To most Indians, it is still not clear why the golden era of growth that began in 2003 has come to such an abrupt end. But what is even harder to understand is the lack of concern that two governments that have nothing in common have shown over the need to revive it.
Industrialists have been crying themselves hoarse for five years that the single most important cause of the collapse of growth is the exorbitantly high interest rate regime the RBI has imposed, with only a single brief respite, from 2007 till today. High interest rates discourage borrowing, so everything that people buy on instalments becomes more expensive. These purchases range from housing, to automobiles, to home and office appliances, to furniture - in sum, about half of everything that industry produces. But that is only the beginning. Higher interest rates also discourage investment by making it more expensive, and more risky. The resulting all-round drop in demand leads to lay-offs, wage cuts, insecurity and a rise in the propensity to save. This initiates the second round of economic contraction.
In India, which was in the throes of an investment boom in 2006, the contraction has been exceptionally severe because high interest rates have not only delayed new investment but also stalled ongoing projects. As the high interest rates have persisted, the list of such "stalled" projects has grown longer.
The full cost to the country was laid bare by volume I of the government's Economic Survey of 2014-15: By December 2014 more than Rs 880,000 crore - $125 billion - was locked up in stalled projects. This was one-sixth of the total capital invested in industry today. Simultaneously the rate of fixed capital formation, i.e new investment, had fallen from 24 per cent of the GDP in 2009-10 to zero in the middle of 2014.
Infrastructure, industry and construction account for the bulk of stalled projects. Infrastructure has been the hardest hit because it has the longest gestation period. At 11-12 per cent, which is the current cost of borrowing including bank compliance charges, the capital cost of even the most prudently managed five-year project goes up by 30 per cent before it earns a single paisa of revenue. The payback period therefore becomes correspondingly longer. It is not surprising therefore, that 87 per cent of the current bad debt with the banks is of "larger" companies that have invested in airlines, heavy industry and infrastructure projects, and that this figure has risen from 78 per cent in just the past six months.
Today some of the biggest blue chip companies in the country have either folded up or are desperately asking their creditors to convert their debt into equity to give them a chance to survive. Kingfisher airlines is gone; Suzlon and Jet airways have virtually sold out to remain solvent; a vast chunk of the media, hit hard by a drop in advertising, has been bought up, or taken control of, by one or two industrial houses.
The latest victims include Jaypee, which is the only private company to have built a 240km motorway, and a Formula One race track, in four years on virgin land without a whisper of protest from those who were surrendering their land, and Unitech, one of India's largest real estate construction companies, whose founders were briefly in jail before securing bail.
Jaypee is burdened with Rs 61,000 crore of debt. If its creditors agree it can survive and complete the half dozen other projects in which it is involved. But if the concerned banks decide to play safe, then it is doomed and so are its projects.
The RBI's latest report on the state of the banking sector shows that 430 out of 2700 large companies are not earning enough to cover their interest payments, let alone taxes and dividends. All are therefore headed for bankruptcy.
It is hardly surprising, therefore that, faced with a totally hostile investment climate in India, companies that are still making money are taking it out of the country to more salubrious economic climes. In the seven years ended 2013, $70 billion of private investment had fled abroad. Another $110 billion was locked up as savings in public sector companies, mainly coal, oil and electricity, which they were unwilling to invest for want of good investment opportunities.
Why have the UPA and BJP governments remained so firmly glued to prohibitive interest rates? Both have claimed that the interest rate is not really high when compared with inflation and needs to be kept above the latter in order to bring them down. The real cause of the slowdown according to both has been poor infrastructure, the unavailability of land, inordinate delays in obtaining environmental clearances, excessive red tape and an ever-growing jumble of central and state taxes.
The explanation is not convincing because these structural problems also existed a decade ago, but did not prevent industry from recording double digit growth then. What is more, capacity utilisation in industry is now barely 70 per cent, so there is ample room for inflation-free growth for months if not years.
The real reason is the huge fiscal deficit that is now built into the political structure and the constitution. Despite both governments' best efforts, this has remained stuck at four per cent of GDP for the past four years. To finance this, the government has been releasing a flood of bonds into the market, whose sale virtually dictates that interest rates be kept "attractive".
Policy rates, argue economists, can be safely lowered only when the fiscal deficit comes down. But every government anywhere in the world that has gone down this route has run head-on into a conundrum. For a reduction in government spending reduces incomes, hence sales, hence profits, and therefore government revenue. The fiscal deficit therefore declines by only a fraction of the cut in spending. Persisting in this endeavour therefore traps a country in a vortex of decline.
The only way to break free is to cut government consumption, simultaneously increase private investment, and thereby not reduce total spending. The Modi government is trying to do this in a fumbling kind of way by raising public sector investment. But by far the easier and quicker way is to bring down the interest rate sharply, revive consumer demand, push up industrial production and rely, as President Clinton did in the US in the 'nineties, upon the rise in government revenues to close the gap. Unfortunately the government's decision to pay out Rs 103,000 crore of additional wages and salaries to its employees is once again dragging the economy in the opposite direction.
The writer is a senior journalist