T N Ninan: Think productivity

WEEKEND RUMINATIONS

Car sales have flattened, and the numbers for trucks and two-wheelers have fallen. Export growth has slowed, as has the rate of increase in bank credit. Most commodities have been experiencing a price dip, ending the boom of the last couple of years, but oil prices remain higher than before. Fresh housing demand has suffered on account of the interest rate hikes, and real estate prices have softened. Computer software has got hit by the rupee's surge. And the sales figures for some consumer durables look wobbly. When it comes to the corporate sector, both sales and profit growth numbers are not what they used to be. So while the Sensex momentarily crossed 15,000 at the end of a week-long bull run, and though many are betting on further gains in the coming weeks and months, there is also a fin de siecle air about it. That is partly because, for the economy as a whole, the many straws in the wind suggest a general slowdown. No one knows by or to how much, but GDP growth is not going to be the 9 per cent and more of the last couple of years.

Still, no one is predicting less than 8 per cent. What then is to be done? Nothing much in the area of macro-economic management, which has seen most of the debate, for the picture looks quite good just now. The Budget numbers for April-May are in line with what had been projected, inflation is down to the region of 4 per cent, and the current account deficit is less than 2 per cent of GDP. Interest rates are higher than before and the spreads are uncomfortably large, but it could be argued that they are not unreasonable. And the monsoons have started well. These give the government room for manoeuvre, and also allow the Reserve Bank to go easy on interest rates from now on. If anything, the primary problem seems to be that too many people have bought the India story, and it is the consequent inflow of investment dollars that is causing the macro-economic imbalances""but no one would really want to shut that window.

When it comes to specific sectors, it is hard to argue that the housing market is in a slump when DLF has listed at a price-earning multiple of 44 and when all that has happened, in a manner of speaking, is that real estate prices have fallen. This should in fact make housing more affordable; the national statistics show that only a small majority has the relative luxury of two-bedroom homes""so demand should not be a constraint if prices are reasonable. With new highways, railway lines, airports and shipping ports being built, construction should in any case continue to expand and prosper, as also related industries like cement (where prices have just been hiked) and steel. Also, there is even now no shortage of industries (like insurance and the media, and aviation) that are growing faster than what used to be the leader of the pack (software). It is interesting that these are now the sectors that have been primarily domestic growth-drivers; in exports too, the growth is now coming from sectors that are less labour-intensive, given where salary levels have reached.

If there is something for the government to do, it comes back to the old shopping list of reforms rather than a different style of macro-economic management. Thus, give more space for the private sector in banking, so that financial intermediation is not at today's high costs. Create a flexible labour market, so that the labour-intensive sectors can grow and prosper. Open up the land market in the cities, so that prices drop. Invest much more in education (as is happening to some degree) so that the shortage of qualified people does not drive up salaries further and neutralise competitiveness in people-intensive sectors like software. Fix the power shortage and speed up transport linkages, so that firms can neutralise the effect of the rising rupee on costs. In other words, work to drop the cost of land, labour, capital, energy and transport. If these are done, the rest will take care of itself.