It is official. Prime Minis-ter Manmohan Singh has said that the economy will grow at a rate lower than 6.5 per cent, which was the Budget estimate. There are various growth estimates being floated around by various agencies including the International Monetary Fund that range from a little over 5 per cent to just below six per cent. But the general view is that the near $2 trillon economy is in the ICU and two doctors and a lawyer — Dr Singh, Planning Commission deputy chair-man Dr Montek Singh Alhu-walia and finance minister P. Chidambaram — are trying to revive it. So far there has not been much to show.
Mr Chidambaram, who has been fighting almost a lone battle in trying to get the economy moving, hopes that the 56 decisions (counted, as he said, by chief economic adviser Raghuram Rajan) that have been taken since he took over as finance minister last August will get the economy on the growth track again.
However, the several steps announced by the government to revive the economy have not seen any growth in industrial production (-1.6 per cent), particularly manufacturing (0.1 per cent) and consumer durables and consumer non-durables (-9.6 per cent and 6.7 per cent respectively) in the first two months of 2013-14.
Expectations are limited on the turnaround in this segment as the spending season starts from August when festivals commence, according to Madan Sabnavis, chief economist at Care Ratings. This could trigger consumer spending, he said, but till then this segment will be downbeat.
The reality is that the two years of policy paralysis by the government, which should have taken decisions then as it is doing now, has resulted in the economy being like a paralytic patient in need of something like the famed Kerala treatment for rejuvenation. As Gopal Sarma of Bain & Co told a meeting recently: The large rising fiscal deficit, rising current account deficit (CAD), high inflation, plunging rupee, high cost and poor availability of capital and slowdown in project implementation led to the steady fall in GDP over the last four quarters to less than 5.5 per cent.
Added to these are falling exports and rising im-ports whi-ch only aggravate the wide-ning CAD. The government has been giving un-due focus on attracting foreign direct inves-tment (FDI) as if it is the magic wand that will revive the economy. This is evident in multi-brand retail where global retailers are waiting and watching for further concessions. The government has been bending backwards in some cases to accommodate them, as with Ikea, but there has not been much success.
“The vulnerability on the real side, falling savings and investments and the crisis in the financial sector as evident in the pressure on the rupee and the widening CAD, forces the government to pursue policies that please global capital,” said Dr Rama Kumar, associate professor, School of Development Studies, Tata Institute of Social Sciences (TISS), commenting on the emphasis on FDI.
While India is and will always be an attractive destination for foreign investment, foreign investors are waiting for more serious issues to be resolved like governance, transparency and consistency in decision making, delays, corruption cumbersome rules and processes etc. The government, whether it is the PM or the FM, says very little on most of these issues. The government is almost in denial on these issues, particularly governance and corruption.
The government would find it more productive and rew-arding if it spent as much time in wooing domestic industry, particularly the micro, small and medium enterprises as they are the backbone not only of exports but of the manufacturing sector.
There is nothing they cannot produce given the right incentives in a timely manner. But when the Prime Minister is in trouble he calls a meeting of India Inc represented by the chambers of commerce. An estimated `5 lakh-crore was given as tax concessions — revenue foregone by the government — of which corporates were given `70,000 crore according to Dr Rama Kumar of TISS, but there is hardly anything to show for it.
“The foot-soldiers of the economy are really the MSMEs who have a lot to offer and it is time the government shed its big business proclivity and started a dialogue with the MSMEs.” What the people need are food, shelter, employment, education, adequate health facilities etc. These are areas where decisions have to be taken that are in sync with the people’s needs. For this it is imperative to have investments in sectors like manufacturing and infrastructure.
The preconditions to investments, says Dhananjay Sinha, head, institutional research, Emkay Global Financial Services Ltd, “are not there. Corporates and banks are highly leveraged and unless the balance sheets of banks and corporate are cleaned up, investments won’t come”. The steps taken by the RBI to curb liquidity could help start this cleansing process, he said.
Manufacturing is the key to jobs and exports but manufacturing as a percentage of GDP has remained at 14-15 per cent since 1970, despite the gross domestic capital formation (GDCF) as a per cent of GDP increasing to 35 per cent since 1970 when it was 15 per cent. An analysis by Exim Bank reveals that while the share of manufacturing in GDFC has remained around 30 per cent since 1970s the share of services has been growing from 40 per cent in the 1970 to 51 per cent in 2010. It observes that government has been exiting from investing in the manufacturing sector since liberalisation and has also been disinvesting, leaving the private players as sole investment drivers in the manufacturing sector.
This about sums up the problems of the economy and a revival is possible if the government gets its focus correct despite being vulnerable on the domestic side after liberalisation.