American crisis, Asian concerns: 24th August Financial Express

The protests by Anna Hazare come at a time when the world economy is also battling a credibility issue, with a global slowdown being conjectured for the current year. One thought that hits us is whether or not these protests will have any wider ramifications for our economy. The global slowdown has evoked a mixed response with arguments being on both sides, with a distinct tilt towards a neutral situation for us. How about the current political and social unrest? Will it upset the clichéd apple cart?

There are two aspects to this protest. The first is whether or not foreign investment will be affected, and the other is whether the domestic economy will witness a backlash. The protests so far are more political in nature, which, at its exaggerated best, has probably some traces of the scent of the jasmine backlash in Tunisia, Egypt and the rest. Hopefully, it does appear that it will remain confined to demonstrations with the more affluent sections of society also using this opportunity to be seen with the rest. The interesting conjecture here is its implications for the economy.

Growth in the economy is driven by three sectors: agriculture, industry and services. Agricultural output is impervious to what happens in Delhi as long as the pricing policy is correct and the FCI is in action. Therefore, there should be no concern from this quarter. Industry is more worried about interest rates, demand and policies. Currently, the concern is that interest rates will drive back consumerism and investment, which is not good news. RBI is evidently looking at inflation to consider interest rate decisions. Therefore, there should be no impact of such demonstrations. Policies are of course important for industry and this is where there can be concern because important discussion time is being used up on the governance issue rather than economic affairs. There are important policies on pension reforms, insurance, FDI in retail, and so on, which will obviously miss the bus as Parliament time is diverted to Ramlila grounds.

There are two ways of looking at it. A more cynical view is that these policies have been on the agenda anyway for long without really derailing growth and hence should not matter. While this is true to the extent that immediate prospects may not be affected, further deferment of such issues will come in the way of future progress. This is so because once Bills are held back, it takes a long time to get them back on the discussion table. One can recollect the infamous FCRA amendment, which has been pending since 2003 and has not seriously been discussed as sessions close and the papers have

to be reintroduced. Therefore, definitely in the medium run, growth will be held back as long as there is a status quo on the policy approach, which is not desirable.

The services sector is a dominant one, with around 45% of its output coming from the unorganised segment, which is largely insulated from any such thought-based revolution. The rest of the sector will be driven by the normal course unless there are any disruptions physically, which, though not expected, cannot be ruled out. We have seen that events like strikes or blockages of transport take their impact on the movement of goods and people, which eventually affects certain sectors like transportation or tourism. But, assuming that the movements will be largely peaceful, as this is the core of the ideology here, disruptions should be minimal.

This then turns attention to foreign investors. Here, again, there is a pragmatic way of looking at things. India has not really been anywhere close to high on the World Bank’s chart of doing business and remains in a static state—notwithstanding economic reforms—when it comes to other morality and governance indices used globally. This, in a way, is a comfort because a peaceful relentless move against such issues should not stop foreign investment from coming in. Portfolio investors will still prefer to look at the future growth convictions in the Indian economy, which is strong even today in a world that is sliding down the grease pole. With strong growth numbers still expected in such adversity from India, it remains an attractive market for all purposes.

Foreign direct investment, on the other hand, has been coming in good numbers this year, and evidently the

opportunities that exist are an ex post vindication of the economy’s prospects. Gross inflows have been $13.4bn in the first quarter as against $5.7bn last year. Therefore, foreign perception of Indian markets should remain unaltered here. In fact, governance standards would definitely improve in the aftermath of what is happening today.

Hence, it may be concluded that it should be business as usual except for some further delays in discussing Bills that anyway do not solicit broad consensus. Our economy is fairly mature and resilient to such occurrences and there is an inherent strength that has been displayed in the working of the economy. Our policymakers have been pursuing policies quite independently with a single-minded focus—be it RBI, finance ministry or Planning Commission. We have seen that even a change of government with different ideologies has not derailed the broader vision or growth path. Quite clearly, Ramlila or any other venue should not come in the way.