The booster shots

Mr. Kumar Mangalam Birla
Chairman, Aditya Birla Group
India Today: Cover Story
11 May 2009

The global economic crisis is now in its third quarter. The ebbing tide has dragged down several boats that seemed rock solid barely a year ago. The knock-on effect on India is palpable. The RBI now expects the economy to grow at around six per cent this year, down from nine per cent just two years ago.

Our stakes in returning quickly to a rapid growth curve are high. These are not just in terms of the GDP growth number and the sensex. For us, high growth is imperative to lift the vast number of people from conditions of poverty, to ensure social infrastructure and safety to our one billion-plus population, and to provide gainful employment opportunities to the growing number of our youth, who will reach working age in the coming decade.

The global economic climate is yet uncertain. Some pundits are projecting a V-shaped rebound, suggesting a quick revival after the deep slump. If true, there are risks to such a scenario.
Many countries have released unprecedented monetary and fiscal policy stimuli. The management of these — and withdrawal — could be a challenge. One cannot rule out disruptive and volatile cycles in the markets.

In such a scenario, we can expect little help for our own growth curve from the global business cycle in the coming years. That backd;rop makes it even more necessary to develop robust strategies that will help India get back to the 9-10 per cent growth trajectory notwithstanding the global scenario.

This is a challenge that our policymakers and industry need to take head-on. Effective responses to this challenge, in my view, could be broadly clubbed into two buckets (though not completely exclusive) — short-term damage-limiting responses and medium-term growth-sustaining responses.

For the short-term, there are two issues that need to be addressed — the confidence levels and compensating for consumption shortfall with an aggressive push to investment.

The new government that will emerge after the elections will need to take immediate actions for boosting confidence levels. It will certainly help if the new government comes out clearly with an economic policy package that assures investors, industries and consumers about the stability of the overall policy direction.

It could step up certain economic and institutional reforms that will also act as confidence-boosters. These could include a quicker transition to a Goods and Services Tax (GST) regime, push to the disinvestment programme, financial market deepening, relaxation of labour laws for certain employment-intensive sectors, enabling long-term investments into equity markets, encouraging development of markets for municipal bonds and so on. Such announcements could send a strong signal to everyone that the new government is committed to high, inclusive growth.

There is also need to review trade policy dynamics. Many countries have used tariff and non-tariff barriers to protect their industry while, on the other hand, there are concerns about dumping by Chinese exporters in neighbouring markets. These call for alert and flexible policy responses so that efforts to revive Indian economy are not harvested by other economies.

The second important leg of the short-term strategy is to boost investments. Most projections suggest that consumption spending may remain somewhat subdued this year. For overall growth, stepping up of the investment spending is critical. This could include a variety of measures, from short-term tax breaks for big-tag greenfield investments to administrative focus on clearing last mile hurdles for large projects. One quick-fire way continues to be a counter-cyclical push to investment by the government itself. The new government will need to continue with the fiscal stimuli announced in December and January. Although that could imply further widening of fiscal deficit, it may be inevitable in the short-term. Government spending could be focused on infrastructure projects, including rural infrastructure that will augment long-term competitiveness of our economy. As growth revives, the government could revert to the path of fiscal discipline.

But efficacy of these measures will require tactical steps in creating room for credit and for making money affordable. The RBI has taken several steps in the last six months to ease the pressure on liquidity and to bring down the cost of funds. Despite these efforts, lending rates have not come down proportionately. This must be followed up. While western economies have exhausted the option of using interest rates to stimulate demand. India still has room to use this tool to boost growth. We must not lose sight of this opportunity.

Moving on from short-term pain relievers to the sustainability of high growth, it may be worthwhile to remember that we have witnessed nine percent-plus growth for three consecutive years from FY 2006 till FY 2008. This was well supported by a rise in savings rates to 35 per cent of the GDP. The other contributors to this phase included strong export growth and exuberance about the "India story" within global capital. Currently, we do not know if these contributors will continue to stay with us over the next three to five years. Bear in mind the fundamental drivers in terms of favourable demographics, high savings rates and improved competitiveness of Indian industries give us an edge. In fact, a sustained higher growth needs to play upon these fundamental drivers and unlock them wherever required.

We will need to really explore some big-bang plans of investment in physical infrastructure. For instance, one can think of raising funds for infrastructure investment through a bilateral agreement with China to channel a portion of its massive foreign exchange reserves. China seems to be already concerned about parking the bulk of its reserves in US dollar assets. It may be time again to tap the savings of NRIs. Part of these funds can be channelised as equity contribution for public-private core projects.

Besides financing, large projects sometimes get stuck into issues of land acquisition and other clearances. The government could explore creating a comprehensive and fair compensation policy for land acquisition and a standard operating process on clearance issues with time bound resolutions, to avoid undue delays.

Social infrastructure is as much, if not more, important as physical infrastructure for ensuring sustainable growth. Besides committing more financial resources to social infrastructure such as health and education, the government may also look at governance issues to improve the effectiveness of delivery of its services in these areas. Also, the private sector may be encouraged to partner in certain areas; for example, technical education.

The development agenda on the government's priority could include delivery of minimum nutrition to children, effective implementation of the goal of universal primary education, improving the quality and reach of healthcare, making water and electricity available to all, improving sanitation and drainage systems, and putting in place economic safety nets.

Additionally,we need to scout for sector-level enablers that can c;reate a big impact on investment and employment, such as the implementation of the National Mineral Policy to encourage investment in mining sector, incentives for increasing fertiliser capacities, supporting Indian companies to acquire natural resources (especially energy) abroad, creating a super-ministry for transportation that can take a holistic view of transport infrastructure and so on.

The downturn is possibly a reminder to us that we still have an unfinished agenda with respect to reforms, policies, infrastructure and institutions, in case the good times made us complacent about these issues. This may be the best time to focus on all these issues so that we emerge stronger when the economic environment takes a turn for the better.

Prescription

• Continue with the fiscal stimuli announced in December and January
• Use interest rates to stimulate demand; invest in physical as well as social infrastructure
• Boost confidence with measures that signal commitment to high, inclusive growth