All macroeconomic signals in India are flashing red. The country’s current account balance and the fiscal situation are in disarray. Even worse, the government doesn’t seem to have a coherent strategy to address either. Market-based price indicators – the rupee, bond yields and equity markets – risk spiralling out of control. The stickiness of inflation is another cause for concern. In fact if one looks at a chart of macro-based indicators, there seems to be no difference between the situation today and in 1991: India’s fiscal deficit and current account deficit are as bad, and so is inflation.
However, no one is saying that things are as bad as they were in 1991, or that India is on the verge of default; the country is far more integrated with global markets today than in 1991 and has far more reserves. But what have we really achieved on the macroeconomic front in 20 years? We used to take comfort from the fact that we had at least fundamentally altered the growth trajectory of the Indian economy from 6-6.5 per cent to 8-9 per cent. But things have changed: the Indian economy has slowed significantly, and we will be lucky to exit FY 2012 with anything more than seven per cent growth. While the jury is still out for FY 2013, it would no surprise if the Indian economy slipped further to a growth trajectory of six to seven per cent.
Although markets are pressing the government, highlighting the stress points in the economy and are demanding action, India’s policy makers seem to be in denial. Whenever they are asked why the Indian economy will not achieve the targeted nine per cent growth, they blame the European debt crisis and the weak global economy. However, the fact is that the weak global outlook should have impacted exports, which until recently were rising at record rate. Our economy has slowed because of self- inflicted wounds. Investment has collapsed because of regulatory hurdles, land and environmental issues, and weakening business confidence. Policy paralysis and bureaucratic inertia are the new buzzwords in corporate circles. The high interest rate environment that the Reserve Bank of India (RBI) has been forced to implement has not helped matters either. Urban consumption is under pressure owing to rising rates and inflation, and the economy is currently being driven entirely by rural consumption. How long can this be sustained?
Unless we sort out the basic factors of production — land, labour and capital – and improve the availability, productivity and cost of each factor, we will not be able to enter a new investment cycle. We should resist the temptation to praise ourselves for growing at six or seven per cent when the world economy is in recession. Given its stage of development, and the opportunity it has to unlock productivity and growth through structural reform, this should be India’s time to shine and deliver eight to nine per cent domestically-sourced growth. This growth will attract global envy, interest and capital. Anything less should be considered a disappointment.
When asked why the rupee has depreciated by 17 per cent year-to-date, our policy makers point to global factors and selling by foreign institutional investors (FIIs), saying that the rupee depreciation is nothing unusual given the global environment. However, the fact is that the rupee has been the worst-performing currency in Asia, and seems the most vulnerable even today. FII selling has also not been that significant, less than $2.5 billion in this period. The rupee is under stress because investors sense the vulnerability of the macroeconomic situation and the lack of firepower with the central bank.
India’s macroeconomic situation does look terrible. The fiscal deficit is likely to be at least 5.5 per cent of GDP, with negative surprises on both revenue and subsidy payments. The borrowing requirement of the government is already affecting demand, with yields spiking, bond devolvements and the RBI forced to carry out open market operations and liberalise FII flows into debt markets. Inflation is looking horribly sticky, with the rupee depreciation wiping out any gains from commodity price weakness. Growth is slowing and the external deficit is also starting to threaten the economy.
Moreover, even our much heralded micro (company-specific) story is coming under pressure. Earnings growth was negative for the quarter ending September 2011, and there is a possibility of balance sheet blow-ups, given the pace and amount of the rupee’s movement. Our return-on-equity premium to the rest of the emerging market world is more or less gone, and companies are fighting just to maintain profitability. No major corporation wants to invest in the country.
Our policy makers have to stop being in denial and blaming the external environment for our troubles. Much of this macro stress is of our own making. Until we see decisive and coherent economic policy making, an improvement in the investment environment and measures to improve the supply-side response of the economy, we are not going to get out of this self-created mess, irrespective of what happens in Europe. We cannot afford to lose our growth momentum. Given the rigidities of expenditure, any slowdown in revenues will decimate the fiscal situation, and permanently push us into a high-interest rate regime.
There is a strong global perception that India has turned much more populist in economic policy making, and also become far less friendly towards business — the recent telecom roaming issues is a case in point. Corporate confidence has never been so low. The government must use this macroeconomic stress to break out of its self-imposed policy shackles. Only in times of stress are critical decisions taken in india. By conveniently blaming the global environment for all our ills, we are not creating the pressures domestically to force change. We must accept that we need structural reform to regain economic competitiveness. The reform holiday of the last three or four years is now coming home to roost.
We have been given the power to more or less control our own destiny. If we take the required decisions, India as a country and as an equity market will do well irrespective of what happens globally. If we don’t, we can continue to languish.
Let’s hope our policy makers do not waste the opportunity that the global economic crisis and the domestic slowdown provide.
The author is fund manager and CEO of Amansa Capital.
