda’s and Russia’s central banks are targeting, the highest among the 37 countries that have and announce such targets (India doesn’t). On the basis of size, India’s number is way ahead of China’s 4%, Brazil’s 4.5%, Indonesia’s 5% and South Africa’s 3-6%.
So, despite an unacceptably-high inflation rate riding an unacceptably-high interest rate regime that is pushing the job-creating Indian industry towards wondering whether it should take its capital to say Thailand (interest rate: 3.5%) or Eastern Europe (0.75-1.5%), Indian households have increased their exposure to home loans. At first glance, I thought there was something amiss. Against the potential danger of job losses or salary freeze, how can the average Dikshit, Mukherjee or Pawar take so much risk with his deepest aspiration and greatest asset — a house? Without adequate data, the conclusions maybe hasty but here they go.
One, the huge cash element in buying and selling houses. So, if a person has put down 25-40% in unaccounted-for cash, and taken the loan on the rest, his downside in case of a default is extremely high and debt servicing low. High rates pinch, but don’t kill. Two, with a negative return of 19.6% that Indian stocks have delivered — worst among 35 large markets — investors have moved to what they perceive to be safer destinations (part of it is also a cultural affinity). We can debate whether that’s the right thing to do — I certainly don’t think so.
But the bigger reading into the phenomenon lies beyond the Mid-Year Analysis. It lies in the minds and hearts of a citizenry that’s taking the uncertain ongoing political economy in stride and adjusting rather well. The tug-of-war between the government and the opposition is not restricted to India. Take a look at the US and you’ll see how the Republicans are stalling every move by President Barack Obama to serve the people, either through his healthcare reform or setting up a strong consumer protection agency. The difference in Indian householder’s behaviour is that he seems to have greater confidence in a future, howsoever uncertain the politics makes it out to be. To be able to take on a 15-year-long liability when jobs are coming under pressure, economic mangers are dancing on their toes to keep the macroeconomics under control and the government is walking on nails, takes a spirit that dares to look beyond.