Reviving India’s animal spirits: Financial Express 15th September 2012

The epigram ‘India Shining’, which was coined years ago, appears to have been replaced with the epitaph ‘India Dimming’. Those with a cynical bent bring in the bathtub metaphor and liken the Indian growth path to one where we are moving from the state of ‘sliding’ to ‘stagnation’ into the ‘drain’, in case the status quo prevails. Besides, the world over, governments are doing something to resuscitate their economies while nothing much seems to be happening in our economy.Today, virtually every economic indicator is under pressure. GDP growth projections are only being scaled down. Industrial growth rate discussions are more academic in nature where, while we discuss whether 0.1% is better than a negative number, the inescapable fact is that there is stagnation. Inflation appears to be something about which no one has a clue because while RBI has taken the onus of addressing it, the other government arms are not so keen. MSPs have been raised and adjustments in fuel prices will be inflationary. Growth in credit is tardy because investment is not taking place in an environment of high interest rates and the primary capital market is lacklustre. The secondary market is surprisingly stable within a range, with foreign interest still holding on partly due to the fact that we still remain a better-placed market. But for how much longer, is the moot question.The fiscal deficit is going awry because low growth has upset revenue collections and our unwillingness to do something on subsidies means that expenditure continues to overshoot. Government spending per se can be Keynesian in nature if the money is spent. So, MGNREGA should be good to the extent that the money is spent on non-food items. Subsidies are not effective Keynesian tools because they only buffer us from price increases and do not add to purchasing power.The external account, too, is under pressure. The exports boom has petered down to a whimper; and with global economic conditions being where they are, a revival will be only slow. QE3 and OMT will mean more money that will push up commodity prices and hence our import bill. FDI has slowed down, which could be an aberration but the rupee has become sticky now with prospects of a further depreciation, which makes ECBs less attractive. The question is, what do we do considering that we actually may not have much control over several of these variables?In mathematical terms, we are trying to maximise the function subject to several constraints. It is quite clear that our current policies have not quite been able to deliver on any of our goals. One way out is to do things in a different way, for which we have to identify the variables that we can control. We should draw our trade-offs. One option is to focus on growth and improve sentiment while possibly living with higher inflation.This means, for instance, tackling the fiscal deficit. While there is controversy relating to raising the prices of the administered fuel products, a simple solution is to increase prices marginally in steps so that the burden is absorbed easily. We have always had the penchant for going in for high increases in prices sporadically, which does not go down well. A better way is to increase price of diesel by, say, a rupee on a monthly basis, which will be palatable.Second, all project expenditure that was planned in the budget should be implemented immediately now. There is around R1 lakh crore budgeted for the year, which should be spent immediately. The practice so far has been to keep this expenditure pending till the end and cut back in case the deficit goes out of control, which will again be the case. This will provide the stimulus to the extent that it has been budgeted and will also let the private sector know that the government is doing its bit.Third, the steps already taken on disinvestment are laudable because they have the potential to revive spirits and also help to lower pessimism on the attainment of the target of R30,000 crore. A clear list of companies to be divested along with timelines will reassure the markets. The same holds for sale of spectrum.Fourth, RBI should now try lowering the interest rates. While this may sound out of place at a time when real interest rates are already negative and inflation likely to only increase, it may be worth trying just to assess whether the animal spirits are revived. Industry has been complaining that high rates have held back investment. The ball should now be passed into their court by lowering rates by 100 bps in one shot, with the caveat that RBI will review them in case the results do not flow. This way, the onus will be on industry to take the lead.Fifth, some of the issues relating to supply of coal for power plants, FDI in airlines, new private banks, environment policies etc that do not have any major opposition should be implemented as soon as possible. While this would not have a direct impact on the economy, sentiments surely will improve. One good measure already taken is to just correct the twin blunders of GAAR and retrospective taxation. These have had a soothing effect.Quite clearly, once the government starts taking action, as it has just done, the right signals will be sent out. One can now expect some serious action on the fiscal side and policy implementation.