Whoever the people of India choose to form the government in 2009, the challenge to take a fiscally stretched, steadily deadlocking economy and kickstart it will be significant. Recent Index of Industrial Production data points to a sharp slide in economic and industrial performance. Blue-chip companies are scrambling for credit. The small and medium scale and unorganised sectors are almost at a standstill. The job market is crumbling and there is consensus that most companies could find themselves smaller next year.
Just a year ago, the country was celebrating five years of unprecedented economic expansion. One of the truths of the situation we find ourselves in is that it is the capping of several months of mis-steps and mis-cues, of misguided self-belief and hubris. There is an impact of the global credit crisis. But this storm was at least 12 months in the making and has as a cause a period of inaction by policymakers.
Inflation peaked at about 8 per cent around March-April 2007 and steadily declined to its lowest level towards the end of 2007. The first business confidence decline showed up in the third quarter and sharpened in the fourth quarter of 2007-08. This was also broadly the period when the rupee was strengthening against a rapidly weakening dollar, creating havoc on exporters. Inflation was still moderate at this stage with a mildly upward bias, hinting at another run-up similar to the one in the first half of 2007.
The confidence at this stage in the government was still obvious from the speech by the Prime Minister at the Federation of Indian Chambers of Commerce and Industry (Ficci) meet in February when he assured industry of “9 per cent growth despite the growing clouds over the global economy”. Industry, then beginning to worry, welcomed the statement in the belief that policymakers knew more than it did.
A few days later, the then Finance Minister presented his budget and referred to his lucky track record as Finance minister. In response to concerns about a slowdown, he said he would keep an eye on industry and take steps if signs of slowdown or sickness were detected. Ficci met the government in early April and shared its concerns about the declining business confidence index. Healthy credit off-take data were cited as the reason to not worry. It was clear that the decision-makers were looking at credit as one lump sum, with no efforts to track credit to various segments of the economy. For instance, public sector undertakings could be borrowing heavily and small and medium enterprises may be dropping off the credit radar and the mandarins in Delhi wouldn’t pick that up. This was the first of many encounters with the government over the next eight months where the drill would be similar. We would use data and sound the alarm. Policymakers would scoff and dismiss us as being ‘negative’. The Fiscal Responsibility and Budget Management report tabled with the interim budget admits, “The decelerating growth phase, which kicked off in the second half of 2006-07, has continued in 2008-09.”
Inflation started nosing up sharply in the early months of 2008-09. This was widely understood to have been caused by supply bottlenecks. As inflation became a noisy political issue, signs of the government and the RBI using monetary policy to throttle inflation became visible. Repo rates and the cash reserve ratio (CRR) were increased systematically and sharply, peaking and remaining at growth-adverse levels till September 2008. Ficci protested this strategy, advocating interest rate cuts, easier external commercial borrowings and foreign direct investment. It presented data to the policymakers that higher interest rates were not moderating inflation; rather they were hurting industrial growth and that such a monetary strategy would cause serious collateral worries. This period marked a critical breakdown between industry and government. Political expediency had won over economic common sense.
After the Left-UPA fallout, the team at Ficci put together a 100-day plan for the government to bring back confidence in the economy. As we distributed this paper to the economic and political leadership, we met with the same distinct lack of urgency. I remember one policymaker even asking us why we titled it ‘Bringing back confidence’, since he felt confidence hadn’t left in the first place.
If the government had showed urgency at this stage, the effects of the global credit crisis could have been mitigated. When it finally hit, the crisis caught the government by surprise. It took the PM some time to meet industry on November 3. Some chief ministers had by then already met local businessmen to discuss the crisis. The mood at the November meeting was still upbeat with business leaders sprouting flowery prose about their confidence in the government’s ability to manage this crisis. Ficci presented yet another plan to the government, seeking an aggressive monetary rollback and fiscal packages. Unfortunately, the government chose gradual monetary rollback and timid fiscal packages. The effects are clear: a sharp decline in industrial production, a crumbling job market, strained government finances and an uncertain future.
There is a moral in this story for future governments and for industry. Rhetoric, hubris and self-confidence are no substitutes to data-led, micro and macro management of the economy. Just like companies, the management requirements for a growth economy are very different from an economy operating in a recessionary global environment.
Rajeev Chandrasekhar is a Member of Parliament and Immediate Past President FICCI.