Reviving the animal spirit: Financial Express: 23rd July 2012

Only GoI can pump-prime the economy as only it can raise funds at 8-8.5% When the Indian cricket team was at its high, winning tournaments, everything we did was right and everyone was doing brilliantly. But when we lost to England and Australia, the reaction was typically Indian. Dhoni was a dummy captain, Sehwag only nicked, Dravid lost his reflexes, Sachin plodded for the record, Yuvraj was anyway an upstart, Gambhir was better at swearing than batting and our fast bowlers like Zaheer were a club cricketer’s delight. It is the same with our economy. Until 2011, we were the second-fastest growing economy whose story was around double-digit future growth. India Inc was an innovator and knew how to get through, FIIs just loved India and the inflows of FDI proved that our policies were in place. The government knew its numbers and 20% exports growth showed that we had arrived. Besides, we had so many dollars that everyone advised RBI what to do. We brought back Tobin and spoke of taxing dollars inflows. More importantly, we were isolated from global disturbances. March 2012 has changed the storyline. Nobody knows what to do, and the growth numbers belted out are hopes and not projections in a pessimistic scenario. The government is paralysed and cannot act. Industry is waiting for the proverbial Godot or action from the government, which is not forthcoming. RBI action on interest rates is now one of throttling growth while for 2 years it was in the right direction. Some have gone and written to say that our growth story really never was (a thought never expressed when we did 8%-plus) and we are a nation of 6% growth. Now, we are linked to the global disturbances and there is nothing to suggest that things are right. How do we move forward, practically speaking? There are two options. One is to wait and hope that things work out somehow. It always does. Like crude oil prices are coming down, which if not interrupted will improve the current account and probably stabilise the rupee. Lower oil prices will spare the government of the higher subsidy embarrassment, which, in turn, will fix the fiscal deficit in a way, if ceteris paribus conditions hold. That should inspire investors to come in. Inflation hopefully will be range-bound and the ubiquitous statistical base effect will ensure that prices are under control. RBI will most certainly not raise interest rates even though there could be a delay in lowering them, and if the deficit is under control, liquidity pressures will not be there and industry can start investing. The PM spoke of expediting projects, which is useful to incrementally add to optimism. The sounds made on GAAR and retrospective taxation could also work with a bit of luck and we could be on the upward climb, albeit with a struggle. This is one way out, which is benign inaction where the outcome depends a lot on good luck. Nations normally are not twice unlucky and so we can work on this premise. What could upset this rhythm is the resurfacing of the euro crisis or oil prices shooting up again. If that happens, then we risk slipping back. The other way out is to do something. The PM spoke of reviving animal spirits in enterprise. This was the Keynesian thought on what drives investment. He said that while theories on interest rate make sense, the real clue was industry picking up the ropes. Today, with stagnant demand and high interest rates and capacity buffer, animal spirits are at best of the whimper variety. The private sector cannot borrow at 16% plus, which is what the medium and small companies pay, and still remain viable. The only spirit that can be shown is by the government, which will be an extension of the Keynesian doctrine of pump-priming. It is still the only entity which can borrow at around 8-8.5% and hence accesses cheap capital. There are lots of ifs and buts today especially as any such expenditure will clash with liquidity dispersion and add to inflation demand. But hasn’t our high fiscal deficit also been pump-priming? But it did not deliver. So far, the pump-priming has been more in line with either maintaining consumption as in fuel subsidy or injecting liquidity, analogous to digging up holes to fill them up, i.e. MGNREGA. The money generated has taken care of existing consumption and not led to additional demand. Further, with higher inflation, most of these funds are being diverted to food and have not led to demand for industrial products. Therefore, priming has to be in project expenditure, which is announced and implemented right away. Suppose R10,000-20,000 crore is earmarked for power or roads. These projects should be implemented without delay so that there is activity being seen. PPPs are the right way, which should eschew the normal public procedures of bidding or else they would be non-starters. This will trigger similar actions in other sectors through backward linkages, which, in turn, could restart the growth process. Immediate changes in policy would help, but, practically speaking, this is not conceivable given the controversies surrounding them. In the absence of such affirmative action being taken by the government, it is unlikely to revive the animal spirits and we will be falling back heavily on time, à la Shakespeare’s great healer. But then the amplitude of the time period will be unknown and it will be leaving a lot to chance. The spirit has to be shown by the government.