India in New Year

The speculative urge in the markets has been dampened, not entrepreneurship or the drive for self-improvement

by S. Narayan

(January 05, New Delhi, Sri Lanka Guardian) The year 2008 has been traumatic for the nation and its economy: Some of the scars and bruises will take a long time to heal, and the media has been full of stories of the difficulties the year has brought to various sections of the people, be they employees, exporters, investors or manufacturers. The government is doing its best, and its actions recall what Churchill once said: “Governments will eventually do the right thing, after having first exhausted all other alternatives.”

The new stimulus package announced on Friday is likely to cost the government at least Rs40,000 crore, and provides opportunities for greater liquidity for the manufacturing sector, especially commercial vehicles. I had written several weeks ago about the difficulties faced by non-banking finance companies, and the new special-purpose vehicle mechanism announced is likely to mitigate these to some extent. The reduction in repo rates and the cash reserve ratio is likely to enable banks to provide easier credit and greater liquidity to business. Exporters and small and medium enterprises would have wished for something more, and the anxiety that the available liquidity should find its way into productive businesses will remain for some time, but the steps announced are all welcome ones.

In fact, there are several signs that 2009 will be considerably better than 2008. First, one has only to visit average shopping centres in the metropolis and the shopping areas in tier II and tier III cities to see that that the consumer is still buying, and indeed, with little let-up. At one end, imported luxury brands are seeing their India sales up over 25%, and at the other end, the Sarojini markets, GK markets and indeed, all the places you and I go to, are fairly full. Off metropolitan cities, middle-class residential housing continues to grow, with little let-up in prices in Chennai, Pune, Coimbatore and most of the “middle-class” cities. It is true that malls have lower footfalls, that tourist arrivals are lower, that upper-end residences have no takers and commercial space is in oversupply—but these are bubbles of the last four years, and the fundamentals of the average consumer have not changed. FMCG companies continue to grow very well, and the sales of electronic goods have not slackened perceptibly. There has been a good winter harvest, the paddy procurement is very good and the support prices have been higher than before, thus leaving the farmer with a good disposable surplus. There is also no shortage of savings—banks have had a good receipt of fixed deposits, the new schemes from Nabard and LIC have elicited excellent responses and people, in short, are sitting on cash. It is true that investments have moved out of mutual funds and equity and debt markets, and that investment capital is hard to find. But it is also true that people are spending more carefully, weighing returns and risks better than they did in the earlier years. In short, the speculative urge has been dampened, but not the entrepreneurship or the drive for self-improvement. Doctors and chartered accountants, hospitals and educational institutions, lawyers and the judicial system, bureaucrats and the government and indeed, all sectors that provide the vaguely defined “public services” continue to do as well as in the previous years, and form the bedrock of basic growth that one would see in 2009.

Second, the anxious people who occupy a lot of English-speaking space are the big corporate houses, the large real estate developers, exporters, automobile manufacturers and, indeed, the large companies that figure in the stock markets. These are the faces of the country’s integration with the rest of the world. But this is only a part of the Indian economy, and the steps taken by the government are likely to provide relief and opportunity to this group. And the companies are analysing their capex and growth plans more carefully, and investments are getting better focused and monitored.

In the last few years, the heady growth in valuation and leveraging had even the most conservative householder dabbling in risk. Now that he has lost some money, he is back to being what he has been all his life—a prudent spender, saver and investor in himself and his family. In fact, we are back to our core and basic values, at levels of income, consumption and living that is considerably higher than a decade ago, and therefore there is little doubt that the lessons of 2008 will form a springboard for growth.

Of course, this will not happen all at once, nor by itself. The government needs to infuse confidence in the growth story and not in the credit markets alone. If it is prepared to invest in projects, others will, and yet the list of proposals recently approved by the cabinet, including universal secondary schooling, appears to focus on social rather than economic initiatives. Announcements for some metro rail projects or large power projects including nuclear power, expansion of the rail system and the like, are likely to charge entrepreneurs into participating together with the government. Like Tennyson’s Ulysses, it is the time for the government to “push off, and sitting well in order smite the sounding furrows, for my purpose holds to sail beyond the sunset”.

We can do it.

(S. Narayan is a former finance secretary and economic adviser to the prime minister. )
- Sri Lanka Guardian