India: The Economy of Future

The last ten days have been packed with events. Just prior to the visit of Obama the World Economic Forum in Davos concluded its 45^th annual conference of the broad theme entitled ‘The New Global Context’.

This was my 17^th year in the Alpine Ski Resort in Switzerland. Davos is much more than mere animated discussions ranging from the economy to politics to medicines to arts and sciences. It manages to get each successive year to engage key policy makers and game changers. The slogan is ‘Come to Davos and meet the world of Game Changers’. At the heart of it, Davos is less about meeting but more about making friends, to nexus, to connect and to leverage contacts. You need a ‘Davos Frame of Mind’ to make the best of Davos. 

Are there multiplier benefits to friendship and contacts even in an interdependent world today? Yes it is, because with face to face contacts, even brief conversation is a quick learning experience about changes, perceptions and pointers to future.

The Davos conference this year had a mixed milieu. The European delegation seemed concerned about the future of Europe and given the uncertainties in Greece and vulnerabilities of some other countries. The future of euro zone remains a question mark. Russia was struggling to keep its head above water since ruble has collapsed; oil revenues were half with rising fiscal deficit, a credit down grade with persistent foreign capital outflows. So between the uncertainties of Euro Zone and Russia, Europe remains in doldrums, if not in turmoil.

The US recovery is robust with employment figures looking optimistic even though there is uncertainty on how quickly interest rates would rise and quantitative easing wound down. In Latin America there were patches of good and bad - Brazil remains sluggish. In Asia, the Chinese economy has slowed down, partly a result of a conscious policy to ease overheating and move economic activity towards low fossil fuel use. The return of Abe and relentless pursuit of Abenomics by way of quantitative easing has yet to reverse the slowdown. In Africa, the South African economy remains sluggish and the falling commodity prices has upset many African economies. India remains in notable exception and indeed as the eminent economist Laura Tyson said in Davos, India is a high point in the short run but now importantly the economy of the future.

India in Davos has always passed through oscillations. Prior to 1991, when Davos was much smaller, India was viewed as a closed economy which discouraged foreign investment and was viewed merely as a potential market for exports of plant and technology. The reforms of 1991 brought about a major shift when the opening up of the Indian economy enthused the world as new opportunities opened. This continued for several years. However, it was during the NDA government under the leadership of Atal Vihari Vyajpayee, the opening up of the telecom sector and massive highway building programmes had Davos excited about the New India opportunity. The acceleration of the growth rate, particularly in 2007-08 continued the India fever. However, the five years of the UPA-II government dashed their expectations. India slipped from global investor radar. The sluggish growth rates of sub 5 percent over the past few years with controversial retrospective tax changes enhanced perception of governance paralysis, lack of transparency, financial malfeasance and crony capitalism; people felt it was a country which had gone back in time. 

All this has changed quickly in the last seven months.

The panel discussions in which Arun Jaitely participated and some in which Piyush Goyal did, were the most sought after meetings in Davos. Arun Jaitely’s CII breakfast meeting under the aegis of Boston Consulting Group had a packed and enthusiastic crowding. Equally Mr. Jaitely’s one on one conversation with a correspondent of New York Times had an enthusiastic response with informed questions from the audience. His televised debate on the BRICS agenda was moderated by Silio Boccanera in which participants included Carlos Ghosn(Chairman, CEO Renault Nissan),  Justin Lin(Professor at Peking University, China) and Nhlanhla Musa Nene (Finance Minister of South Africa. Similarly, the well attended NDTV debate on the Future of India had Chanda Kochar, Nouriel Roubini, Vikram Chadra with Arun Jaitely.

My broad conclusions on India at Davos would include the following four points.

1. India is back on the global radar of investors. They are back in their reckoning and in the plans and programs of their corporates and associates. 
2. The expectations of a 5.7 percent growth this year, over 6 percent in the following year, climbing on to 7 percent and higher subsequently, with moderate inflation, acceptable current account deficit, significant opening up of foreign investments in railways and defense, the prospects of reviving manufacturing, the Make in India Campaign, the Swachh Bharat, Digital India and Clean Ganga offer enormous opportunities for technology, capital and entrepreneurial skills. 
3. Investors would watch carefully the implementation of many promised steps. They appreciated that instead of endless wait, the key ordinances on coal mining, land acquisition and insurance was a commitment to adopt the unconventional route than sacrifice growth. They would hope these are converted into legislations sooner than later. They will also watch other measures on labour laws, implementation of projects with stranded assets, clearing up of balance sheets of banks and injection of financial resources through increasingly market based instruments. 
4. The speed of government action has taken the world and indeed investors at Davos by surprise.

Davos 2015 marks the rekindling of global hope and expectation about the India story. The world hopes this would not be yet another false dawn. We hope so too.

India in 2015: Challenges Ahead

This is my first column for 2015. Let me begin by wishing my readers a very happy 2015. Sarah Ban Breathnach has said, “New Year's Day. A fresh start. A new chapter in life waiting to be written. New questions to be asked, embraced, and loved. Only dreams give birth to change.” and yet Winston Churchil has cautioned us that, “It is always wise to look ahead, but difficult to look further than you can see.”.

The year that went by contributed to some important turnarounds.

First, we have a strong, stable and credible government with a decisive leader. The era of fractured coalition politics is hopefully behind us for some time. The parliamentary majority in the Lok Sabha is decisive for the ruling party. In the Rajya Sabha the ruling party does not have a majority and forging bipartisan support will remain a challenge. It will test the skills of the ruling party in the months ahead. Even while the spectacular victories in Maharashtra and Haryana following the general election of 2014 was a reiteration of the pro-Modi sentiment, the recent victory in Jharkhand and decisive improvement in Jammu & Kashmir mark a continuation of the same trend albeit according to some in muted form. The changed composition of the Electoral College will improve BJP’s strength in upper house in 2016 with continuing improvements.

Second, the economic decline looks to have bottomed out. We have hopefully seen an end of the prolonged period of policy paralysis, sub-5 percent growth, unsustainable Current Account Deficit, raging inflation, rising subsidy bills and little or no credible action aimed at macro-economic stability or structural reforms. This fiscal year will end with growth rate somewhere between 5.4-5.9 percent, moderation of inflation, a manageable current account, a modest revival of investor confidence. Interest rates would come down this week or by the first week of February. The recent ingredients of structural reforms includes deregulation of diesel prices, replacing cooking gas subsidy with direct transfers, reforming coal sector and allowing private sector in it, Pradhan Mantri Jan Dhan Yojna, Swachha Bharat Abhiyan and labour reforms.

Third, looking at the external factors, the world in general presents a mixed picture. Japanese economy will struggle to crawl out of recession even under the renewed leadership of Abe. The slowdown in Chinese economy will persist for a while with declining competitiveness in labour intensive manufacturing. The American economy has shown a sharp upward turn with expectations of increase in interest rates which may encourage outward capital flows with pressure on our exchange rate and current account deficit. The European economy would remain in doldrums. The growing geo political tension between Russia and the West could create multiple dynamics of its own.

Fourth, the altered global energy scenario with medium term prognosis of soft oil prices has huge implications for India. The current downward trend in petroleum and oil prices would benefit fiscal management particularly subsidy flow but make renewable energy less cost competitive. A robust recovery of our exports, given global uncertainties, could remain problematic. This could impact the current account deficit. However, on the whole, the external environment in the short term looks advantageous for us. The subdued inflation behavior should be used as an opportunity to rationalize cross subsidies and pursue many pending reforms.

So what are the challenges which we face? And what could be the most beneficial outcome?

First, combining rapid economic growth with social cohesiveness will remain problematic. Societal evolution in accepting the consequences of rapid growth at best presents a mixed picture. Preserving traditional values, cultural identity, during periods of rapid urbanization and migration poses policy choices on which there are no easy answers.

Second, rapid economic growth cannot be taken for granted. Expectations both form the Prime Minister and the Budget in altering the growth trajectory remain high, almost unrealistic. Policies and procedures when altered have a gestation period. The misalignment between expectations and ground level changes in the short run can create uncertainties. The opposition would hope for political backlash. It is important to persevere and stay on the course.

Third, creating gainful employment both in manufacturing and services will need changes in regulatory framework beyond administrative actions. Some recent measures initiated in earnest to fix time limits on grant of approvals, simplifying the number of approvals needed, resolving contractual disputes, simplifying registration procedures can make a difference on the Ease of doing business. Changes in labour laws would need to go beyond encouraging states to adopt the best practices of some states like Rajasthan and Madhya Pradesh. Legislative action sooner or later will be inevitable. Reports that large foreign investments from relocation of Japanese investment away from China are still in a wait and watch mode for India suggest need for more decisive action.

 Fourth, improving health and education outcomes has received priority focus. Nonetheless, harmonising skill inculcation programmes with emerging demands needs coordinated action between centre and states, the corporate sector and more robust forms of public private partnership.

Fifth, managing parliament, particularly the Rajya Sabha could remain problematic. Government has options by the way of ordinance, its promulgations and Joint Sessions. These are no substitutes for persevering with forging bipartisan support to enact key legislations. Given recent setback in State Elections the opposition may be subdued facilitating greater cooperation during the year.

Sixth, internal security presents a complex challenge. The recent ethnic killings in Assam, challenge of terrorism aided and abated from across the border and the specter of Maoist insurgency in several states requires a robust response. The conduct of peaceful elections in Jammu and Kashmir has many positives.

Finally, harnessing the improved external environment to India’s advantage. The investor appetite in United States Japan and Australia has been rekindled. Translating expectations and commitments into tangible actions may require re-doubling our efforts. Moving foreign policy to foreign economic policy must go beyond rhetoric. Harnessing the enthusiasm of Indian diaspora can be a decisive advantage.

The New Year comes with the renewed hopes and expectations. The prime minister was right when he recently said that the “World is ready for India but is India ready for the world?”. We must prove that we are and that there is credible action to address the key challenges.

It is well said by Joyce Meyer that “We don’t grow when things are easy; we grow when we face challenges.”

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