A three-week end-of-the-year vacation came to an end on 8 January when my Singapore Airlines flight touched down at Singapore’s Changi airport, with the usual note of wistfulness. This “vacation” took me to many meetings and conferences in six cities. My impressions from this visit form the basis for my first column of the year.
One of my friends living in north Mumbai, situated away from the din and bustle of Bandra-Worli and south Mumbai, admitted sheepishly that his small apartment was worth around Rs 1-1.2 crore. Prices of apartments coming up in that distant suburb of Mumbai match those that come up in the posh and central areas in most other cities in India. The real estate bubble is both a reflection and the cause of the overall demand-supply mismatch in the Indian economy.
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The problem is not with hoarders or middlemen, as is commonly made out. Ban on exports and other short-term price-cap measures prevent price signals from causing an adjustment in demand. Worse, they prevent farmers from benefiting from the improvement in their terms of trade (the enduring hypocrisy of India’s commitment to farmers). Higher prices would also induce them to increase production and improve productivity of their land. Repeatedly, governments have done the opposite. Yet, farmers’ suicides are blamed on factors and forces other than these short-sighted decisions.
Recorded food price inflation is at 20% and the overall inflation rate is at or above 10%. Inflation expectations are about to be entrenched at higher levels, if that is not already the case. That would give rise to the well-known price-wage spiral. The government that has put the “aam aadmi” at the core of its policy agenda is overseeing a sustained rise in prices of essential commodities.
India needs a supply revolution, if not a supply-side revolution. The lower inward foreign direct investment in the current fiscal year and the alarming decline in the growth rate of production in core sectors confirm the same trend: that investments are not happening in the right areas.
Yet, television channels, commentators and experts are unanimous in predicting the arrival of double-digit growth in India in the near future. There is nothing preordained about India’s economic growth. Without reforms that remove bottlenecks in many areas, demographic dividend will be all about domestic demand and not domestic capabilities. Many countries have stood on the threshold of higher economic growth and widespread prosperity, only to fritter them away through complacency.
An Internet search on “India and Argentina” takes us to an interesting document prepared by Vijay Kelkar (http://info.worldbank.org/etools/docs/voddocs/328/940/kelkar.pdf). Perhaps this document was prepared sometime in 2002. It is not certain. He points to India’s many differences (advantages) with Argentina: absence of offshore borrowing, political intolerance of higher inflation, flexible labour market since 90% of the labour force was (and is) in the unorganized sector and hence flexible, market-determined exchange rate (no official commitment to a fixed exchange rate), rising savings rate in the household sector that prevents the high fiscal deficit from crowding out of private investment and, lastly, institutions that manage social conflict.
It behoves us to ask whether these advantages are there and working as they should be, around 10 years later. Has a flexible labour market created jobs for all those who seek them and are capable of working? Has the political non-acceptance of inflation weakened? Has the household savings rate plateaued in India, and even if it has not, is investment going where it should? If not, are there incentives or disincentives that stand in the way? Despite lower interest rates, if an extortionist and corrupt executive chips away at returns to private sector participants at every stage of investment—from award of contract to construction to payment of bills—then should we be surprised that speculative rather than productive, ends attract investment capital?
Are institutions of conflict management doing their job effectively? Many stakeholders in society attack the judiciary, an important institution of conflict management, if it does not rule in their favour. Parliament is non-functional or dysfunctional and many important pieces of legislation are both badly drafted and little debated. In an important state, the executive does not want the police to take cognizance of its interference, let alone resist it.
It may be necessary not to lose one’s sense of optimism and larger purpose about India, in this milieu. With a few exceptions, most are basing their overriding optimism on India’s favourable demography. The least they can and should do is to find out how many countries rode the demographic dividend to economic and social progress and how many allowed their weaknesses to prevail over their demographics. That is the first step in ensuring that India does not join the latter camp.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at email@example.com