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A Decade of Low GDP Growth

A strong-willed government can aid revival, but it will still take several quarters, maybe a year or more, before the numbers get better

Fiscal 2013-14 will end with GDP growth in the range of somewhere between 4.5-4.9 per cent. The projections for 2014-15 suggest that, at best, growth may recover till around 5.5 per cent. The economic prognosis is spotty. Some indicators are improving, while some are not. Growth has declined across the last three fiscals. Overall, this is the lowest GDP growth period in a decade. In terms of manufacturing alone, it may be the lowest period of growth since the 1970s.

There has been one area of massive improvement in the external position. The Balance of Payments, the CAD and the Trade Deficit have all improved substantially in dollar terms. Exports have risen and imports declined, also in forex terms. The rupee has stabilised after plunging to historic lows in Q2 and Q3.

The trade deficit for 2013-14 is down to a three-year low of $139 billion and the CAD is down to $36 billion from $190 billion and $89 billion respectively. Reserves have risen to $309 billion. Exports have grown by 4 per cent to $313 billion, while imports shrank 8 per cent to $451 billion. The import compression is partly due to demand collapsing, partly due to rupee weakness and above all, due to measures restricting gold imports. Reserves have risen considerably to over $309 billion, so import cover is not a concern at least. Fiscal 2014-15 will require BoP of about $180 billion so this should be comfortable.

Exports grew primarily during the period when the rupee weakened. The currency dipped from an annual high of $53-54 to a historic low of below $68. It is currently in the $60-61 zone and exports have shrunk over Feb-Mar 2014, when the rupee strengthened. The RBI will have to ensure the rupee doesn't strengthen too much and keep it traded within the right band where it can stimulate exports, without triggering currency weakness.

Currency management is not the central bank's only concern. Since Raghuram Rajan took charge, he has raised policy rates three times to help pull inflation down to single digit levels. The RBI specifically wants the CPI to move down below 8 per cent by Jan 2015.

In March 2014,the WPI was at 5.7 per cent and the CPI was at 8.3 per cent. That came after a three month deceleration and it could mean that the RBI will achieve its target ahead of schedule. But there are warnings, the monsoon could be weak due to the El Nino effect. That would push up food prices and food is the biggest inflationary component with a weight of 48 per cent in the CPI basket. A poor monsoon could therefore, mean another interest rate hike.

Among other indicators, mining is in a terrible state what with court-imposed bans and lakhs of jobs lost, or in suspended animation across the mining industry. This has had repercussions on commercial vehicle sales with trucks (and barges) lying idle and also on cargo traffic at major ports like Goa, Paradip and Mangalore.

The lack of demand for trucks, coupled to low consumer demand, has pushed the automobile industry into a second successive year of recession. The president of the industry association, SIAM, reckons 1 lakh to 1.5 lakh jobs may have disappeared as a result of this.

Among other indicators of economic health, corporate margins appear to have bottomed out but not recovered much (only a few Q4 results are available at the time of writing). Steel production has bottomed, at least temporarily. Electricity generation seems to be picking up. Does this mixed picture justify the stock market zooming to historic all time highs as has indeed occurred? The bull run has been based on massive FII buying in the past three months. It is of course, driven by hopes that a moribund government will be replaced by a more dynamic formation.

Any investor with common sense should however, recognise that India's economic problems cannot be solved instantly with a wave of a magic wand. UPA II had been trying for the past two years to turn things around. A more strong-willed government may be more successful. But it will still take several quarters, maybe a year or more, before the numbers get better. In that sense, the stock market and valuations have run far ahead of realistic estimates of what can be done and how fast. It may be illuminating to compare the likely policies and manifesto statements of the INC and the BJP on some key issues.

On Agriculture, both parties would continue to offer soft loans. Both would maintain handouts like MNREGA. The BJP states it would offer farmers a minimum of 50 per cent profit over cost of production and also try and improve rail linkages to agricultural areas. The INC says it would bring an additional 10 million hectare under irrigation. Neither party intends to look at reforms in the food procurement chain, where food inflation occurs. Neither intends to touch fertiliser subsidies.

Both parties have stated intentions of cutting down corruption and bringing back black money stashed abroad. Colour me cynical but I suspect any such attempt will be undertaken purely to harass the losing side in the general elections. Assuming a coalition results, neither the BJP nor the INC would be in a position to rein in corrupt coalition partners.

On tax reforms, both parties state that they wish to introduce GST and the INC wishes to simplify DTC. The BJP consistently obstructed every attempt to get GST rolling while it was in opposition. The INC is perfectly capable of doing the same now if it sits in opposition.

On FDI, the BJP remains specifically opposed to multi-brand retail. Policy here is so tangled anyway that potential investors are deeply suspicious of being tied up with red tape.

On the subject of inflation, the BJP says it wants to set up a price stabilisation fund. It's not clear what that will mean. The INC says the party “will continue to take firm action to control inflation”. Given the track record of the past three years, this is a joke.

On “natural resource allocation”, which is critical to mining, spectrum, etc., the BJP says it will put “national policies” in place. There are already policies in place, and some of these were originally drafted by the NDA. These policies are incredibly complex. They have sparked endless litigation and accusations of crony capitalism. Maybe the BJP can simplify the policies but I won't hold my breath waiting for it to happen. The INC wants instead to put independent regulator(s) in place. Experience tells us, regulators also tend to be captured. Either way, fast resolution doesn't seem likely.

There is silence on the subject of labour reforms from both parties. Less than 10 per cent of India's workforce is in a job. The rest are unemployed, self-employed or temporary. Without labour reform, there is little chance of improving access to formal employment for India's vast workforce. The so-called demographic dividend could well turn into an army of unhappy, unemployed.

There is silence on the subject of subsidies. Will fuel continue to be subsidised, along with power and fertilisers? These will be a drawdown increasing the Fiscal Deficit. The new land acquisition act will push up the price of land sharply. This means infrastructure projects are likely to be very expensive or to just remain stalled.

There isn't much clarity on reviewing the environmental clearance system by either party. Issues here have meant that clearances have often been slow or impossible to get. Sometimes clearances are handed out for reasons that have nothing to do with environmental compliance.

These are all touchy, politically sensitive issues with massive vested interests aligned to keeping the current systems. However, any big bang attempts to accelerate GDP growth will have to tackle these specific issues head-on. If neither major party is willing to attempt reforms in these areas, economic recovery will come eventually but only at leisurely pace. There are no low-hanging fruit left in terms of “easy” reforms because those have all been attempted in the past 23 years.

The writer is an independent financial analyst.

This story appeared in the June 2014 Issue of Wealth Insight.