Indian Economy 2013-18: Expectation Economics or Execution Economics?

Over the last twelve months, India has seen its growth rate halve, from 10 percent to 5 percent, and industrial output contract to as low as 2 percent. Current Account Deficit has widened, Rupee has lost as much as 10 percent in a span of just 10 weeks, with a further 10 percent slide forecast over the next 10 weeks. Foreign direct investments (FDI) have stalled while the Foreign Institutional Investors (FIIs) have pulled out billions from the Indian stock markets. Inflation has been persistent even with liquidity getting squeezed. India, Inc has been reporting lower profits, and in some cases lower revenues too. Some of the aura surrounding India as the potentially the third largest economic power is getting eroded.

Certain industrial sectors are particularly relevant for reading the strength of the Indian economy. Realty, power, capital goods, metals, and oil & gas sectors have fared poorly over the last five years, with the stock market indices relating to the sectors plummeting by 90, 70, 67, 60 and 37 percent respectively. Important sectors such as consumer goods, banking and technology have remained flat. The only sectors that have recorded growth are FMCG, healthcare, automobiles and IT at 182, 103, 80 and 70 percent. Within these, automobiles and information technology have seen fluctuating fortunes in the last three years.  Recent physical numbers of performance indicate a clear deceleration in these sectors while IT’s performance is linked to dollar appreciation vis-à-vis Rupee.

Lagging economics

The laws of industrial and consumer economics typically operate with a lag. The high performance of domestic consumption oriented sectors does not necessarily reflect long term sustainability of domestic demand and consumption. On the other hand, the languishing of realty, capital goods, power, shipping, metals, oil, gas and other infrastructure sectors indicates that sustainable investments are not being made to support a healthy long term supply and consumption profile in the Indian economy. Simultaneously, the inability to keep continuously developing newer bases of competitive manufacture such as electronics, semiconductors, solar panels and systems, telecom gear etc., limits the country from continuously generating domestic investments and drawing foreign investments. China’s massive thrust on infrastructure has been well accompanied by competitive manufacture of all industrial and consumer goods.

The macroeconomic balance of any economy is governed by the positive trade balance, flow of foreign investments, domestic savings and investments, and current account balance.  Looking back, we can identify post-liberalization of 1992, two distinctive five year cycles: 2003-08 and 2008-12 which saw Indian economy climb up to new tracks, despite the striking global liquidity and bankruptcy crisis in 2008. These cycles were marked by high rates of growth, increasing foreign investments, high inflation in parts, high fiscal deficits, steady increases in manufacturing output and volatility in infrastructure development with some highs and lows. One would expect the Rupee-Dollar parity to exhibit volatility under the circumstances over the ten year period; but it did not. The exchange rate (Rupee to Dollar) remained steady at about Rs 45.6 during the ten year period. Some underlying contradictions did exist which are now coming to the fore.

Expectation economics

Reviewing the past decade of 2003-12, one may wonder whether the macroeconomic stability of India was a result of a peculiar phenomenon of expectation economics, globally as well as locally. The last decade, for example, has been an era when the mighty economies of the world, USA, Japan and Europe, and their respective mighty currencies Dollar, Euro and Yen became structurally weak. This was also the period when the concept of BRICS economies (including India) came to the fore as the drivers of a future global economy. There was also a well deserved all-round admiration for the way India managed its banking and liquidity system in sharp contrast to the meltdown in the USA and Europe. Huge expectations had built up as a consequence that India would be the future market for industrial and consumption growth.

It was, therefore, not unnatural that what should have been an intrinsically weak Rupee for the reasons adduced in the previous section above maintained its parity as a stable currency. However, the moment the economies of other nations started perking up and the expectations of India started turning tepid, the fault lines in the Indian economy have begun to show up in recent times, as discussed in the opening paragraphs. The lessons are clear that while India has all the right ingredients for becoming an economic superpower such as its large 1.3 billion population, growing middle class, youthful demographics, increasing literacy and reducing poverty, there must be a growth oriented macro and micro economic regime to harness the resources.

Incremental economics

When macro-economic and micro-economic fundamentals are under threat, incremental measures would hardly suffice. Discouraging consumption of gold (through increase of duties), tightening of domestic liquidity (through bank liquidity ratio controls), curbing conspicuous consumption (through taxing of luxury goods), facilitating foreign investments (through relaxation of certain FDI caps) and buffering against hard landing (through subsidy and security options) can at best be palliative measures. They do not address the basic infirmities or weaknesses of the macroeconomic situation (for example, balance of payments, short term and long term debt and microeconomic situation (for example, industrial costs, prices, output and consumption).

The perils of incremental economics are that governments end up undertaking corrective measures too little and too late. As a result, problems become crises. The near bankruptcy India faced in 1991 is an example of delayed transformational moves. While everyone considers 1992 as the year of inflexion in terms of transformational economic liberalization in India, there can be no denying that India has been taking partial measures of liberalization even from the 1980s but they were just not enough. A large complex economy like India needs transformational economics when faced with problems that could turn into crises; it is true now as much as it was in 1990s. India traditionally had a strong consensus for weak reforms. In the context of the several years of liberalization further dramatic liberalization policy changes as in China could be a challenge for India.

Competitiveness economics

India has its contradictions; fundamentally the people want to grow and prosper but at the same time, people are patient and tolerant of low or even no growth. The larger base of population, at the base and the middle of the economic pyramid, is less knowledgeable about the benefits of further liberalization versus any other way of economic management. In fact, there continue to be many misconceptions about liberalization which is equated to the opening of the Indian economy to “foreign domination”. As long as Indian polity is fractured it is unlikely that total liberalization as a concept will have open advocates.  It is critical that the importance of competitiveness, as opposed to liberalization per se, is taken up as the primary economic concept. The purpose of liberalization, after all, is competitiveness.

India must focus on sector competitiveness as a panacea for economic ills. For example, if India becomes a global leader in design and manufacture of jewels for global markets and becomes a net foreign exchange earner, it would probably not make a difference even if the country imports gold and diamonds. The same would apply to other sectors as well; if import of certain technologies makes India globally competitive it is a path worth taking. Competitiveness, however, requires an enlightened mindset on the part of employers and employees. The best intentions can go awry if competitiveness is equated only with shop floor productivity as painfully brought out by the unfortunate incidents at Maruti Manesar plant. Competitiveness must create new jobs, enable better living conditions and ensure greater prosperity for all stakeholders.

Execution economics

Competitiveness is a function of design as well as execution. The Indian Finance Minister is on record that China’s execution capabilities are indeed enviable. Timely and rightful execution of policies and strategies, whether liberalized or not, adds more to competitiveness than a perfect liberalization policy or strategy. In formulating policies, the end point of economic growth with social equity cannot be lost sight off. It matters less whether bullet trains are set up in India with indigenous technology or imported technology and domestic or foreign investments, or a combination thereof compared to whether the bullet trains would be set up at all. Not ensuring exceptional connectivity with such transformative transport option that is also capable of generating several thousands of new jobs is poor execution economics, and denies the country the benefit of competitiveness economics.

The above is not to imply any preferential statements in favor or against dependence on foreign capital and technology flows vis-à-vis self-reliance through domestic investments and indigenous technologies. Amongst the Asian Tigers, Singapore has succeeded immensely based on the former while Korea became a leader based on the latter. For a large country such as India with several natural resources and intrinsic capabilities, the Korean model of development of its own fast-follower and pioneering technologies as the foundation for creating globally competitive industrial superstructure is probably more relevant. Korea represents an impressive model of execution economics. India would have much to gain if investments are directed into the infrastructure sectors which have seen de-growth and competitiveness is enabled through technological competencies and execution promptitude.

Posted by Dr CB Rao on August 10, 2013