If only by some magic wand the investment cycle can be revived, India can be put back on the high growth trajectory with macroeconomic strength
Our country needs an extraordinarily tough situation or crisis to accept and face major challenges. We needed atrocities of the British rule to unite, fight and emerge victorious in 1947. Fruit was priceless Independence. We needed balance of payment crisis of 1990 which saw our forex reserves dwindle down to $2.2 billion to accept the 1991 reforms that delivered the liberalisation, privatisation, globalisation model. Fruit was second-highest growth rate in the world, $300 billion-plus forex reserves and self-generated economic strength.
Both the struggles, not comparable though, meant lots of pains to many people. But we accepted it albeit some resistance. Ironically, it?s difficult for people to comprehend and accept painful policy reforms when everything is hunky-dory. But when in trouble already, we don?t mind some more. Like a patient takes bitter medicine more readily than a healthy person. Today, the pace with which India?s macroeconomic fundamentals have moved south, leaves us knocking at the doors of a crisis and hence is the biggest justification to usher in difficult reforms. Management education must prepare students to seek opportunities in the oncoming changes rather than lament the pains.
Just some months ago we boasted of ?excellent? macroeconomic fundamentals despite recessionary tendencies, especially amidst global blues. Our GDP growth rate was good around 8%, although a bit down from the high of 9.5. Inflation was high but still appeared controllable. People had jobs. Forex reserves over $300 billion looked good. Although fiscal and current account deficits were high, the trend seemed reversible. Rupee was pretty stable without RBI intervention and stock markets were performing. Suddenly something happened and India growth story started looking weak. Growth rate has now slipped below 6%, unemployment has risen, inflation is adamantly high, rupee is sliding fast below 55, forex reserves dropped below $300 billion, the twin deficits widened and stock markets turned bearish. So, what has gone wrong?
The investment cycle downturn theory attempts to explain recession. But why have investments dropped? Let us not blame it on the US or Europe. It?s said that many huge investment projects are awaiting approval for months. The policy paralysis of last several months, whatever its origin, has cost India growth, jobless, inflation, investment, foreign funds and, moreover, loss of entrepreneurial enthusiasm, the ?animal spirit?. There is no dearth of funds in private hands and banks. But if credit off-take and private investment upturn is desired, the roadblocks in the producers? path must be removed as soon as possible. This points to the dire need for several urgent reforms. Besides private business, investment can also come from the government which can be carefully channelised into productive avenues. But this also needs several major reforms.
Fast-tracking infrastructure projects needs reforms, and by infrastructure I don?t just mean roads, railways, ports and energy. I mean irrigation, warehousing and logistics; social infrastructure of education, health, sanitation, food and drinking water especially in rural India, probably on the lines of the ?PURA? model (Providing Urban Amenities in the Rural Areas). Petroleum prices need to be decontrolled gradually. Oil extraction has gone down despite more than 100 discoveries due to non-decision on approvals. This sector needs reforms. Since most subsidies end up being gobbled up by the non-deserving and their delivery is a costly affair, all subsidies must be aimed at being phased out one day, by initially replacing them with direct cash-transfers and subsequently by lifting the under-privileged population to levels where they won?t need subsidies any longer. Education sector needs bold reforms. We have one of the biggest education systems in the world by quantity. Quality of curriculum, teaching, rules and procedures, regulators? integrity are all questionable. FDI and FII are awaiting quick favourable decisions. Land legislation and agriculture need urgent reforms which alone can save the ailing sector that still happens to be the backbone of our economy. Corruption is at its high, it distorts most well-intended policies and needs brave reforms.
If only by some magic wand the investment cycle can be revived urgently, India can be put back on the high growth trajectory with macroeconomic strength. If government expenditure, although raising deficit, encourages private investment expenditure and household savings rather than consumption expenditure, it will generate the required funds while raising the employment level and supply of goods and services. This will raise tax collections and reduce deficit too. With both demand and supply sides taken care of, inflation will come down and savings will rise further while maintaining consumers? purchasing power and market. Thus, incremental investment will have the ?multiplier effect? on raising incomes, which, in turn, will induce more investment, known as the ?accelerator effect?. Together, these will generate the ?leverage effect? that will not only pull the economy out of recession but also put it on an automatic upward spiral.
Since most problems in India need reforms, the issue boils down to political will. There is a narrow corridor of a few months from the President?s election till the general elections in which all the magic can happen through reforms. And, by their very nature, reforms don?t take a lot of time to be announced, the home work does. Effect will be seen in short to medium term, and surely in the long run, the reformers will have created history. So, dear PM-FM, the whole country today looks upon you with great hope and expectations. Turn good economics into good politics for once.
The author is professor of economics at Symbiosis, IIPM, Indus B-school and Pune Institute of Business Management. She can be contacted at shubhadasabade@hotmail.com