The year has started with a lot of optimism. The 11.7% rise in the index of industrial production (IIP) in November 2009, the sharpest increase in two years, and several positive signs in the last few months have brought a lot of cheer all around. The Sixth Pay Commission has put money in people?s pockets. The NREG scheme has acted as a security net and has made rural markets flourish. There is no denying that quite a lot of rural families have benefited. The automobile industry is booming and demand for steel has picked up. Consumer durables are also doing well. The growth has been across sectors like transport equipment, metal products, textiles and even the laggard, mining.
Even professional pessimists concede that the economy is on a good track at the moment. The economy has taken the deficit monsoon in its stride. There has been no panic, and alarm bells did not ring. Most of the industries have regained a lot of confidence. Auto industry has registered a rather spectacular growth. The sector grew by 17% during 2009. In December alone, more than a million vehicles were sold in the country, registering a growth of 68% that month.
The stimulus package of lowering excise duties certainly helped. The auto sector was able to benefit from it as it got into long-term restructuring in the first decade of the 21st century. All the majors had taken cost cutting and quality improvement seriously. Most international auto brands have Indian auto components in their vehicles today. When the export market crashed because of the downturn, domestic demand helped the auto industry cope.
However, there are some who have seen the country?s boom and bust phases who worry about what is going to happen next. Is our optimism sustainable? For instance, not all industries have been ready to face the crash of the export market. The apparel industry shows no signs of picking up. This is a fragmented industry. It does not have a big player. Bangladesh has overtaken India in apparel exports over the last 11 months. Sri Lanka is expected to do so in the next four months.
There are many gaps and ifs and buts in India?s growth story. A senior banker says that the next 12 months will be good. The growth momentum will hold. The downtrend may start in 12 to 18 months. The following 18 months may see stagnation. Why do some economists say this? The long-term outlook appears doubtful to them. Inflation seems to be creeping up. There seems to be no control over food prices. RBI will tend to pull back on the monetary side. Monetary tightening seems to be on the cards.
This is what happened in the mid-90s, when the thrust of the monetary policy was to reduce the annual inflation rate and provide credit support for production. Money supply was reduced considerably, mainly because of a slow growth in bank deposits and a decline in the growth of reserve money. Slower monetary growth was accompanied by lower bank credit to the commercial sector. These trends were compounded by a decline in other sources of finance to industry, such as primary issues in the domestic stock market and GDR issues in euro markets.
Funds raised from capital markets declined and the amount raised through euro issue loans also fell down nearly 70% over the same period. Continued high levels of government borrowing and a large fiscal deficit kept money markets tight throughout the period. This, in turn, put increasing pressure on interest rates. It was a knee-jerk reaction of panic, which then lead to a slowdown and stagnation. Will we go the same way now?
Corporates may not suffer as much as they did in the 90s. They are less dependent on banks for funds than before. They have more diverse sources of finance. But consumer spending will tend to get squeezed. This will have its effects on the economy. The NREG scheme is the best social spending programme to date in the country. But it does have problems of leakages and mismanagement. In states like Tamil Nadu, there are problems of labour shortage in the agro industry. Talk to any plantation or sugar industry people, they will all complain bitterly about how the NREG has made it difficult for them to get people to work full time in the countryside. Economists also worry that the scheme is not exactly helping in building assets in the rural area.
The country is still struggling with rural poverty. The government has not been able to find answers. The country is again hoping for a double-digit growth rate but corruption remains an unsolved issue. Those who worry about the future point out how corruption has pervaded all segments of society. Even more worrying is people?s apathy towards corruption.
What may also pull us back in the long term is our lack of focus on infrastructure development. We do not even discuss infrastructure seriously any more. We have reached the magical figure of a million cars going on the roads in a month. But nobody is seriously concerned about building and improving the road network. Parking remains a nightmare in all the Indian cities. Chennai, touted as the once famous Detroit of India, keeps talking about multi-level parking. But there is no visible action. ?Our priorities are all wrong. We believe in short-term pampering of the people. We keep them happy with malls and multiplexes. But don?t give them parking space,? says an economist.
In spite of rushing to China in droves, foreign investors are worried about the country. It has a highly restrictive foreign investment policy. Investors can enter into joint ventures only with the government. China is not giving the world an opportunity to be part of its growth story. India is known for its pluralism. It is receptive to outside influences. Sadly, it also suffers from a history of inefficiencies. Outsiders feel frustrated in India. So China grows in leaps and bounds. And India crawls.
Unless we learn to fix our problems in the next 10 years, the country becoming an economic powerhouse in 2020 will just remain a fantasy.