The Indian economy and sentiment vs. reality

The state of the economy was profoundly depressing over the past many years. The Congress Government had gone into a stupor in its second term, with the surfacing of the major corruption scandals, and the immense media and judicial oversight slowed down all Government action. Already tottering with the economic slowdown worldwide starting from 2008 and continuing for the next few years, the Indian economy started getting into problems. And it’s not that India makes it easy to do business, with the amount of Government corruption (in terms of clearances, graft, forms, raids, and so on), the economy got into a real downturn. Unless there is a shock, the slowdown takes time to happen, just like it takes time to improve the economy again. For some time, as the economy was going slowly down, the Congress mandarins took credit for steering the economy inspite of the global problems but the inevitable happened. In the last few years of the Congress Government, the Government tried to promise improvement in the economy, and “green shoots” became the most promised not-happening event.
When the BJP Government got control of the country and the economy, they were in for some tough times. The bad turn in the economy was the pivot that brought the BJP to power, but the hope is very high. In a single line, these raised hopes are the ones that pose the biggest danger to the future of the Modi Government. For some time, the memory of the mis-rule will continue to drive further movement of the BJP, but it needs to be complemented by economic movement of the Modi Government. And this is the nub of the whole argument.

Now, sentiment remains high in large sections of the economy. The Modi state Govt in Gujarat has been seen as a government that promotes development and Gujarat is seen as a model state in industry and large sections of the population, and the same reputation precedes Modi into the central Government. The jump in the stock market in the past few months, when it was clear that the BJP and Modi will come to power, was a reflection of this sentiment. However, any improvement in the economy and sentiment rests on several legs. These are:
– Easy for business to work. This is a complex subject, with multiple parts. There is a benchmark where India is measured with the rest of the world in terms of ease of doing business, and India is an abysmal position. This relates to the complexity of paperwork for getting work done, the amount of graft / corruption needed for getting work done, ease of hiring and firing employees. Some of these are difficult to do here in India, especially when it comes to modification of labor laws; but increased openness is something that needs to happen. Here, Modi is supposed to do a lot of improvement, and has mentioned changes in this area regularly. However, one really does not seem too many measures to tackle the endemic corruption that increases the cost of doing business, and movement in the area of easing paperwork / inspections is still slow. There has been no drastic changes, something that people have been looking upto.
– Modi has been pushing his Make in India initiative, and this one requires a large amount of pushing. It needs to ensure that those in power keep pushing, and Modi has been doing that regularly. However, it also requires a lot more work in executing changes required to entice people coming into India, and people need more changes here. For example, people need clarity on legal frameworks, on quick and fair judicial processes. The interim budget refused to take a categorical stand on retrospective taxation, and hints that it would not be invoked does not present such clarity. Further, there is no effort undertaken whatsoever to move towards quicker processing of the judicial system (and just blaming the judiciary does not really work, most people expect the Government to take effort to improve matters).
– Inflation is still keeping its head high. There is some public confusion on inflation, with some figures claiming inflation is down, and others claiming that food inflation is high. However, it is oil products such as petrol and diesel which are down, and food inflation as per recent reports, is alive and kicking, and hitting people (and indirectly, the credibility of the Government). One cannot see any public actions of the Government that seem to be addressing this area – there has been no public announced initiative of enhancing cold storage and other infrastructural issues that could play a hard in increasing food supply to the market. This inflation problem continues to trouble the RBI, which has refused to reduce rates, something that industry has been looking forward to.

There have been initiatives by the Government to improve sentiment, but a lot more stuff is needed. Public finances are helped by sales of 2G spectrum and sales of shares in Coal India. However, the strategic sales initiative of the Vajpayee Government seems to have been totally dropped.

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