Reforms & Dismal GDP Forecasts



Amul ad poking fun at the Sensex

India’s dismal early forecast for 2012-2013 financial year’s economic growth, at a decade low of 5 per cent, should have meant glum faces at North Block, home to the country’s finance ministry.

However, strangely, not too many of the Mandarins who work in that cavernous red stand-stone Raj-era building seem too worried, rather they seemed perversely pleased. Probably, because the figures could actually come in handy for finance minister P.Chidambaram and his economist boss, Dr Manmohan Singh, when the duo argue for tough reform measures with cabinet colleagues and Congress party leaders, who ahead of crucial general elections early next year, want to see more populist measures and less of belt-tightening reforms.

Data released by the Central Statistical Organisation places growth forecasts far below an earlier 5.5 per cent prediction by the Reserve Bank and an optimistic 5.7-5.9 per cent target set by the finance minister P.Chidambaram and far average growth rate of 8-9 per cent, achieved through the last decade.

Singh-Chidambaram duo

The Singh-Chidambaram duo will have the advantage of this gloomy picture to force reluctant colleagues into agreeing to slash oil subsidies and fat defence budgets as well as steering opening up of the economy to more foreign investment and cutting red tape in doing business. 

The schism within the cabinet had often spilled out in the open in the last few months, with tough decisions like subsidy cuts being pushed on the backburner several times at cabinet meets, before being finally accepted. Spats over auctioning gas blocks between petroleum and defence ministries and opening up coal mines between steel and environment ministries still remain unresolved despite the Prime Minister chairing meets to sort out such rows.

No wonder Indian industry has been talking of policy paralysis.

To make things tougher for the Congress leadership, BJP’s poster boy and almost certain prime ministerial nominee Narendra Modi, has begun selling the `Gujarat development model’ with slogans like “minimum government and maximum governance” and "inculcate skill, scale and speed to compete with China”.  

Singh and Chidambaram desperately need now to show that they do have a `Delhi  development model’ up their sleeves and that too speedily!

Narendra Modi sells Gujarat Model

Yesterday’s data forecast said farm sector could grow by just 1.8 per cent in 2012-2013, compared with 3.86 per cent in the previous year, while manufacturing could slow down to 1.9 per cent from 2.7. This is the slowest pace of growth for the manufacturing in the past 14 years. Even the services sector which for the better part of the last decade grew in double digits, could grow by 8.6 per cent.

In the first half (April to September) of the financial year, the economy grew at 5.4 per cent, today’s data indicates that the economy may have grown by just 4.2 per cent in the quarter ending December 31, 2012 and may grow by 5 per cent in the current January to march quarter.

This data points to the desperate need to bring in reforms to boost infrastructure and manufacturing growth. Industry chamber Ficci has already flagged: “Quicker implementation of the National Manufacturing Policy, speedier decision making under the aegis of the Cabinet Committee on Investments, ushering in the Goods and Services Tax regime, passage of the insurance and pension bills in the next session of the Parliament and bringing greater competition in the coal mining sector” as ways to get ahead.

The industry wish-list more or less tallies with Chidambaram’s reforms-to-be-taken-up list, with additions like less largesse on populist subsidies and tax reforms which help Indian firms stand up better to foreign competition.

Finance Ministry officials want to redraw duty structure so that domestic capital goods, electrical gear, telecom industries and even steel which have been facing import pressure can again revive.

Proposals in the offing would place higher duties on imports in these sectors, while reducing duties on raw materials such as iron ore, coal as well as components which go into making electrical or telecom gear and having a tax structure which encourages domestic telecom and electric equipment.

India had drawn up a tax structure which imposed high duties on finished cars imported into the country, less taxes on semi-finished cars and far lower taxes on cars which were at least 70 per cent indigenous. A similar structure is being looked at for the telecom equipment industry.

However, what industry captains really want is ground level reforms such as setting up a coal regulator. India has long been debating setting up an independent coal regulator as besides the single monopoly coal producer – Coal India – a large number of firms have been given captive coal blocks and some have been allowed to trade surplus production.

Amul ad on Coal scam

The government is also expected to step up the gas and put up some 54 coal mines up for auction to a limited field of buyers –iron and steel factories and cement and electricity plants - over the next four months. The auctions, speeded up by allegations of scams in earlier allotment of mines, are expected to yield precious revenues to state government coffers and much needed coal to fire coal-burning furnaces and power plants.  

The Government has cut base prices for another round of telecom auctions, which should bring in some more money into government coffers and at the same time give telecom firms more radio-waves to base future mobile connection sales. India has about 935 million mobile connections for 1.2 billion people, and unless better connectivity and services can be ushered in, growth may soon flatten-out after slowing down to just 2.25 per cent on a year-on-year basis.

Officials say Prime Minister Singh is also pushing them to clean up a Direct Tax Code, which could jiggle tax rates, while enlarging the tax base. The DTC is expected to simplify tax laws, lead to less legal disputes over taxes and ultimately bring better compliance. Industry says any tax reform measure always helps business grow and bring more of the `parallel’ economy over-ground, with more businesses declaring their tax liability. 

However, two reform measures promised to industry at large and foreign investors in particular could remain in doldrums unless the government does a better job at floor management inside the parliament.

In the last parliament session, the government was unable to go ahead with voting on the insurance bill as no agreement could be reached in back-room parleys with opposition and supporting parties on a clause which seeks to raise FDI to 49 per cent.

Officially the debate will be shifted to the next session of Parliament. The BJP had earlier agreed to help pass the insurance bill, provided the foreign investment cap was retained at the current level of 26 per cent.

Linked to this is the fate of the pension regulator bill, which gives teeth to the regulator and allows foreign investments into pension funds. The FDI limit in pensions is linked to the limit in insurance firms. It could be taken up separate from the insurance bill and passed, allowing foreign pension funds to buy up to 26 per cent stake in Indian pensions for starters, but a final call on this could depend on how the voting numbers stack up in the coming Parliament session.

Growth, Rupee and dollar incomes

Hit by global recession and costly credit, India’s economy may expand at its slowest pace in three years at just 6.9 per cent during the current financial year (till March 31, 2012) , compared to a more respectable 8.4 per cent in the previous fiscal.

Indians used to 8-9 per cent GDP growth and aspiring to see their economy grow at double digits, weren’t exactly happy with the news. Business leaders were quick to say “I told you so”, pinning blame on high interest costs for slowdown in investment and consumer demand. A tight money policy to combat commodity inflation has seen interest rates for buyers of homes and cars as well as industry hoping to set up new factories rising to 12-16 per cent compared to 8-12 per cent, two years back.

The government admitted slowing industrial growth was a problem but also blamed the   Eurozone crisis and continued slow recovery in the US and Japan, India’s major markets. A  quarter of India’s GDP is accounted for by foreign trade and this has obviously taken a hit.  

The problem for the Congress led government has been that if it does not give the Reserve Bank a free hand to combat inflation, it risks alienating millions of poor people who have voted it to power and whose very daily meals are at threat because of rising food prices.   

On the other hand. Slow growth, shut factories means millions remain unemployed. Not exactly good news for a party which wants to woo 18-25 age group voters.

The problem of course was industrial growth at a mere 3.9 per cent compared to 7.6 per cent last year and double digit growth for most of last decade. Industrialists have long been protesting that 13 rounds of increases in the Reserve Bank’s policy rates which now stands at a high of 8.5 per cent, has made it difficult for them to borrow to set up new plants and factories or to refinance old debt

India Inc.’s top brass including the likes of Wipro’s Azim Premji, truck-maker Keshub Mahindra and banker  Deepak Parekh had also written letters to Prime Minister Manmohan Singh blaming the government for a policy logjam which has seen several key policy initiatives including bringing in foreign investment in retail, pension funds and aviation delayed and mining sector held up by unclear environmental laws.

High interest rates slowed down sales of big ticket consumer items such as housing stock and cars. Auto sales halved from 30 per cent in 2010 to just over 14 per cent in 2011, while housing sales remained sluggish in 2011 and could be in negative figures in 2012 according to credit rating agency Fitch. The latest figures issued by the Central Statistical Organisation placed growth in construction at 4.8 per cent in 2011-12, against 8 per cent in 2010-11.

Mining output shrank by 2.2 per cent. Partly because of policy logjams which saw much of the area earmarked for coal mining declared `No Go’ where mining would not be allowed on environmental considerations and partly because of heavy Monsoon rains which saw many mines shut down in central and eastern India.

Farm output is expected to rise 2.5 per cent, compared with 7 per cent in the year before. However, this is seen as a statistical glitch given that last year farms recovered after a bad farm year in 2009-2010, when agriculture grew by just 0.4 per cent. Only services provided a silver lining. Trade, hotels, transport etc. grew 11.2 per cent while finance, insurance, etc. grew 9.1 per cent.

In its mid-year Economic Review, the government had pegged GDP growth at around 7.5 per cent and at  9 per cent in its pre-Budget survey released early last year. Worryingly, economists do not see much improvement next year despite hopes that the RBI will now relent and allow interest rates to drop in a bid to push growth.

Most economists expect the economy to grow next year by 7.5 per cent or so. Not great news but still music compared to negative or marginal GDP growth rates being posted by the west.

Postscript:

The latest data also showed that per capita income will be above Rs 60,972 per annum during the current fiscal. In terms of rupees this means incomes have gone up 14 per cent in a single year! Not bad at all despite inflation eating into earnings. However,  because the Rupee’s value has fallen it means in Dollar terms Indians on an average now earn $ 1240  a year instead of $ 1177 they used to in February last year, an increase of just over 5 % !