T N Ninan: Beyond the present

WEEKEND RUMINATIONS

Is it time to be neutral on India for the short-term, while remaining a long-term optimist? Consider that in the short term, the stock market seems richly valued, while there is a plateful of problems confronting businesses, though admittedly some of them are the problems of success. There are the headaches caused by the appreciation of the rupee""pressure on exports, job losses in export-oriented sectors like textiles, and a domestic liquidity surge that the Reserve Bank struggles to contain. Then there is the growing shortage of qualified people, and their ever-increasing cost""squeezing the margins of the software giants and sending some of the smaller software companies into a tailspin. There is also the ridiculous levels of rent for commercial space""despite the new construction activity""which now range between Rs 500 and Rs 600 per square foot, competing with Manhattan. Those half a dozen headaches are all a consequence of the India fever that many global businesses seem to have caught. So while the problems point to supply-side failures and other chinks in India's armour (the universities and institutes are not turning out enough qualified people, there are desperately few office buildings of quality, too many exporters have built businesses on the strength of a weak currency, etc), they are in a sense the flip side of the success story.

What makes matters look less sunny is the second set of problems, many of them related to the government. At one level, there is paralysis (look at the continued inaction on retail petroleum product prices, even as international crude prices have gone up 50 per cent); at another, there is grotesque rule-setting, as in the telecommunications sector these past two weeks (with hints of crony capitalism at work); at a third level, nothing has been done to improve the delivery of key government services, especially education and health care; on top of which, there are the continuing failures on the infrastructure front (the power situation has never been worse). Then, there is the reduced prospect of a stable and functioning government after the next elections. All these must act as a brake on the country's performance in the coming years, or raise risk perceptions, and matters are not helped by the growing risk of a US recession next year and its backwash effect on the rest of the world. Taken together, these would suggest that the near-9 per cent growth rate of the past five years (including the current one) may not be sustained. Ironically, the Pay Commission award (expected next year) will serve to show up the GDP growth rate because bigger pay-outs to government employees automatically translate into more value addition in the government sector""but the price for this artificial booster will be borne by the fisc, which will see a partial undoing of the deficit reductions achieved in recent years.

But the important point is that, even after factoring in all these problems, the long-term story continues to look exciting. For instance, it is hard to see what set of circumstances, other than a catastrophe scenario, can prevent the size of India's consuming classes from trebling over the coming decade. That justifies the assumption made by analysts, that many markets for premium products will continue to grow at 15-20 per cent and more, year-on-year, for the coming decade, while luxury products will start to become serious businesses for the first time. Lower down the income category, the burgeoning numbers emerging out of poverty or near-poverty will create mass markets for a whole range of products and services. It is this demographics that explains the desperate rush to grab pole position in a whole range of businesses. A large number of home-grown businessmen and international firms are looking well beyond the next quarter and looking long-term at what the future will be, and making sure that they will be a part of the action. From that perspective, it is possible to think of today's uncertainties as temporary blips on the screen.