Going UP - Mission Impossible?
The new year is all about going UP. If you're about to dismiss this as a wrong insight, given the dismal business sentiment with no graph headed in that direction, here's a clarification: the 'UP' being referred to is the state of Uttar Pradesh and all votes are headed in that direction upto March 4, 2012. The policy paralysis that we have been subject to, which has brought our economy to its knees will continue even further till the UP elections are fait accompli.
The mid-year review presented by the government clearly shows that GDP growth has fallen to 6.9 per cent in the second quarter, manufacturing has slowed down to 2.7 per cent, construction to 4.3 per cent, while sectors like mining have shown a negative growth. Though the finance minister presented an annual growth forecast of about 7.3 per cent, it is unlikely to meet it and manage the projected fiscal deficit target of 4.6 per cent GDP. On one hand using fiscal tools, the RBI has continuously raised interest 13 times in the past 12 months to tame inflation, while on the other, the NREGA scheme and the food security bill are being announced on the back of a rising fiscal deficit and existing fertiliser and petroleum subsidies. It has been argued that part of the European crisis owes its woes to the creation of the burden of welfare, even though those countries were in a prosperous state to bear the largesse at the time of their introduction. We, on the other hand, are staring at a slowdown. RBI data shows, year-on-year growth in non-food credit had decelerated to 17.4 per cent as of November against a target of 18 per cent. Similarly, year-on-year growth in M3 (money supply) had also fallen below RBI's target of 15.5 per cent growth. The stimuli, in the form of government spending especially after 2008, are tapering off. During April-September 2011, Central Government expenditure rose by 9.9 per cent per annum versus an average growth of close to 20 per cent per annum over the three years ending March 2011. Government spending will continue to be low on account of the slowdown in growth, affecting tax revenue collection; reduction in customs and excise duty on petroleum products; and volatile equity markets, making divestitures difficult.
The one reform that would have seen the initiation of supply-side reforms through agri-infrastructure was shot down in the political one-upmanship game. So, the Parliament prefers to pass the Food Security Bill which will cost us Rs 100,000 crore, rather than FDI in retail which will result in the creation of backend agri-infrastructure; protect foodgrains from rotting; and enhance realisations for the farmers by cutting out middlemen and enhancing productivity.
Here's the scenario for industry: low government spending resulting in a deficit in project pipelines, high building material prices with a forex double-whammy, rising cost of hard-to-find labour, high interest costs, low demand, a focus on corruption issues and UP elections drawing government attention. So what action does this situation need? Clear all pending projects with directions on action required for their clearance (we are losing Rs 100,000 crore per annum on delayed projects - enough to payfor the Food Security Bill); enact the GST (Goods and Service Tax) with a deadline; expedite the power reforms process; clear hurdles in land acquisition and mining bills; commence interest rate reduction; and step up government spending for development.The external environment will still play havoc but our own agenda is no 'mission impossible!':
Happy New Year!