The New Growth Paradigm

The past couple of years have been very harsh on the Indian economy. GDP growth came down to abysmal levels compared to what we had been clocking just two years ago, inflation has hit every pocket, right from the common man to the businessman and governance was such that the less we speak about it, the better it is.

Hopes of a recovery had been hinging very strongly on the change in guard at the centre. The NDA which looked as the only viable option to the fragmented and laggard government that we have had over the past 10 years has finally assumed power. With a strong leader at the helm of its affairs, the nation is all but waiting to fly into the next orbit of growth.

The best barometer of the expectations from the new dispensation at the centre is our markets. Over the past few months we have seen the stock market’s rally very well. Global investors too have been extremely optimistic about India. The cautious optimism took a euphoric turn in the middle of May, when the NDA led government with Narendra Modi at the helm came to power. That euphoria may have subsided temporarily owing to geopolitical stress on the international front, but the overall optimism still remains intact.

Benchmark indices have set a floor for themselves and have been oscillating in a very narrow band over the past couple of weeks. Even the global scenario is threatening the one sided rise of the markets, fundamentally on a long term basis all seems to be well. The Indian economy is surely in for a change of direction under the new government. All that is needed is a perspective driven action plan that can help the economy tide over its shortcomings. These actions will have to be based on a very simple fact that is tough decisions for a speedy recovery. So, what lies ahead and how do prominent voices look at the future panning out? Here are the answers.

The Inflation Conundrum

The biggest issue that is in front of the new government is Inflation. The problem has been a typically chicken and egg situation for the government and authorities to handle so far. The RBI has been solely focusing on interest rates as a measure to counter inflation. That measure seems to have had a very limited implication so far. The problem of inflation is more to do with the supply side constraints that we are currently facing. Food inflation has been the worst in years so far this year. Just as it seemed to be coming under control, untimely rains and hailstorms and now the delayed monsoon have cast a shadow on the improving situation. Developments so far point to a very bleak short term picture on the inflation side.

 The government has already initiated a good amount of steps to control inflation. From imposing export restrictions on certain farm commodities to warning hoarders against restricting supplies, the voice has been quite stern. Action will follow only with a lag of time in these areas, but the way things are, it seems that the government is at least for now moving in the right direction. Dr Rajan has constantly maintained that he would like to see fiscal reforms before he changes his view on loosening interest rates. So in that sense, the Central Bank was anyways expected to maintain a status quo before the government takes significant measures to rein in inflation.

But all said and done, the RBI has for a long time been focusing only on Interest rates as a tool to control inflation. What has largely been ignored in this context are the supply side constraints. There is a need to focus on this aspect, if inflation really has to come under a meaningful control. This view finds favour with many industrial leaders. Glenn Saldanha, CMD, Glenmark Pharmaceuticals says, ‘First of all, the government should focus on controlling inflation and boosting economic growth. The stress should be on policy implementation and good governance. The new government should have a clear set of economic policies in order to kick start a period of higher growth for the economy. It should take eff orts to create jobs, curb inflation’.

 Time To Get Going

 One of the most important factors that will contribute to putting the economy back on a growth path is the kick starting of stalled projects. In fact, that has been the nemesis of banking sector as well. A bulk of the bad loans which have translated into NPAs for the banking sector are attributable to the stalled infrastructure projects that were financed by them. The government has already sounded its resolve to tackle this problem. The first moves from it in that direction are worth taking note of. Speedy land acquisitions, prioritizing environmental clearances and ensuring that these projects get off the ground as soon as possible will surely go a long way in putting growth back on track. This has a double advantage. On one hand, where the projects will bring into productive use the assets created, on the other bank loans which have gone bad will be on their way to recovery thereby strengthening bank balance sheets.

A Roadmap for the Government

There is a long list of do’s and don’ts that are being pitched from various quarters for the new government. The most important thing to remember is that there is no magic wand that can be waved to get to where we intend going. The process of economic improvement and growth is going to be one of systemic improvement spread across a time period which can ensure a proper implementation of the policies. There is ought to be a lot of pain involved for all stakeholders which will have to be endured before the fruits of growth can be reaped.

 This view is fully subscribed by many of those with whom we have interacted on the subject. Nirmal Jain, Chairman IIFL succinctly sums up this thought. According to Jain, “The government has begun on a right note and the recent railway fare hike before the budget indicates that it is ready to bite the bullet. I would expect the budget to do away with any populist measures that India has to some extent got accustomed to in the previous regime. I expect the Finance Minister to cut down certain subsidies. Steps will be taken to put the fiscal deficit under control in a very genuine manner even though it may seem unpopular initially.”

 Continuing reforms is a factor that will go a long way in ensuring success for this government. There is no way that reforms can be put on a backburner if economic growth has to come out of hibernation. “I am expecting to see some positive steps as far as reforms are concerned. FDI of 49 per cent in several important sectors is something I look forward to. Simplification of tax structure is a long pending demand and I see some development here. More importantly, I expect a host of measures could be announced to make it easier to do business in India particularly for foreigners” adds Jain. A vie similar to this is shared by Glenn Saldanha, CMD, Glenmark Pharmaceuticals. According to Saldanha, “A decisive mandate is definitely a welcome outcome of the 2014 elections. A sound mandate will create a favourable environment for speedy resolution of policy bottlenecks and reforms and contribute in spurring economic growth.”

This is just the beginning and a lot more is yet to come. We follow this up with some very interesting insights gained from our interactions with industry leaders and market intermediaries. While Dr K C Chakrabarty, former Deputy Governor, RBI rightly points out that the government needs to improve trade surplus to ensure that we do not borrow more. Adi Godrej, Chairman, Godrej Industries is absolutely bang on target in saying that interest rates are probably not the only way to contain inflation.  The right way to sum up is in the words of Keki Mistry, Vice Chairman and CEO, HDFC who says the economy is heading in a positive direction in the in the medium to long term.