Rewind: It’s decision time, India

A part of India wants to rewrite past history, and correct historical wrongs (with regard to the Karnataka Government’s move to celebrate Tipu Sultan’s birth anniversary). A larger part wants to prepare for the future. India has to decide which route it wants to follow, and to do so fast, for global economic conditions seem to be flashing some warning signals.

Despite years of easy liquidity through cheap debt to drive up investments (to create jobs) and consumption (to drive GDP growth), global economic growth is sluggish. The US, the world’s leading economy, grew at an annual rate of 1.5 per cent in the September quarter. China’s GDP growth is slowing down, along with its demand for commodities. It was the world’s largest buyer of most of the world’s commodities, and the slowdown in its economy has driven the Baltic Dry Index (BDI), a measure of global trade in dry bulk cargo, to the low levels it had reached during the 2008 financial crisis. This is an ominous sign, for it indicates that global trade, and demand, is dropping sharply. Global trade is down 8.4 per cent this year. Japan is also not growing, despite a huge quantitative easing, and industrial production in Germany — the strongest of the European countries — has fallen. The Euro Zone continues to languish.

In all this, India’s GDP, growing at 7.5 per cent, is a cause for joy but not of complacency — a very familiar Indian policy trait. Remember how the GDP growth of 8 per cent collapsed surprisingly fast?

I believe the Prime Minister recognises the need to put India on the right road, of developmental economics and growth. He announced, through executive action, the opening up of FDI in 15 sectors. Modi knows, too, the urgency of creating jobs and of kick-starting the investment cycle. The Ministry of Road Transport & Highways plans to spend ₹1.5 lakh crore next year to build 15,000 km of roads; of this, 30 per cent will be in the private sector and the rest through government funding. This will provide employment, build infrastructure, and kick-start the investment cycle.

The Ministry of Power has formulated the Uday scheme, for the financially-stricken power distribution companies (discoms). Discoms are perennially loss-making, largely due to electoral promises of free electricity made by state politicians, and the inability to control power theft. The losses are held in the books of banks, as non-performing assets. For example, 6.8 per cent of Central Bank’s loan book consists of restructured loans (a polite word for unrecoverable loans) extended to discoms. Under Uday, State Governments would assume the liabilities of discoms gradually, and issue bonds to banks to make their balance sheets healthier. However, steps must be taken to stop theft of power, and to stop state politicians from promising free power to solve the problem at the root.

Banks, especially public sector ones that have been arm-twisted to lend to discoms, would benefit from the Uday angioplasty to their balance sheets. India’s large domestic economy and huge population are, for sure, attracting attention. It attracted the highest FDI, of all countries in the first half of the year. Its current account deficit has fallen from 4.5 per cent of GDP to 1.3 per cent, thanks largely to a fall in the price of crude oil and gold.

The new sovereign bond scheme would help reduce gold imports and strengthen the rupee. The switch from physical to paper asset would be fortified if investors feel protected. So, it is a good sign that the Maharashtra Government has taken the matter of investor protection seriously and appointed authorities to liquidate seized assets of scamsters and repay investors.

Last week the sensex fell 256 points to close at 25,610.

Narendra Modi is on a state visit to Britain, India’s biggest FDI investor. But he has to indicate that, in the driver’s seat, his vision is forward looking through the windshield, and not backward looking through the rear view mirror. As a nation we have to take a call which road we wish to take. The one going forward, or the one trying to resurrect history. The market would move accordingly.

The writer is India Head, EuroMoney Conferences

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