Tackling the supply constraint

September?s industrial production has been widely viewed as an upside surprise. The fact, however, is that over the past six months, industrial expansion has outpaced expectations. Manufacturing growth has averaged over 12% in the first six months of 2006-07?it has picked up from 11.7% in the first quarter to 12.4% in the second. Some might point out that capital goods output growth fell sharply in September. But note that machinery output growth was still in double-digits, even if it has fallen from the high pace seen since November ?03; and that there have been some off-months?notably, November ?04 and January ?05. Further, revisions may push the numbers up, since the overall decline is sharper than what the rates for machinery and transport equipment suggest.

Some will argue that we?ve seen it all before: In the period 1993-96 we had an even faster pace of growth of 15% in some months, but look what happened? the house came down. While there are no cures for the permanent pessimist, some issues are worth underscoring.

First, the phase of expansion that started in July 1993 lasted 38 months before closing in August 1996. Second, this period was characterised by asset creation?for the most part innocent of the compulsions of either business or financial risk (shared in equal measure by the financial sector, especially the financial institutions). It was done in the old pre-reform style, with scant regard for domestic or global competition, and equal disdain for the extent of leverage (debt to equity), the cost or the maturity of the debt. Third, to top off matters, cheap supplies from bankrupt factories in the former USSR and new plants in East Asia lowered commodity prices, which, in a not entirely unconnected development, saw the Asian currency crisis break out in the summer of 1997. Commodity prices in steel, polyesters, fertilisers, petrochemicals?the stuff that was the object of much of the hectic asset creation in the first half of the 1990s in India, suffered a longish period of acutely depressed conditions. That, palpably, is not the case today.

Fourth, the current pace of industrial growth in India has lasted 51 months at an average rate of 8.6%, compared to the previous 38-month long phase which had averaged 9.9%.

However, the biggest difference between current developments and what had happened in the early years of reforms, is the sea change that has transpired in Indian corporates, their financiers, the capital market, and also the regulators and policymakers.

The system has come of age and businesses reflexively test their plans against the world gold standard?every new business must be competitive and must not import an excess of financial risk. Many companies have gone much further in seeing global acquisitions as a platform to launch networked business solutions, encompassing access to technology, research, sophisticated markets and advanced country financial markets. It has been a very rapid ?coming of age? for them, occasioned by a hard-fought struggle to survive in the wake of bad investments, depressed markets, weak financial structure and the flood of defaults and losses that came with it. Not every company made the grade. And many new ones appeared on our corporate firmament.

The financial sector has also largely managed to shake off the shackles of past habit, but the state-owned sector still has some way to go.

Which is why this phase of expansion is so radically different. It is happening with far lower import protection or export incentives than ever before. It is unfolding with both corporate management and investors keeping an eagle eye on prospective profitability and financial risk. Some of the expansions overseas may mean a more complex financial situation, but complexity in itself does not mean a major increase in financial risk, apart from that which is inevitable.

The problem is with what is not happening fast enough?physical and social infrastructure. India has excelled in managing with poor infrastructure?it may even have strengthened those competitive muscles! But infrastructure is the big structural deficit. Which does not tell us the whole story. For, the real problem seems to be a singular inability to execute decisions taken?whether completing a project (for instance, the overdue New Delhi-Gurgaon expressway) or fixing theft and loss in electricity distribution. The same problem arises in the province of schooling and education.

This is where we fall greatly short of China. Our great northern neighbour seems supremely capable of executing decisions. Projects and changes happen on time. Once they decided to get foreign investment in their banks, they went ahead and did it?25%, and in many cases management control?who has the last laugh is another matter. Once they decided to build expressways, they did it, and have now an enormous network of six and eight lane highways, while their road system was once worse than ours.

If we have to sustain growth, we have to work out changes in our organisational structures so we can achieve objectives agreed upon and do so in time. In a way, we seemed to have sensed this problem early, when several ?missions? were set up in the late 1980s. If ?mission-mode? is one way, so be it. Perhaps, there might be a few other ways.

In any event, we have to find ways to actually do what the system agrees upon. Else, India will continue to be a supply constrained economy, and at some point economic agents will simply fail to somehow negotiate those constraints in the manner that they have been doing till today. The aftermath will be dismal.

?The writer is economic advisor, Icra