Howdy Economy?

“Howdy” is in the air in India these days! With Prime Minister Narendra Modi set to address the global Indian audience from the NRI platform at Houston, which has been branded as “Howdy Modi”, this American slang has got into the Indian vocabulary!  But, in India, ever since the 1st Quarter poor GDP results were out, the commentariat has been asking just one question “Howdy Economy?” Because, Indian economy is believed to be in ICU where the Chief Doctor was not giving much attention!

In India, the time tested tradition has been to undertake reforms when there is a crisis. Economist and Author Shankkar Aiyyar explains this beautifully in his book – “Accidental India” with back stories behind every single historic economic initiative of post independent India. The bottom line being, we take such drastic steps only when push comes to shove!

It looks like the latest decision of the government to slash corporate taxes drastically in one go from 30% to 22% is one such initiative which will have a lasting positive impact on the economy but which was taken when the answer to Howdy Economy question was very, very feeble. Naysayers notwithstanding, simplifying the tax structure, eliminating the myriad exemptions and having a reasonable low rate is a welcome move. It will make the industry competitive, make it more profitable, attract both foreign and domestic investments thereby have a trickle-down effect on the economy.

I saw some commentary that, this is more of a long term treatment and not an answer to the short term woes. Indeed yes. There is no silver bullet that can get the economy growing at 8% and more. It needs a combination of measures that are short term and long term. My belief is that, irrespective of the condition of the economy, a simple and low corporate tax structure was anyway required to grow the economy from the 8% levels we were couple of years ago, to 10%. With the economy struggling at 5% levels, the crisis like situation galvanised the government into action. Finally, the progressive reduction in corporate tax from 30% to 25% which was promised by the then Finance Minister Arun Jaitley in the 2015 budget has been executed by his protégé Nirmala Sitharaman. She has done it in one stroke and has gone a step further reducing the rate to 22%.

While the reduction in corporate taxes is a supply side reform, steps are required in the demand side as well. With the transition to the GST regime, the government has less flexibility to announce stimulus like in the past where excise duty or Sales tax cuts used to be announced to boost demand and consumption. In the present GST regime, the GST council has to take a call on the same and make those adjustments. Some of the announcements on GST rate reduction on hotel tariffs are in this direction.

With the reduction of corporate taxes, there is a loud clamour for reduction on the personal taxes front. Experts keep saying that this will put more money in the pockets of the salaried class which will make them spend more. I am not too sure of this. In the past, whenever there has been some personal income tax slab changes and effective rate reduction, we hardly came to know of the savings or reduction. And I don’t think anyone then consciously went to spend the money saved! Of course, it is more of a mood lifter and gives a feel good effect to the salaried class. Beyond that, I am not sure if a personal income tax rate reduction will boost the consumption in the short run which is what experts claim!  Nevertheless, as I have opined in the past, simplification and reduction of tax rates is essential.  This will also remove the peeve that there is now too much gap between the corporate and personal income tax rates!

One positive signal from the last few weeks is that the Government is listening.  In today’s world, any government of the day can choose to ignore the mainstream media. However, it cannot afford to ignore popular opinion which manifests in social media. As someone said, in India, we have as many economists as we have cricket experts! But the good part is, thanks to social media, apart from the secluded voice of the commentariat, there is an opening for “People like us” to give our opinions.

Ever since the tax cut announcements, there has been much discussion and debate as to whether it is right, whether it is sufficient, whether it is too little – too late, if it is pandering to corporates and so on. And if things can turn around quickly? With the festive season coming up in India, it is all about signalling and lifting the spirits and mood. When there is bad news which usually reaches us through the media, even if we are not directly connected to it, we all start talking about it, isn’t it? I refer to this as the economy suffering from “Headlines syndrome”! So similarly, when there is positive cheer emanating from even a single but important decision like this, it has a ripple effect. So, I hope this corporate tax cut move leads to such positive ripple effect in the coming days! And the answer to “Howdy Economy?” becomes loud and cheerful in the coming days!

Postscript:  In my earlier posts, I had said,

As a purely short term stimulus, any capacity building in manufacturing industry by way of new factories, expansion of plants,.. should be provided with tax relief”

And

With respect to taxation, “In simple terms, the mantra should be lower tax rates with no or very few genuine exemptions

Glad both these found resonance with the government and have been implemented!

Turning the GDP (Gross Disappointing Product) tide!

Many years ago on my visit to China, I found most of the newspapers there giving a lot of attention in their front pages to decline in GDP, tapering of FDI into China and other such economic issues. In a blog post that visit, I rued that in India, our media doesn’t still focus on economic Roti, Rozgaar issues but spend disproportionate amount of columns on mundane political news and views. For the past few months, it has been good to see in India too, the media at last waking up to the slow down blues in the economy.  For more than a year or so, the entire country was pre-occupied with the Modi re-election issue and everything else did not matter.

Since the re-election of Narendra Modi and his government that too with a majority better than last time, the euphoria and the resultant expectations have been very high.  However, the party has been cut short by the bad news coming in on the economic front, day in and day out. There was a great opportunity for this Government with a new face as the Finance minister to have seized the opportunity when she presented the Union budget on the 5th of July and fire the economy. The budget was a decent one but one that was devoid of Out of box, bold ideas which would set the economy on fire. In doing away with the brown brief case and opting for the bahi kaatha, Nirmala Sitharaman’s budget was a ritual breaker but, was not a path breaker! Hence, ever since the budget, there has been quite a few negative reactions as manifested in the tanking of the markets, depreciation of the rupee and a massive FPI pull out!

The initial reaction of the Government to these reactions were in expected lines that our economy was still resilient, one of the fastest growing and hence no need to panic. However soon enough, with bad news emerging on the Automotive sector first and then even on FMCG, the Government was forced into action and from then on we have been seeing a slew of measures, cabinet decisions and sops to revive the economy. Q1 GDP at 5% turned out to be the last straw.  Coinciding with the Q1 GDP results, the Government announced the merger of PSU Banks as a way forward in banking reforms. Economy was finally on top of the news cycle and the Government’s attention, Kashmir notwithstanding!

It was widely expected and hoped that some of the important initiatives of the Modi Sarkar in the 1st term like the thrust on Highways construction, massive investments in improving Railways infrastructure, improving air connectivity to the smaller towns, making electricity available to the last village and so on would start yielding results in terms of improving economic activity and fuel growth in the country. Added to this, Modi Sarkar has been constantly increasing outlays on MGNREGA in every budget. Why these measures have not started yielding results on the ground both in terms of economic growth and job creation is mysterious. It may be a good idea for the Chief Economic Advisor to come out with a White paper on the outcomes achieved for the massive outlays in Modi Sarkar 1.0.

In the back of all these, the question becomes, are the measures so far announced by the Government enough to resuscitate the economy? The reversal of some of the proposals in the budget are certainly welcome moves but those just contain the damage.  And the other measures like opening up of FDI and so on are necessary but not sufficient to get us back to where we were last year (8%) and then hit our dream goal of 10% GDP growth which increasingly is becoming a pipedream.

During Modi Sarkar 1.0, the Government leveraged well on the windfall it had from the crude prices and not passing on the entire benefit to the consumer to “manage” the economy with heavy public investments. The hope was that gradually the private investments will pick up once the sentiments change. But unfortunately, due to the NPA and the overall banking crises, it did not fire up the economy so much but, just kept the wheels of the economy going. Now, under the current circumstances however, continuing of public expenditure alone may not be sufficient. The recent red herring on the increasing debt of NHAI may in fact become a dampener here. For India as a country, the next few months are supposed to be very high on economic activity with the impending festival season. And the fact that the monsoons have been bountiful for most parts of the country notwithstanding the floods in some parts, there is still hope even for this year.

So, in order for the economy to fire up, ways and means have to be found for increasing private investments and individual spending/consumption. I am no economist but here are some thoughts:

To get private corporate investments going:

  • Modi Sarkar should bite the bullet and announce 100% FDI in Multi Brand Retail. Though India as a country missed the retail bus 10 years ago, it is still not late. Some of the global retail majors may not be as bullish today as they were a decade ago on India due to our policy flip flops and the current industry shift to E-Commerce. But still considering the country’s size and the potential it offers, India is still an exciting market for say specialised vertical retail stores. In announcing this, we should do away with the myriad sourcing conditions and allow the retail water to find its own level. Retail gives fillip to low end jobs, manufacturing industries as well as commercial real estate.
  • Copy the STPI (Software Technology Parks of India) strategy that helped in boosting the software industry in India in the 90s and come up with a similar framework for boosting Electronic hardware manufacturing in India. This will help India in becoming a preferred country for those who are looking at alternatives to China. Again we are late in this game and today Vietnam has emerged as an alternative to China for low cost manufacturing. But still considering the long term view, I believe we still have opportunities here.
  • Every Government recognises the potential of Tourism as an industry to provide jobs and improve economic growth. However, to unleash and unlock the true potential of India, we need massive capacity building in hotels, recreation facilities, connectivity and infrastructure. Government should provide time bound tax cuts for investments to private sector in this area to targeted locations in India which need infrastructural boost. The tax cuts must be linked to time bound completion of projects.
  • As a purely short term stimulus, any capacity building in manufacturing industry by way of new factories, expansion of plants,.. should be provided with tax relief.

To improve consumption and spending:

  • Holiday season is upon us. Provide relief on Income tax to individuals for money spent on holiday travel and stay in select locations in India which require boost on tourism (Uttaranchal, North East, Leh for example) with a cap of say Rs. 1 Lac. This will motivate public to take vacations and boost tourism in certain locations which have potential, decent infrastructure and connectivity but are untapped. Usually this has a spiral effect. When more people throng these places, automatically investments start pouring in for development.  For every 3 years, the locations can be changed in order to make it widely spread.
  • On the real estate front, today the supply is high and the demand low. This is mainly because the property rates are artificially pegged high and the home loans still high. This jinx needs to be broken. Though I have seen the Government announcing a slew of measures in the past few years, the housing market has not taken off. Considering the fact that the private real estate lobby is not going to cut prices ever, there is a need for the Government to intervene and disrupt the market. Like in countries like Singapore, Malaysia,.. Government must float either own companies or joint ventures to construct affordable housing in a massive scale and allot to citizens who do not own a single house in a transparent manner. The Government can offload its equity and then exit after say 20 years from these companies once the overarching objectives are reached. This will also disrupt the existing real estate industry and make it fall in line in terms of pricing and best practices, both of which are found wanting in the current scheme of things.

To revive the “animal spirits” in the Indian economy. Animal spirits are related to the points mentioned above i.e. both consumer and business confidence. I have put this separately as there are some low hanging fruits here which can be taken:

  • Sell Air India as of day before yesterday!
  • Get going on “Actual” disinvestment of Public Sector units already identified as non-strategic. Identify another Arun Shourie to make this happen in this term!
  • It is not enough to merge PSU Banks but to offload equity, get professional management and turn them to “HDFC Banks”!
  • Today many of the Government’s grand projects are stuck or going slow due to land acquisition issues. Identify the issues and fix them by bringing about the necessary changes in the Land bill!
  • Use the current crisis of job loss to build consensus around Labour reforms. Adopt the “GST council” approach for labour reforms. Today all state governments will eagerly come on board considering the pressure all states have on generating jobs.

As I write this blog, I am seeing that the Finance Minister is addressing a press conference. This is her 3rd one in the last 2 weeks. Glad to see the Government demonstrating the needed sensitivity to the economic situation and willingness to take steps. Our only urge is that instead of incremental small steps, we need big leaps.

Only that will ensure we turn the tide over Gross Disappointing Product and achieve real Gross Domestic Product rates quickly!

Our Tryst with GST* – * Conditions apply!!!

GST – The Good and Simple Tax, as our acronym lover PM touted during the launch on 30th June is finally a reality after almost 11 years of intense labour. This along with FDI in retail must count among the most awaited reforms in India by India observers.

So, the advent of a single tax which subsumes, at last count, some 17 different taxes and myriad cesses certainly must count as the single largest Tax reform undertaken in India. Not to forget the application of tax only on value added in the chain. Along with this simplification, the fact that goods from one state can pass thro different states without wait, harassment and accompanying corruption portend a new beginning for trade in our country. In the pre-GST era, logistics and warehousing strategy of companies have been dictated by tax compliance rather than supply chain considerations. In the sense, the number of warehouses and their size would be driven by billing point concerns rather than geographical spread of demand. In the GST era, warehousing will depend on supply and demand equations and not taxation points. And hence like in most developed countries, companies will get to run larger, integrated and fewer of warehouses. Development of more efficient logistics hubs, warehouse consolidation and ensuing FDI will become a reality soon. This is a new dawn for retail, supply chain and logistics industry.

So with all the seemingly obvious benefits of the GST regime, why is it that there is still some cynicism and negativity from different quarters about the move? Why is P. Chidambaram once the prime mover of GST when UPA was in power, cautioning all of us to “Get Set for Turbulence”? The GST in the current form is nowhere close to the one which was originally conceived. Rolling stones probably gather no moss. But a rolling GST gathered whole lot of moss on its way from the wisdom of empowered committees to standing committees to GST council. The current version of GST is a product of what I call “co-operative federal bullying”. The result is instead of the One Nation, One Market, One Tax premise, what we have is One Nation, One Market, One Tax name, 3 Sub Tax names, Multiple Rates, Few Exceptions, Some flexibilities and with an *. * – Conditions apply.

Being part of the GST council, the states in their own wisdom, ensured that we as a country don’t get away with a simplistic tax which may throw many Chartered Accountants out of jobs. However, I understand that without having a set of different GST rates (in some cases different rates for the same category as per user segments) or without excluding items like Petrol, Alcohol, Real estate,.. consensus could never have been built in getting GST off the ground. UPA’s failure to make GST a reality during their regime stems from this. So the choice before the centre was to accept what the states demand and bring about a not so ideal GST or wait endlessly for a few more years may be decades before some major economic crisis forces all concerned to come to an agreement on the ideal GST. From that point of view I agree with the stand taken by the Govt. to bring in GST in its present form with its shortcomings, with a hope of ringing in the changes in the coming years. Kudos are in order hence.

The Congress party which at every opportunity reminded us that the seeds for GST in India were sown by the UPA, however, chose to be petulance personified and boycotted the GST launch. While rubbishing the GST in its present form its main “anGST” against GST was that it is being rushed thro and should be delayed by 3 months till September. We all in India know that in our country whatever may be the preparatory time available, things get accomplished at the last minute. If we get more time, we stretch our deadlines accordingly. That if we have more time, we will be more prepared and can do trial runs before actual roll out,.. exists only in theory. Don’t we see in our Indian weddings, folks tying up some loose ends literally till the baraat arrives and continue to do so as the wedding is in progress?  Finally when the wedding gets over, its smiles all over.  So even after the GST roll out, there will be glitches, teething problems and surprises which I am sure we will find ways and means of getting over. Pushing back by another 3 months is not going to make things any different.

It must be commended that this Govt. stuck to the date of July 1. It would have been very easy for the PM and the Govt. to throw in the towel and put off the launch by a few months. But then, there are other implications. Come Oct. it is the peak festival and hence business season in India. Does It help if the roll out happens when India is in the midst of its biggest Annual economic cycle? Will it help if GST is launched in Jan. in the final quarter of the fiscal year???

The ruling party, the BJP counts traders as its important traditional support base for the party. That the party still decided to go ahead with the tax reform which professes maximum disruptions for this group is a significantly courageous move.  In India economic reforms have always been carried out under duress; when push comes to shove. The heralding of GST must be the 1st major economic reform brought in when not under any kind of stress but just to ease up things for the future. This certainly conjures up the arrival of Acche Din for our country.

Still our penchant for complicating things comes to the fore here as well.  Though the GST collections have to be shared between the state and the centre, could it not have been done at the back using technology rather than coming up with 3 variants like SGST, CGST and IGST??? Does the Anti-profiteering clause make sense? Will not competitive economics eventually drive pricing??

GST is indeed a Good and Simple Tax. So there is nothing like a good or better time to introduce the same. But, we should not forget that this is India and we are Indians. So, conditions apply.

For more Olympic medals, need more Raghuram Rajans!

As I write this piece, the situation is slightly better. Only slightly. A tally of 2 medals – one Silver and one Bronze at the Rio Olympics for India. Just a couple of days ago, as a country it was all despair.  We were staring at a situation of returning empty handed and that was something for a proud and populous country like ours – ‘bilkul Shoba nahin deta’. The usual diatribes ensued. – “A country of 1.3 billion and just 1.3 medals!” “As long as we laud Cricket and applaud only Cricketers, there’s no hope for Olympic sports!” “So long as we keep praying for Engineers and Doctors in maternity wards, athletes will be hard to come by!” “As long as sports administration is in the hands of politicians, there is no chance for medals.” So on and so forth.  And these are nothing new. Every time our contingent returns with a modest performance it’s usually a repeat of the above template outrage.

Our rather modest performance in sports events historically could indeed be due to one or combination or all of the above causes. But I do believe there’s one more important bullet.  And that is the size and state of the economy. As we speak, USA is at the head of the medals table at Rio Olympics followed by Great Britain and then China. In terms of GDP, USA is at No. 1, EU of which Great Britain is a part as of now is at No. 2 followed by China. Russia which is at No. 4 has been a past economic super power.  The medals table at London Olympics looked almost similar.

olympics , gdp

China which has been at the 11th rank in terms of medal tally at the 1988 Seoul Olympics, has been at No.3 or better since 2000. Around the same time when China was deemed to have shrugged off the developing country tag and took guard as an economic powerhouse.

By this logic, we have hope. One would have thought that our good performance at the London Olympics in 2012 would be the tipping point as a country in so far as Olympic performance is concerned. However it seems that’s not to be. Drawing a parallel, doesn’t our economic performance mirror this?  A country which was on fire around 2011/Mid 2012 and gradually sort of lost its way and now seems to be on the recovery path once again.

While I am trying to draw a parallel here between the state of the economy and our sports performance, it could be just a coincidence.  But where I am coming from is, for a country to excel in sports and be at the top 10 of the medals table, it should be doing well economically.

Excelling in sports is today an expensive affair. It is not enough to have strong willed, talented and focused individuals. It calls for financial resources to be poured on infrastructure, training, coaches, equipment and the like.  And in a country like in India not just in cities but in fledgling towns as well which are now throwing up talent like never before. We keep hearing tales of talented girls stopping coaching sessions because of ill equipped toilets. Or those who give up when they cannot afford to spend money on professional coaches or facilities. And those who still cross all these hurdles and arrive at the National scene – need to be exposed at International levels for which you need to invest on foreign coaches or send them abroad for training for longer stints all which costs a lot of money that too when you need to do this not for 1 or 2 but 100’s of individuals.

An Abhinav Bindra did not have the need to fall upon the state or other sponsors to chase his Olympic dream. He was more than financially sound to acquire for himself the ecosystem required to win an Olympic Gold. But then all are not Abhinav Bindras. Ergo, you need the support of the state or private sponsors to adopt potential medal winners and provide all the support required without counting the last paisa.  Even for a noble movement like Olympic Gold Quest (OGQ) spearheaded by champs like Geet Sethi, V. Anand, Leander Paes, Padukone Senior,.. with a clearly stated mission “To Support Indian athletes in winning Olympic Gold Medals” the biggest challenge is to raise funds to achieve their mission. A fledgling economy doesn’t count the last rupee to sponsor a Sakshi’s stint abroad or a Narsingh’s 24*7 nutritionist. A struggling economy on the other hand will be hard pressed to focus on other priorities.

In much of our or water cooler or these days WhatsApp discourses, parents who think that their wards are better of chasing an Engineering / Medical dream than that of sports are at the receiving end. I do believe that in general, parents think of only the well-being of their kids. So if they do feel that a career in athletics is not remunerative enough to have a decent life, they can’t be blamed.  However this can change and it is changing. Olympic sports unlike in the past have started getting the attention from corporates who are willing to support athletes for a longer period of time. And just as we saw a few days back the bronze medal winner from HaryanaSakshi Malik is already a dollar millionaire based on the many announcements we heard. This kind of commitments are possible for both the Government and private players if their coffers are growing with tax collections and profits respectively.

So as a country as we transition ourselves from a “developing” country to a “developed” country in the next couple of decades our economy will be in a better position to afford to support the needs of churning out Olympic champions.  So we are back to Bill Clinton’s 1992 campaign theme – “it’s the Economy, stupid” here as well. Our country has to continue to grow as an economy, lift millions of people out of poverty, collect a lot of taxes which will help pour money on giving birth to Olympic champions. So, for more Olympic medals, we need more Raghuram Rajans to help steer the economy on a continued growth path 🙂 🙂

Long lasting Budget Wishlist!!!

Tomorrow, on the 29th Feb 2016 as the finance minister “rises to present the budget of the Union for the year 2016-17”, he also raises a lot of hopes. In the media in India in the past 1 week or so, it’s been raining wishlists from the budget. As an Aam Admi, I also got tempted to join the bandwagon to submit my own wishlist though I know very well that it’s too late to incorporate even one from this (Wait a minute, may be one can be). But I still go ahead and here’s my list of 10 things which I would like to see change around the budget atleast in my life time.

Here we go:

  1. First up, do away with this archaic “Halwa ceremony” where the FM participates to prepare Halwa in the North Block office along with the staff who are going to be holed up for few weeks in isolation running upto the budget. What’s this Halwa got to do with the budget making? On the other hand, “Halwa Kudukarathu” (Giving Halwa) in Tamil is a euphemism for taking one for a solid ride😁😁! So unless the Govt. actually meant this only every year, they should stop this. And what’s this FM and team posing every year stirring up the Halwa😩
  2. On the day of the Budget, one familiar sight every year you can’t escape is the FM posing with a shining new “Brown Brief case” just as he enters the parliament. To me this brief case symbolizes extreme colonialism which we find it difficult to shrug off. In British parliament also same thing happens to date. (For more on the history of the “Budget Bag” pls click here).  For a country, which boasts itself as an IT behemoth and all that jazz why can’t the FM just walk in with a high capacity pen drive or a lap top instead of this antiquated brief case??? Won’t that be cool?

Budget pic3. And as the FM reads the budget speech, it’s usually from a huge bound document supported by a wooden stand crammed with facts and figures. How will it be if the same is presented as a power point presentation – with slides to the point with graphics? (something we could see in this year’s Economic Survey presented by Arvind Subramanian and team)

4. I don’t know when or who started this trend of sprinkling budget speeches with Shayari??? I do know that FMs like Manmohan Singh, Yashwant Sinha and now Arun Jaitley (Not to mention P.Chidambaram and his Thirukural couplets) get into shayar mode in the course of the budget speech but with limited effect. While it’s good to keep the speech which tends to get boring interspersed with some couplets, poetry,… more often than not it looks thrust upon and not in a flow. As if the British left that also as a rule! Some good self-deprecating humour could be a better option!

5. What is this thumping of the desks by the treasury benches for every outlay announced? It’s now obvious that outlay in itself doesn’t mean anything. Before the FM starts reeling out budgetary allocations, I would like to see the FM starting with the “Outcomes” from the outlays of the top 20 items in the previous year and explain how it benefited the people at large. That will give us some idea as how “our” money has been utilized and for the Govt. an opportunity to boast their report card. This can be followed by the outlays for the next year with clearly expected outcomes from the same.

6. And what is this “ranking” business the media resorts to by the Industry captains immediately after the budget? We have now seen that the devil is in the detailed explanations that surface later. So any ranking without understanding the fuller provisions according to me is an exercise dipped in frivolity.

7. And when is the last time you have seen industry captains giving a thumbs down to the budget?? It is generally a mega thumbs up or atleast a thumbs up with conditions attached. The feedback is always ‘right” and seldom “honest”. So why get into reactions from the Industry which are any way far removed from honesty?

8. Any why do the pink channels get excited and scream about the way the Stock market reacts to the budget?? We have now seen many times in the past that the Stock Market reaction to the budget is knee jerk and not borne out of any proper analysis of the after effects of budget proposals.

9. And why do the pink papers – The Economic Times in particular come out with a blockbuster issue the next day of the budget with the full budget speech and the myriad annexures??? Just upload on the net and leave it to the discerned to access if they need. Saving trees and the environment can just start here!

10. And finally, instead of the FM just making a once a year marathon appearance why not present a review of the budget and the progress made on outlays once every Qtr.? This will help us understand which ministries are performing and will aid PM to separate the wheat from the chaff!

I admit that my wishlist is more on the “method” and not on “matter” and “form” rather than “content”. One of my earlier posts (read here) delved on that a bit. Hopefully we get to hear something sweet in the leap year budget speech tomorrow which will leapfrog our economy. And are not dished out the greasy “Halwa” we Tamilians abhor.

Now running successfully worldwide – “India Sorry”

In the corporate board rooms of many multinational corporations the “India Story” which was weaving itself has now given way to “India Sorry” with accompanying pathos.  The overwhelming feeling is of a wholesale deprivation of the aspirations of the talented Indians by their political masters. “Incredible India” is desperately ‘in’ need of a ‘credible’ script, actors, technicians and the works. Flash back to the 2003-06 time frame, thanks to the easy money flowing in from the developed markets to emerging markets that included India, the markets were on fire. Pundits and others claimed that a GDP growth of 7-8 % is the base line rate of growth, come what may and if Govt. and administration did its bit (and If China gets to host events like Olympics 🙂 ), we could head towards 9 – 10 % growth.  The party was briefly interrupted by “the Lehman shock” the tremors of which shook the world – developed, developing and others. I say briefly because within a year or so markets like India and China not only recovered but were again breathing fire. This time the stimuli announced by developed countries like the US, Germany,… injected funds into the monetary system and once again easy money found its way here.  This was when the “India Story” was running full houses worldwide.

I recall seeing and hearing of many multinational companies having their Board meetings in India that time. Expansion plans for global companies seldom excluded India. Forex reserves were booming whether it was thro FDI or FII money. If you look at it now, that kind of over the top India focus and fuss became detrimental to India’s future. For, the rulers(UPA-I) started imagining and talking of India which is “decoupled” from the world without realizing that if structural reforms are not put in place, the “India Story” will turn apocryphal when the flow of easy money stops. And that’s exactly what happened. This is explained beautifully in Ruchir Sharma’s book –“Breakout Nations – In Pursuit of the Next Economic Miracles”. While he analyses many emerging markets and gives his verdict, as far as India is concerned his verdict is a 50:50 chance for India to breakout. I suspect that his own patriotic “Indian at heart” feeling came in the way of saying that the chances are pretty dim for India to become a breakout nation. Ruchir also says that we will have to get used to the “New Normal” of Pre 2003 GDP Growth which is 5.5-6%.

My own sense is that if India had focused on Governance, the situation would not have been as bad as it is now inspite of the global liquidity party getting over long while ago.  However in India the politics of economics is a deadly game. So instead of focusing on Governance, the Govt. headed by a Cambridge educated Economist was economic in Key decision-making and thereby introduced “policy paralysis” in the lexicon of the opposition/Industry and corporate reviews. Many observers are in unison when they point out that the Union budget presented by the present President of India in the year in the year 2012 as finance minister was the tipping point that led to world relegating India as a foot note in their strategy documents. Pranab Mukherjee amended the Income Tax Act, 1961, to impose a retrospective provision for tax on some types of global mergers, including Vodafone’s 2007 acquisition of Hutchinson’s assets in India. Even for a lay man it is difficult to fathom how somebody in the Govt. can think of passing an amendment with retrospective effect when companies have taken decisions to invest based on prevailing laws of the land.  That this controversial provision passed through the FM, the bureaucracy and even the PM is till today a shocker for me.  From then on it’s been a downward climb with downgrading of ratings, pulling out of money, slowdown in investments, falling off the Rupee,..,..  India got demoted while Pranabda got promoted 😦 😦 To compound to the situation, delay in environmental clearances for new projects, banning of mining, Telecom imbroglio, corruption charges all this made Indian investors to look for avenues outside of the country to invest.

As a rearguard action, Chidambaram was brought in as the Finance Minister to succeed Pranabda and frankly speaking he has been trying his best. The decision-making wheels in the Govt. have started moving. The “Rajan effect” has been just short of magic. From the time Raghuram Rajan was made the Governor of RBI, there has been some great things happening in the economy the most important being the strengthening of Rupee.  But the “Sir Newton effect” has been overpowering. Newton said “For every action there is an equal and opposite reaction”. So the reaction from the world now is of a wait and watch.  With the Government in the December of its term, it makes little sense to investors and others alike to jump into the fray. For them it makes more sense to wait and see if India presents a credible and durable “Change” come 2014.

And it is not just the world which is looking for a change in India but even within India the mood is the same. Though it is still not clear what the opposition’s clear economic agenda is, Narendra Modi the PM candidate for BJP is attracting attention all over.  This can only be due to an overwhelming yearning for change. If that change happens, it will be interesting to see how they tackle the economy differently. Yashwant Sinha an Ex and potential finance minister in his book calls himself a “Swadeshi Reformer”. As oxymoronic as it sounds, except for opposing what the Govt. is doing, even he has not yet spelt out clearly BJP’s stand on key economic reforms.

Shankkar Aiyar a reputed columnist in his book “Accidental India” says and I quote “It would seem that everything the country has achieved has arrived by accident, catalyzed by calamity”. Turning points in the country like the liberalization of 1991,.. as per him “were not the result of foresight or careful planning but were rather the accidental consequences of major crises that had to be resolved at any cost”. For quite some time now I was of the same opinion but dismissed it as a streak of a cynical Indian. But reading this fantastic book has confirmed my worst fears around policy making which is by nature reactive rather than proactive.  As the country is in the throes of another economic crisis if not collapse, we await another “accident” which will bring the “India story” back to the global theatres. Till then it looks like there is no escape (velocity) 🙂 🙂

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Also pls. read my earlier post on reforms “The Politics of Reforms” written in Sep 2012 –  http://wp.me/p1dZc2-bQ

“Dahi Handi” & the many parallels with India’s Economic Growth

It was the 29th of August, a day after people celebrated Krishna Janmashtami with gaiety and religious fervour all over India.  It was almost around 9 pm and I was flying back after a same day return business trip, obviously tired.  I was lost in thoughts of the happenings around the Indian economy the last few days. The rupee had its worst fall in the last 20 years and nobody had a clue where it is heading to. The worst nightmares around India were coming true one by one.  Finally India beat ChinaChina was supposed to slowdown first but we beat China on this!!! On the flight for a change we were spared of the usual traffic congestion over Mumbai and we were promised a prior to schedule arrival.  Closer to touch down, one could see the narrow streets of Mumbai lit up in sparkling Chinese lights, crowds gathered around some junctions and an overall frenzy. It just dawned upon me that on that day in Mumbai and may be in few other cities in India, the Dahi Handi (Curd pot) ritual was played with increasing vigour year after year.  As per Hindu mythology, Lord Krishna as a child used to steal butter from earthen pots hung high from the ceiling of neighbours. The practice to emulate this has become an increasingly popular event in cities. The earthen pots migrated from inside houses to main roads, streets and housing complexes and Krishna’s surreptitious acts of theft have now become open opportunities for groups of men (called Govindas) to excel in broad day light in front of thousands and take home rich bounties chipped in by many a sponsors!!!

As my cab took right from the Western Express Highway (yes, in Mumbai we call long stretches of road at times narrow, at times wide, with intersecting signals every kilometre, with slow inefficient toll plazas slowing down the traffic and with no concept of a hard shoulder to use in case of emergencies – as Highways and Express ones in that) the traffic congestion which we were spared of while on the sky came to haunt us with a vengeance on the ground. The traffic quickly graduated from being slow moving to “No” moving. I got out of the car and it took me just few seconds to realize that the battle between the “Govindas” and the “Dahi Handis” perched few metres from the ground was gathering steam and so traffic blocks be damned. I decided to let myself consumed in the atmosphere and observe what’s going on. I had not watched one in such close proximity before frankly. As I watched the proceedings I could draw few parallels between the Dahi Handi ritual and our country.

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The Handi I guess was suspended about 20-25 m high and I heard that the height varies from mandals and it could be even 40 m +. The chants of ‘Govinda ala Re and ‘Haathi Ghoda Palki Jai Kanhaiya Lal Ki’ accompanied by beats of the Dhol amplified the already noisy surroundings. It signaled the arrival of a group of Govindas all attired in yellow with sponsor’s logos (as is the wont nowadays) to take a shot at breaking the pot. They took a few minutes to size up the challenge and as the beats started hitting a crescendo they began the task of putting together the human pyramid. Expectedly, strong, taller men formed the base and layer by layer they built the structure. So far so good. With few thousands of people watching the scene with breathlessness some with jaws open like me, the tension was palpable. It was now time for the kids to be lifted up as the pyramid gathered height.  The pace slowed now. One could hear many instructions going around. It was clear that these groups practiced collective leadership and were mainly driven by instinct. With just few meters away from the pot, it was time for the last part of the pyramid – a small kid may be 6-7 years of age to be thrown into the ring. The boy wearing a yellow protective vest (happy to see that but surprisingly he was the only one to wear that) slowly helped by many limbs, biceps and shoulders gradually made his way up. The cheers now get really boisterous.  And as he reached the top and tried to balance himself – lo somewhere something went wrong and the pyramid fell apart and with it the hopes of the participants to hit the pot and jackpot accompanying it. It’s very difficult to pinpoint who did what and what went wrong.  What happened immediately after this was interesting. Few seconds of disappointment later, the group recouped itself.  Took a few minutes off breaking into a dance to ‘Sheela Ki Jawani’ and goading chants and went for the 2nd attempt.  Ironically they didn’t manage to break the pot in that as well. When the crowd withered away, we got some leeway and got out of the spot. Another group may be in a red uniform might have come next. They also might have given a crack at the pot. Might have failed once and may be finally accomplished on the 2nd or 3rd attempt. The 1st yellow group forgetting the experience would have moved on but with renewed energy to the next mandal and hopefully succeeded there.

I was soon in the cab continuing my journey back home and couldn’t help myself reflecting on what happened.  What I hear is that while the Govinda groups are highly enthusiastic about hitting the pot, there is no training or rehearsals done before the day. There are also no structured strategy / tactics adopted to hit the pot which could be of different heights from mandal to mandal. The groups just move on from place to place, size up the task, put together a quick approach and give it a shot to hit the bull’s eye. If it’s achieved well and good. Everybody is happy. The prize is won.   People all around are excited. If they fail, there is disappointment for few seconds. But there is no despair. They again give a try. May not do anything much differently.  May succeed this time. If not just move on and may be give a better try next year.  Political parties associate themselves with different mandals. Bollywood joins the party. As I mentioned before businesses are anyway part being sponsors for different teams.  The next day every year invariably newspapers report of a few hundreds of people who got injured and a few who even died due to mishaps and accidents in the whole Dahi Handi revelry. I asked the cab driver if there is any formula for success here. He said – Nothing Sir, just try, try and try till you suceed oops succed sorry succeed (YES!!!)

Unfortunately our approach to managing the economy and achieving growth rates is eerily similar. The breaking of the pot is similar to the GDP growth rate India can achieve. Just like the different heights of the pots it can be 6 %, 9% or whatever. Just like different groups trying to hit the pot, there are different groups working in different areas to make the economy grow and hit a GDP rate figure. The target may be 8%, 9%,.. in the beginning of the year but only at the end of the year depending upon the height of the handi we will know if we have hit the same or not.  Though we want to grow there is no structured plan or strategy which is put in place. We just hope that the consumption fuelled by our great growing population or economic growth in the developed nations will use more of our products and services and propel our economy. That’s the reason why our economy grows one year at 7 %, few years at 8%, drops to 5% and so on. If the GDP target growth rate is achieved, everyone is happy, plenty of jobs are generated, billions of FDI comes in, stock market booms, realty picks up,.. ,.. and there is happiness all around. On the other hand when the economy doesn’t achieve its growth, and goes down, it drags with it thousands of people who lose jobs, have to take pay cuts,.. like the hundreds who end in hospitals the next day injured. But is there a major despair?? No. Just a bit of disappointment and people just shrug off and continue their day to day work hoping to contribute to a better growth next year.  In governance too there is no leader but something called a collective leadership which essentially means no accountability. In the whole process of driving the economy, politics, government policies and corporates all play their part – sometimes helping the cause and (as we see these days) at times hampering the cause.

On the day when rupee depreciated close to 2 rupees to a dollar, there was panic and gloom in the corporate board rooms as reported by pink papers. But not on the streets. The Dahi Handi was going on in usual raucous fashion.  So that is India. We have our own way of balancing our lives by shrugging off our woes and still moving on in life with fun and revelry. The festival season has just kicked in. Janmashtami was just the start. Tomorrow is ‘Ganesh Chaturti’ – a time to chant “Ganpati bappa morya’ and forget what’s happening to our Rupaya!!!