Let me state at the outset that I have been a firm believer in the India story. And that is precisely the reason why I am not quite happy at the state of our economy today. What also concerns me is the lack of any meaningful debate within the political fraternity on the ways and means to revive the economy.
In 2012-13, good news has invariably been mixed with bad news. Even as the months of complacency and inaction on the policy front seemed to have ended in September 2012 with a show of welcome political resolve, it was accompanied by poor economic performance.
Now, if one has to look at the 2.5 percentage points gross domestic product (GDP) slump over the past two years, I would flag the following four root causes—high inflation and interest rates, inaction on the policy front, a lack of fresh investments, and poor monsoon.
The manufacturing sector is either stagnating or contracting, and the normally robust services sector has seen a sharp slowdown. In January, lower inflation prompted the Reserve Bank of India (RBI) to cut interest rates for the first time in nine months; but this silver lining has now been covered by a fresh cloud—the current account deficit has become an area of major concern, and this might put further rate cuts on hold.
So how did we land ourselves in this situation?
Policymakers probably assumed the country will come out of the 2011 slowdown as quickly as it had recovered from the slowdown in 2008. It was believed that the demographic advantage and our market size were enough to sustain an over 8% growth. So complacency seemed to have set in and the India story was put on autopilot. Other factors also contributed towards creating this situation. For example, diesel prices were left untouched for years even as global crude oil prices hit the roof. Secondly, precious little was done to rein in inflation for far too long; RBI started moving in this direction only in 2010.
Business sectors can sustain growth when, at least, a few growth engines are firing during difficult times. If that doesn’t happen, the industry goes into a tailspin.
Look at the two-wheeler industry, where growth has slowed considerably. And yet, the same sector bucked the previous slowdown in 2009-10, another year when rainfall failed. Yet, in that year, the services sector was growing in double digits and this created crucial pockets of demand that offset the poor rains. Today, the pace of the services sector growth has halved, and a poor monsoon in 2012 has made it worse. Of course, the government, to its credit, is now trying to put the economy back on track. But it wouldn’t be fair to demand a quick turnaround. We need to understand that the impact of major reforms (real impact, and not just feel-good reforms) in India is usually felt only a few years down the line.
Therefore, I expect to see a U-shaped recovery rather than a V-shaped one. The shape of the U, of course, will primarily depend on our proactive approach towards fast-track reforms, the movement of the rupee and crude oil prices over the next six months.
This is the new reality and the new normal that we must wake up to in 2013. We have no option but to take the slow and painful road back to recovery.
In terms of setting priorities, I think the government should go the extra mile in getting the goods and services tax off the ground. This move alone can lift GDP growth by 150 basis points; perhaps, the states coming on board should be given a special bonanza, like a higher share of central sales tax proceeds. One basis point is one-hundredth of a percentage point.
The current account deficit has to be tackled quickly as it is affecting inflation and weakening the rupee. There is also a strong case for boosting domestic edible oil production in order to reduce palm oil imports. India’s palm oil import bill soared from Rs.14,709 crore in 2006-07 to Rs.56,295 crore in 2011-12.
Growth is necessary but, at the same time, it has to be employment-intensive. The generation of more employment is likely to set off a virtuous cycle of more consumption, greater demand and higher growth.
The time has also come to revisit the Mahatma Gandhi National Rural Employment Guarantee Act—this flagship programme scheme has undoubtedly reduced poverty, but has also spiked wages, especially in rural India, without the resultant increases in productivity. Perhaps, an emphasis on skill and certification will address this gap.
The focus also needs to aggressively shift to infrastructure projects, which could be funded by channelizing household savings. For this to happen, the cabinet committee on infrastructure will have to get the various ministries to commit to fixed timelines for project approvals.
Over the last few months, the government has shown us its keenness to bite the bullet. Now it needs to show us that it can fire as well.
Pawan Munjal is managing director and chief executive officer of Hero MotoCorp Ltd