Down! Down! Down!

If the country’s economy — hit by a falling rupee, high inflation and reduced spending — is to reverse its decline, many long-awaited reforms must be unleashed without further delay. Gaurav Choudhury writes. Case studies | Seeking answers

At his home in east Delhi’s Mayur Vihar, 24-year old Shailesh Das (name changed) opens his laptop and logs in to his email account. He scrolls through the inbox and pauses over each and every unread mail. Minutes later, he slides back into his chair, closes his eyes for a few moments, then lets out an expletive, heaving a long sigh. Another day has passed by without word from his employer.

HT Image

Shailesh is one among thousands of tech graduates that an information technology giant had recruited in an on-campus programme only a few months ago. Last week, the company told them that it would be delaying the joining date for these recruits by several months.

“If all had gone to plan, I should have been in Bangalore by now,” Shailesh points out. “It has now become uncertain,” he mutters softly with an air of resignation as he stretches his hand to get to the AC’s remote control lying a few feet away on his couch.

Shailesh and thousands of his peers will have to do with the home AC for now to beat the blistering heat, rather than joining an army of fresh hires in India’s air-conditioned city, Bangalore. Budding careers appear to have hit the pause button even before they had taken off.

Deepening global gloom is causing unease among business and the world’s back office is no exception. India’s iconic software industry that fuels aspirations for jobs and prosperity among middle-class people appear to be slowing down.

Infosys has said it will hire 35,000 people this year (2012-13), down from 45,000 last year. Hiring growth in other tech firms are also expected to remain flat during the year.

For millions of Indians, the last 12 months of high prices, particularly of food and manufactured products, and low income growth have been gruesome. And, that has slowed consumption and corporate spending and sparked a series of slowdown cycles.

The slowdown

India’s economic growth crashed to 6.5% in 2011-12, and 5.3% during January to March this year, the worst in nine years. Costly borrowing and inputs have dampened investment activity as firms defer capacity expansion plans, hurting job prospects. Companies have pruned wage bills to cut corners in difficult times, and offered lower salary hikes that barely take care of rising prices.

Already, there are voices comparing summer of 2012 with that of 1991 when India flew out 67 tonnes of gold to Europe to tide over a dire import-payment crisis.

“We may be in the danger of slipping in to a 1991-like crisis. Therefore, urgent and bold steps are needed,” said Rajiv Kumar, Secretary General of industry body Federation of Indian Chambers of Commerce and Industry (FICCI).

The government, however, dismisses such a possibility. “The fundamentals of the Indian economy today are far more robust than 20-years ago,” a government economist said, requesting anonymity.

Experts were concerned that the slide may continue unless the government swings into action with immediate and tangible measures.
“The length of slowdown depends on what steps the government takes to combat it,” said M Govinda Rao, director of Delhi-based think tank National Institute of Public Finance and Policy (NIPFP).

Tug-of-war between prices and growth

Rising prices and sliding growth remain key worries for the government and the central bank.

The Reserve Bank of India (RBI’s) strategy: Raise interest rates to mop up liquidity and lower inflation, even if it lowers growth. It’s working, but partially.

Industrial output crawled at 0.1% in April, confirming what most analysts had feared: The RBI’s bitter medicine – to raise interest rates to cure inflation – has not tamed prices, but has had serious side effects on growth.

Retail prices of almost all everyday products and services – from food to footwear and movie tickets to medicines – have surged, signalling India’s inability to control household inflation.

India’s overall consumer price inflation – a more realistic cost-of-living index because it captures shop-end prices – rose 10.36% in May, marginally up from 10.26% in April. The devil of the fresh price indices lay in its detail.

On a year-on-year basis, vegetable prices clocked the sharpest rise at 26.59%, while that of milk and allied products shot up 13.74%. Non-alcoholic beverages – like a can of soft-drink– rose 9.54%.

Prices of prepared meals – a proxy for restaurant meal costs – rose 8.64%, partly because the government hiked service taxes and partly due to soaring vegetable prices.

Such high inflation has meant average middle-income Indians are making expenditure adjustments to keep afloat.

In the past three years, home loan equated monthly installments (EMIs) have steadily gone up. Higher prices and a need to find additional money for EMIs have forced a cut-down on purchases of televisions and cars. The resultant fall in demand has hit companies, hurting their revenues, already boxed in by rising input and borrowing costs.

“In the past three years, the EMI on my home loan has gone up by 25%. My monthly fuel bills have doubled. So, to ensure that we don’t default on EMIs, we have had to cut on expenses such as eating out and vacations,” said Sudhir Verma, a Delhi-based independent marketing consultant.

Besides, while there is no current data available, but inflation is likely pushing millions who had just climbed out of poverty back into where they were earlier on the real income scale.

Reforms push

RBI governor D Subbarao, was perhaps acutely conscious of the cold realities when he presented the monetary policy hours before US-credit rating agency Fitch came out with its scathing report on the Indian economy last week. He withstood mounting pressure from local businesses to cut interest rates. These firms had been arguing that the steep cost of raising loans had upset their capacity-expansion plans.

Global agencies have also been unsparing in their criticism about the government’s economic management. Credit rating firms Standard and Poor’s (S&P), Moody’s and Fitch have all raised fresh questions over India’s economy hit by high government borrowing, rising imports and political compulsions that have coerced the government into bottling up reforms initiatives.

When growth falls, it is usually expected that the central bank cut interest rates to boost demand and spending. Subbarao, however, argued that people buying more goods prompted by lower interest rates will only help push up prices at this point. And, effective bank lending rates were still lower than what they were during 2003-08, India’s high-growth phase.

So, the reasons for the slowdown lay elsewhere, not on high borrowing costs. As also the solutions.

Reforms are vital to finance the $1 trillion (Rs 57 lakh crore) – more than half the value of the national GDP – India will require over the next five years to overhaul its collapsing infrastructure, which, if built, could potentially catalyse every sector, from farm to factory.

“If you start work on infrastructure projects, it leads to an increase in demand for all investment goods, such as iron and steel. This will perk up the economy,” said Yashwant Sinha, BJP leader and former finance minister said.

Reforms, as was seen two decades ago, can herald entrepreneurship, employment, income and spending.

“A few key reforms will enable higher growth. New capacities are not being executed as orders have not started improving,” said Adi Godrej, chairman of Godrej group and president of Confederation of Indian Industry (CII).

“Lack of economic reforms have also contributed to the present problems,” M Rafeeque Ahmed, chairman of Farida Group and president of the Federation of Indian Export Organisations (FIEO).

Investors are keenly watching signals that the government sends out. Critics, however, have pointed out that managing a restive political alliance has consumed a lot of time, leaving little for prudent policy making, which has resulted in missteps that have induced fear among investors.

“We believe that the macro environment is likely to remain a challenge for India in the months ahead,” investment bank Morgan Stanley stated in a recent research report.

A lot will still depend on an adequate monsoon, which is crucial for the summer-sown crop that accounts for more than half of the country’s annual food output.

“A National Food Security Board chaired by the Prime Minister with state chief ministers need to be set up urgently,” said M S Swaminathan, agricultural scientist and father of India’s green revolution.

As our top five reforms sheet indicates (alongside), India needs not just reforms in diverse areas but a governance makeover. Unless that begins, a cycle of upturns and slowdowns will continue – with more of new India’s people sliding back to the old.