Charles Dickens may lose his balance under our present conditions and be compelled to say: it is the worst of times, an age of foolishness, the epoch of incredulity, the season of darkness, the summer of despair, we have nothing before us and we are all going direct to hell.
Our economy is currently in a shambles. Several years of misrule and missed opportunities have resulted in slowing growth, a plummeting rupee, increasing indebtedness, and rising inflation and joblessness. It has pushed us Indians into a panic. But, hang on before you buy that one-way ticket. A silver lining is emerging on this very dark cloud.
Speaking specifically of cumulonimbus clouds, we have had a very good monsoon season. According to the Indian Meteorological Department (IMD), India has had cumulative seasonal rainfall of 804mm versus a normal of 742mm, resulting in 8% excess rainfall. The spatial distribution of this rainfall (except for Bihar, Jharkhand and the North East) has been excellent and should support a bumper crop. The Food and Agriculture Organization (FAO) said that cheaper global food prices last month reflected declines in corn, wheat and edible oil prices. Prospects for a rebound in global cereal supplies to record levels have reversed the price trend this year. The FAO price index, which measures monthly price changes for a food basket, is at its lowest since June 2012 and is expected to decline further.
So, prices make up a bit of the silver lining. How, you may well ask, in the context of generalized inflation can prices be an item of good news? First, as the FAO index suggests agricultural prices are likely to decline because of record global production and a good monsoon (this is net of adjustments for imported items, and the increasing costs of transportation and storage).
Second, at the very time when the prices of ordinary things are going up, asset prices in real terms are beginning to decline, in some cases sharply. In particular, the rental price for commercial real estate has been declining for some time on a real basis. The average current rental yield for commercial space is only 2.5%. As the US Federal Reserve tapers its quantitative easing, real interest rates in India will likely rise. This will cause real estate prices to fall. Commercial rent, which is a critical ingredient in the recovery of the economy, will fall further. Additionally, declining equity and fixed income markets in dollar terms begin to once again attract foreign investors—both foreign direct investment and foreign institutional investors—since return on investments look attractive. Sceptics would say that the decline in asset prices is a necessary but not sufficient condition for economic confidence to return.
To generate sufficient confidence that the country is on the right track, the government needs to act, courts need to adjudicate and Parliament has to legislate. It may well take till the next elections for the government to act cogently, but the good news is that Parliament has woken up. In just this monsoon session, more important Bills have been passed than for the entire second term of this government. To name a few, the companies Bill, the food security Bill, the pensions Bill, the land acquisition Bill, the judicial appointments Bill and the street vendors Bill have all been passed.
Several others, including an insurance law (amendment), are likely to be taken up in this session that was extended by a day and may be extended further. To be fair, some of these legislations may exacerbate the problem (food security and land acquisition, for example). Nevertheless, completed action and removal of uncertainty hold a premium for economic participants. Investors will engage the long-term case making some allowances for the negative perceived effect of these actions.
The long-term case for India is well-known and I seek only to update it in light of recent developments. The most important learning is that it is not inevitable but must be consciously delivered with good policy and action. The reduction in poverty reported recently is real (the controversy over the poverty line is a sideshow) and points to the impact that can be made with strong growth and targeted social assistance. For the median Indian, born twenty-plus years ago, this is the first taste of the cost of inaction and misrule. If this young Indian gleans that good governance and continual action is required for prosperity, then this crisis would have served a very valuable purpose.
Last week, markets surged and the rupee reversed when a young man, the new governor of the Reserve Bank of India, made a speech. In economic terms, the speech was unremarkable. But, he telegraphed from the podium that he was an adult who was in charge and accepted the responsibility. The good news for India is that it may require only a few such (wo)men to put us back on track.
Don’t lose faith in Dickens’ idea of a “beautiful country and a brilliant people rising from this abyss”.
PS: “A living faith will last in the midst of the blackest storm,” said Mahatma Gandhi.
Narayan Ramachandran is chairman, InKlude Labs. Comments are welcome at firstname.lastname@example.org
To read Narayan Ramachandran’s previous columns, go to www.livemint.com/avisiblehand-