Sustained high growth all over, booming markets. Is gross national contentment around the corner?
It was also the defining moment for finance minister Jaswant Singh. From middle-class pocket protection to 9 per cent growth ambitions, Jaswant has travelled far in 18 months. Right now, with seemingly little effort, he presides as kingpin of the bjp’s tres successful poll campaign. "The economy will do even better in the next two quarters," he said and then unleashed a slew of IT reliefs and duty cuts, to make the consumer delirious, tip the sensex up to 6108, and launch a March poll preamble.
To spur further the feelgood element in the country, the government last week announced a surprise mini-budget consisting of a wide range of changes aimed mainly at lifting the telecom, IT and air travel sectors. In fact, PC makers have already announced that they’d pass on the duty cut reliefs to customers.
Primarily, the government slashed peak customs duties on non-farm goods by another 5 points to 20 per cent—that’s exactly what it had done in the last budget. Says economist and Rajiv Gandhi Foundation director Bibek Debroy: "I’m happy that import duties have been cut but why still the tinkering? Anyway, we are still some way off from the asean average duty levels of 7-8 per cent."
Still, the sectors that will benefit are non-farm goods, steel/power projects, electricity meters, mobile phones, computers, aviation fuel, electrical appliances and bulk drugs. To boost air travel, the government also scrapped excise duty on ATF and scrapped the 15 per cent inland travel tax. Low income workers (those earning less than Rs 1.5 lakh) and pensioners without taxable income also don’t have to file IT returns anymore.
All this is clearly done with an eye to the polls and to make the urban elite happy. As PC and mobile phone prices go down by at least 10 per cent and air travel becomes cheaper, it will inevitably contribute to the disposable income-triggered consumer boom.
As a result, even as India still stands low on major global rankings—the latest Global Competitiveness Report puts us at 56, behind China at 44 and Brazil at 54—it’s picking up encomiums from all corners. After the awesome Goldman Sachs BRICS report, 94-year-old management legend Peter F. Drucker recently told Fortune that India was becoming an economic powerhouse and knowledge centre very fast and that its progress was better than China’s!
The euphoria at home seems to suggest that Jaswant’s favourite gross national contentment is not a very distant goal. New RBI chief Y.V. Reddy insists that the 5.8 per cent inflation will remain benign and tells banks to stop cutting deposit rates and industry to boost investment. "The Reserve Bank," he told the FICCI annual meet in the capital last week, "expects the growth momentum to be reinforced, inflation to be contained, financial stability to be maintained and the external sector to perform well."
Industry is expectedly jubilant. The Confederation of Indian Industry (CII) expects the next quarter growth to top 9 per cent, when the full impact of the good rains would be felt. The time has now come to "raise the bar" and "go" for 10 per cent, it says. Its latest CEO snap poll also shows that close to 40 per cent of them expect sales and profit growth of above 20 per cent. Says industrialist Rajshree Pathy: "Even though my industry (sugar) is going through deregulation, I enter the new year with less cynicism and with far more positive expectations. Most of my employees today carry personal cellphones, drive a car and wear Allen Solly. If this is not feelgood, what is? My farmers are also happy because they are debt-free."
What has triggered this nationwide confidence burst? Many factors, which proves that it’s not just a freak show. Instead the uptick has been widespread, solid and sustainable. Compare the gdp breakup for the last two quarters and the haze lifts. Agriculture is growing much faster, from 1.7 per cent in Q1 to 7.4 per cent in Q2 and will pick up further with good rabi prospects. The manufacturing and construction sectors are maintaining growth at 6.4 and 7.3 respectively, while services have practically gone through the roof, from 7.6 to 9.9.
It’s more interesting to focus on the component of trade, hotels, transport and communication, which now accounts for almost half of the services sector and equals the share of industry in gdp, and which climbed from 9.6 per cent in the first quarter to a whopping 12 per cent in the second. And this growth is significant, as it means domestic trade is booming, goods and people are being transported all over, and the telecom market is ever expanding.
The next vital booster is the manufacturing sector, the real story of the ’90s. Says Prof Raj Singh, head of Amity Business School: "For the first time, companies are seen to be practising scientific management and have managed to remove inefficiencies to a great extent." The giants cut costs and did financial jugglery to improve bottomlines by about 2.5 times over the previous half-year, and helped Indian industry emerge as a globally competitive player in steel, auto ancillaries and engineering. Rising demand is the simpler explanation but a more important reason is the cultural revolution on the shopfloor. Even exports are up 9 per cent so far, over 18 per cent achieved in the same period last year, and imports have zoomed 22 per cent, doubling the trade gap.
All this, and the spiralling forex reserves (at $100.6 billion now), have set the stockmarkets off on a roll (see box). Already, the value of government holdings in psus has gone up by Rs 1,50,000 crore in the past eight months. Analysts foresee that even with six per cent national compounded annual growth rate (CAGR), the sensex would top 10000 in 4-5 years. That assumes that the fii funds flow, which peaked at $7.1 billion in calendar 2003, will continue to roll in.
And it could be a perfectly valid assumption. The fact remains that net portfolio inflows over the past decade cumulates to $24 billion, a quarter of our reserves. India is clearly one of the best emerging markets in the world, one even the US finds useful, not only because mncs are carting off their backroom jobs to it, but because of its stable and mature polity. Says Arvind Panagariya, professor at University of Maryland: "The perception of India in the US has decidedly changed. The extra 2 point growth applied to a billion people does add up. Economic growth and India’s greater openness on the diplomatic front in the post-Cold War era plus the rising clout of the Indian diaspora in the US have been behind the increasingly closer ties between the two natural allies."
Much of the feelgood factor is associated with the obvious signs in the economy. According to Arun Natarajan, editor, TSJ Media that tracks venture capital and private equity activity, VCs invested $304 million in Indian companies in Q3, a 70 per cent rise on the previous quarter. Most of these are big, long-term players and they certainly believe that the bull phase is not a blip.
Add to it the consumer credit and construction upswing. The IT and the fledgling bpo sector, which have seen a dramatic rise in disposable incomes of their employees, have triggered the lifestyle spending and retail boom in India. There are signs that public as well as private construction is booming and may well become the fundamental story of this decade. The PM’s Rs 1 lakh-crore Sagarmala (ports) project will soon launch, while highways involve another Rs 1.5 lakh crore. The housing projects will need three times this amount in the near future. Says Vinayak Chatterjee, chairman, Feedback Ventures: "This will be the best performing sector in the near future and will have an impact on most other sectors. Most of the construction companies’ orderbook position is full." So, a sustained high growth in these sectors can help the government tackle the unemployment genie.
If all this has happened amidst the most appalling governance, imagine what might happen if governance improved. Says Y.K. Modi, FICCI president: "Industry can grow at 15 per cent if there is cheap credit delivery to small companies. Our archaic labour laws are what’s restricting job creation. And that’s one reason why India’s still not the preferred investment destination." Adds Panagariya: "Unless we move forward with some of the key reforms that we stubbornly refused to carry out for the last several years, we should not expect even the 7-7.5 per cent growth rate to sustain."
Clearly, if the country wants to keep up with its new image, it needs to develop a global mindset and get rid of its archaic, enterprise-discouraging, defensive and protection-oriented laws and rules. The economy may yet win the polls, but the question now is: can good poll results transform the economy?
Paromita Shastri with Gauri Bhatia, Arindam Mukherjee and Suveen Sinha