There are small signs of optimism in the air. These could have been
sparked by the festival season with strong growth in sales of two wheelers,
consumer durables, retail etc., RBI?s guidance of a rate pause ahead, the new
manufacturing policy, the pick up in the October PMI with rise in new orders,
FDI inflow recording high growth in the first eight months, the stabilisation
in international food and crude prices over the past few months. Whatever the
reason, there is a sense that the run of negativism is touching the trough.
Optimism, pessimism are all relative terms and what does this really mean for
growth? We know that industry in general has been in doldrums with
manufacturing and mining at low points and construction has of course dipped.
Yet, with the second and third quarters of this year expected to turn in
7.6-7.7% growth, this spark does have the potential to translate into a better
than expected fourth quarter.
The strong underlying growth momentum has been hit hard so far, on
one hand, by relentless rate hikes and on the other, by lack of support from
the government on policy moves. On both these fronts there has been some
movement now. The RBI signalling the possibility of a pause comes as a very big
positive. It has of course made it very clear that the pause is hinged on
inflation heading downwards, but more importantly the RBI has moved beyond the
headline number to measure the trajectory. On all accounts, inflation is
heading downwards slowly, though small spikes will remain. A pause therefore is
imminent by the fourth quarter ? will the rates begin to go down next year? If
they do, how fast will the rate cuts be? All these questions will be better
answered once we know how the fisc plans to cooperate next year. The problem
with the fisc is that it is going to get even more strained, with the focus on
subsidies growing in every dimension. What?s worse, these subsidies push the
possibility of a 4% inflation level even further away, we are looking at about
6-7% inflation levels through the next year if growth is to be maintained at
7-8% levels. That?s the best we can do with a lazy government that appears to
be resigned to such mediocre aims. It appears that the RBI has factored this
into its policy now.
The other point of a new manufacturing policy however is not such
an optimistic story. The policy says all the right things ? simplification of
regulations and procedures, exit mechanism, tax incentives, skill initiatives,
green audits and so on. But the central focus is on National Investment and
Manufacturing Zones (NIMZs) ? the simple question that begs to be answered is
that even if these NIMZs work out as envisaged, what happens to the rest of the
country? If the laws can be avoided for some areas, why can?t all industries
and industrial areas be declared NIMZs? Why shouldn?t there be a shift in
business regulations and procedures all across the country? Why shouldn?t there
be exit mechanisms for all units? Not every state can pull these NIMZs off,
more importantly, not every entrepreneur has the capacity to locate in these
areas; effectively creating islands of excellence, without even trying to bring
the others up to par with the basics, may push growth up a few points for a few
years, but why go this route? Why will NIMZs work when SEZs did not? The
government has wasted its and everyone?s time.
The issue is that the policy focus is not on the long term at all.
If we have to resolve the pressing problem today that impacts the long term
potential of the country, it?s the need to kickstart investment in a
sustainable fashion. Getting the investment story right would also reduce
inflationary pressures. If that is really so difficult, then we should
reconcile ourselves to a 7-8% growth maximum being the best that India can do
and focus on construction and services.