The Indian Government has played its hand badly over the past four years. For example, with regards to coal scarcity, most of the damage was self-inflicted as the Environment Minister dithered on the “go/no go” areas and then instituted an overzealous process of checking emissions in the vicinity of Coal India mines. The totality of these measures has probably set back Coal India’s production by 5-7 per cent per annum. Another example of self-defeating intervention is the hasty introduction of GAAR in the Union Budget.
However, is the Indian Government so influential that its blunders have bought our economy to its knees? I don’t think so. Three other factors have played a powerful role in India’s humbling.
Firstly, a range of problems which prima facie appear to be caused by the government’s “policy paralysis” are arguably linked to the global seizure in risk appetite. The “under-the-table” model was used in the “noughties” to lubricate our political system as promoters sought to build construction, infrastructure, real estate and mining empires. Now many of these promoters do not have the means to use this model on such a scale (partly because the QIP/IPO market is shut – the most obvious route for financing such transactions).
Whilst promoters are quick to blame “policy paralysis” for their inability to get projects off the ground, my number crunching suggests that in many instances these power, infrastructure, real estate and mining companies are throttling their projects’ back because they do not have the availability of equity that is required.
The second reason for not joining the “fright club” is that a number of regulatory institutions which have come to the fore over the past two years that will help the Indian economy going forward, though the merits of such institutions may not be clearly visible as of now.
Regulatory activism
In the natural resources sector, for example, almost all our titanic promoters seem to have hit a brick wall in New Delhi as they run into: (a) The CAG which is publishing report after report on different aspects of malfeasance in this sector; (b) The Environment Ministry which is no longer willing to give clearances to projects; (c) The Supreme Court which is unwilling to let illegal mining continue and which has advocated the use of auctions for all natural resource allocations henceforth; and (d) The relevant Ministry (be it coal, petroleum, mining or steel) which is unwilling to play ball. It is hard to imagine that our enfeebled executive is behind such a coordinated blocking of a range of powerful companies.
If the Competition Commission of India continues its crusade against abuse of dominant positions by market leaders and by cartels, it should help improve our economic efficiency. If the CAG continues its practice of scrutinising public spending and regulatory decisions, it could revolutionise the way the Indian Government works. Without such interventions from regulators and a powerful judiciary, India could go the way of numerous “banana republics” in Latin America and Africa.
The final reason for not joining the fright club is that our GDP data is so compromised that drawing any conclusions about the state of the economy based on this data could result in poor investment decisions. Firstly, India’s GDP data is subject to inexplicable retrospective revisions of a material magnitude. For instance, investment demand growth numbers have been revised upwards from 5 per cent y-o-y and -4 per cent y-o-y in Q1FY12 and Q2FY12, respectively, to 15 per cent y-o-y and 5 per cent y-o-y, respectively. Secondly, there is limited synchronisation between trade data as shown by the national accounts data and the same variables captured by the RBI. Thirdly, the share of ‘discrepancies’ in the Central Statistical Organisation’s GDP growth data have risen by 50 per cent from FY05-FY08 to FY12 (from -9 per cent of the change in GDP to 42 per cent of the change in GDP!).
Investment implications
Also, a significant part of the blame for the dramatic slowdown of the Indian economy lies not with domestic factors but with the freezing of risk appetite globally in the wake of the European crisis. My colleague, Ritika Mankar, estimates that at least a third of the collapse in India’s growth can be attributed to the slowdown in investment growth which in turn is most profoundly affected by the global risk environment.
This “blame attribution” is important. If investors pull out of equities believing that there is something “systemically” or structurally wrong with the country, they will lose a great opportunity to participate in the Indian recovery which will come when global risk appetite recovers. This is main reason why I refuse to join the “fright club” of commentators who are sounding dire warnings about what will happen to India if the Government does not do X, Y or Z.
CAG: Comptroller and Auditor Genreal of India/ GDP: Gross Domestic Product /y-o-y: Year on Year/ GAAR: General Anti Avoidance Rules/ QIP: Qualified Institutional Placement / IPO: Initial Public Offering
This article was originally published on July 26, 2012.
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