Growth Woes & RBI Folly

Shankar Sharma, VC & Joint MD, First Global believes that the Indian growth story hasn’t gone away forever…

Do you feel that the India growth story has gone down the drain? Or is it just a cycle that we are going through - high inflation leading to high interest rates….?
It will eventually all come around. The ‘India growth story’ has not gone away forever, but it has hit a bump on the road. We are already talking of less than 7 per cent GDP growth this year. The problem is that when you break the momentum of growth, it is hard to recreate it.

What led to that?
Primarily the policies of the RBI. When you have double digit interest rates, you cannot be competitive in any business. One of the main reasons we had a bull market was that interest rates were low in 2002-03. So corporate India could compete. And of course, when interest rates are low, equity as an asset class becomes more attractive. Both those factors have worked against the stock market. And ill conceived movements like Anna Hazare’s is also paralyzing decision making, even among honest ministers and bureaucrats.

Did the RBI not have to act to control inflation?
Inflation cannot be controlled by the RBI. There is no co-relation. From the time this tightening cycle began I have been very vocal about it. I have said this dozens of times. I do not understand the purpose of this. All factors that are causing inflation are market determined. Nothing that can be controlled.
The only thing that has been controlled is growth. Now the issue is that if you do not have growth, you do not end up creating purchasing power. Think about it. Oil prices went from $20 to $100/barrel over the past 10 years. Did it curb consumption of fuel? Or, for that matter, affect the sales of cars? On the contrary. There was a quantum growth in the Indian auto industry during this period. The economy was doing well. If the economy is growing, the inflation gets accounted for. Salary hikes and rising wages and job opportunities takes care of it. If there is no growth, then even $20/barrel is too much.
So my point is that only through growth can the problem of inflation be solved. Because it is growth that will increase the purchasing power at the hands of the consumer. Now when you have inflation and growth is killed, it will have an adverse affect in terms of pay hikes and job opportunities.
In my view, the RBI has taken a very Western perspective which does not make sense in this country at this point of time.
Growth is so precious in this world today. Countries are fighting for 1 per cent growth. Here we had 8.5 per cent growth and we do not like it. It is just absurd. Subbarao will go down in history as the RBI Governor who derailed the growth story for a period of time.

What in your view is the cause of the inflation levels we are seeing today?
Global commodity prices. Agricultural products, commodity prices, crude, all of them have been high.

The government stimulus post the 2008-crisis aided consumption while nothing was done on the supply side. This too resulted in inflation. Is this not so?
In theory - yes. But you cannot change the supply side overnight. It takes time. The fact of the matter is that due to increased prosperity we are consuming more.

There is a view that the downturn we are facing is all to do with homegrown issues and not the global crisis. Do you agree?
But one cannot deny that we are facing a very tough global macro environment and we are co-related with the world markets. Go back into history and see the linkage from the mid-90s of the bull and bear markets in India and the world.

Do you think India needs to spend much more on infrastructure?
I don’t think we should be spending excessively on infrastructure. Every country that spends heavily on infrastructure goes bust.

Is that your view on China? Going bust?
Yes. Countries are not like companies that can go bust in a few quarters - its takes time.
Japan, USA, China - all have gone bust. China is technically bust whether it is going to be known tomorrow or a year later.

So what is your view on building infrastructure then?
The point I am making is that we should not be forced into building infrastructure simply for the sake of building infrastructure. We should spend on infrastructure but it should be done in its course. It would be stupid to blindly emulate the other countries that have gone overboard by spending heavily on infrastructure for the sake of it. The reason I am saying this is because we do not have that kind of purchasing power in India to support that infrastructure. You need the purchasing power to use those roads and airports and ports and bridges.

What is working for India?
What’s working for India is our Gods, 33 crore Gods - one God for every four Indians. It prevents us from doing stupid things.

The reason for your sarcasm?
I am not being sarcastic.

Do you feel much more needs to be done on the reforms front?
I think India is doing just fine and we are fundamentally in good shape.
The government has done a phenomenal job of stimulating rural demand. They are of the view that urban demand can take care of itself, we do not need to do much there. So they have gone out and stimulated rural demand. The government has done a lot to empower the poor and that is where the consumption story over the past few years has come from. Not because of urban demand but rural demand. That has not just happened because the Gods willed it. The government made it happen.
We have a power policy where companies can go and set up a plant. We have a right to education bill. We have the UID.
The only problem I see is the RBI policies. And the Anna movement.

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