From where we stand, we see only government spending as the way out of a crisis like this. The unfortunate reality, though, is that India hasn't any bullets left. The government has fiscal obligations that it cannot abscond on, not if it wants to maintain the country's credit ratings. And it doesn't look like exports can be the economic saviour for India that it has been for Southeast Asia, not even with the falling rupee.
What, then, are India's options? It cannot depend on falling oil prices, easy Fed policy or yet another global miracle, as it has done over the years, because these are economic imponderables. And while there is no shortage of pundits with big ideas for India, the simple fact is India cannot afford to execute big ideas, given the pushes and pulls of a democracy run through coalition politics.
So what do we do when we can't afford the big ideas, if, as it were, we can't afford to buy the tractor to move our mountain of problems? We go for the small ideas. We move that mountain bucket by bucket - we take a small idea, or better yet, many small ideas, that would have a quick material impact on the economy, and ruthlessly execute them.
Here's a bucket-sized idea: The government orders 200,000 public transportation buses. Given the sorry condition of India's public transportation system, there is no way this would be called wasteful spending; nor would it require environmental approvals. The benefits would be tangible, and the multiplier effect would be far-reaching. We've done a back-of-the-envelope calculation (see table) and find that this one project alone would add $11.8 billion to the overall GDP, i.e., a 0.6 percentage point boost to GDP growth, and create half a million jobs.
More importantly, the government wouldn't have to foot the bill for this all on its own. The predictability of revenues and shorter payment period would be incentive enough for the private sector to create very simple equity or debt instruments for such a project. The risk, then, would not be on the government's balance sheet. We can point to several examples of projects successfully executed using such methods across Asia. A recent one is the Bangkok metro train system, which is very similar to the Delhi metro. To fund the expansion of this project, the Thai government securitised future ticket receipts of the Bangkok Metro.
We can think of many other small levers that can result in big changes, in a manner of Archimedes' lever-to-move-a-mountain strategy. Why not invest in thousands of small projects in areas such as public toilets, sanitation, domestic tourism, rain water harvesting etc? The concept is similar - a basic need for which consumers pay a relatively small amount, but involving expenditure that would have a significant impact on the economy. Just as sachets were the game changer for the consumer industry, this sachet or bite-sized (easier to digest as well!) approach to economic growth could bring about far-reaching economic development, that will create growth as well as greater common good. In cricketing parlance, this is equivalent to continuously taking singles rather than looking for the big sixes. The smaller projects would fly below the radar, not requiring complex approvals, and would keep the economic scoreboard ticking. This is also very similar to the principle used in portfolio management, where the emphasis is on lots of uncorrelated bets rather than a few, large, all-or-nothing bets. Ultimately, the government is the portfolio manager of the economy, and putting sound portfolio management practices to work in framing economic policy is a prudent approach.
In my opinion, it is decisions like these that matter more in the long run, more than cutting rates or talking up the economy. Government divestment targets become easier, as not only earnings but sentiment also improves. Above all, however, what this does, more than provide transportation or improve hygiene or expand infrastructure, is boost business and consumer confidence, with the consequent improvements in the environment, productivity, and investment.
India has been among the biggest recipient of portfolio flows in the last 10 years, with about $125 billion coming in. The main drivers have been emerging markets inflows and significant allocation to India. It is clear to me, however, that both these drivers will be under pressure possibly on a multi-year basis. India would do well to brace itself for an environment of negative portfolio inflows for a few years. The days of access to cheap capital to hide our mountain of problems are gone. But the outlook does not have to be so dire. Fortunately, our savings rate remains high and we can still turn the domestic economy around provided capital is used optimally. India is not exempt from the laws of gravity and economics, and it has to realise that it should seek solutions to its problems from within - else we are headed towards a crisis, if we are not there already.
The author is a portfolio manager with a foreign institutional investor. These views are his own.
bucketsol2growth@gmail.com
bucketsol2growth@gmail.com