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HindustanTimes Sun,31 Aug 2014
Looking for growth? Wait till Sept 2014
Gautam Chikermane, Hindustan Times
August 31, 2012
First Published: 20:47 IST(31/8/2012)
Last Updated: 20:52 IST(31/8/2012)

If it is growth you're looking for, here is a forecast: you won't see it till September 2014. Maybe, I'm being hyper-cynical, but the reason is politics and the argument is simple.

The growth in UPA's first tenure (2004-09) came in the first three years due to excess money sloshing in global financial pipelines that lifted all markets; due to its small base, India rose faster. From September 2008 through May 2009, when the global economic crisis took the world down a financial precipice, India's growth came from domestic consumption, a story that ran through UPA's second tenure, till 2010.

Since then, the velocity of global money has slowed down, and is likely to freeze, as EU implodes before our eyes and the US enters a recession --- Nobel laureate Paul Krugman is forecasting a lost decade for the US, like Japan faced in the 1990s.

To global money contraction, add India's politics that prevents any important reform from being passed, from increasing FDI in retail to a land acquisition law. Sprinkle a string of scams --- Rs. 186,000 crore coal scam, Rs. 176,000 crore 2G spectrum scam, Rs. 163,000 crore Delhi airport scam, Rs. 29,000 crore ultra mega power projects scam, thousands of crores in the Commonwealth Games scam, hundreds of crores in Adarsh Housing Society scam --- to an Opposition looking for causes to embarrass the government and what you have is a political stalemate.

But even that's not enough. Due to its wasteful spending, the government has overdrawn money to run populist schemes --- some of them arguably important tools of empowerment --- increasing the fiscal deficit to a level that's unsustainable for foreign investors to park money. We're one step away from a junk rating that will pull out money from India, as many institutional investors are mandated to invest only in investment-grade securities and countries. Worse, this deficit has squeezed legitimate private sector borrowing out of the market --- and raised inflation to double digits.

As a result, what we as workers and spenders face is a dilemma. On one side, we watch our incomes freeze, opportunities vanish and are close to job losses or pay cuts.

On the other, prices of everything, from food to rentals, are rising. With the RBI holding on to its position that interest rates will not fall until inflation does, EMIs will continue to stay high. What does a household do in such a case? It cuts expenses. What does that translate into? The beginning of the end of the consumption-driven domestic-demand story.

Step back and see what companies can do. Because of political uncertainty till the results of May 2014 elections are out, no serious investor will want to put his money into India. Add harebrained ideas like retrospective taxes to this uncertainty — a tax that India has legitimate right to legislate, as many other countries like Germ-any and the UK do — and the 'I' of BRICS moves to Indonesia from India.

Finally, let’s look at the options before the UPA government. Short-term growth is completely invisible. For medium-term growth, infrastructure investments is one way out. Which is fine economically. But for the shortest-gestation infrastructure project to see light it would take two to three years --- a road, for instance. Such investments would catalyse supplementary demand and investment. The question before UPA is: will it still be in power in the next elections?

If not, there is no point to make the effort and hand out the resultant growth to a BJP-led coalition. Presuming BJP comes to power in May 2014, the investments of today would be maturing and would show up in the quarter ending Sep 2014. Against a low base of a series of stagnant or fallen growth, the smallest upsurge in output wou-ld appear larger than life, and the accolades would go to BJP. Perhaps the Congress is not confident about winning elections in 2014. If this thesis is true, say goodbye to growth for two years.


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