Test of patience

Last Updated: Sat, Sep 01, 2012 18:42 hrs

A year ago, in Q1,2011-12, GDP growth slowed to 8 per cent and mild concern was expressed by most. Now, as Q1 2012-13 growth registers at 5.5 per cent, there is actually relief in some quarters! It shows how much expectations (and growth, of course) have dropped in a year.

If one believes the data, the economy is near a bottom. But growth could slip further – there are people of Dalal Street betting on sub-5 per cent though they’ll never say it officially. Or 5.5-6 per cent might end up being the “trend” growth rate.

The government has shown urgency about combating deceleration in the past year and it’s showing none now. While there will be behind-the-scenes attempts to talk rating agencies into not announcing a sovereign rating downgrade, there is no focus on policy that could change the ground reality. There are some fears associated with a possible downgrade. It would force many overseas investors to cut back India exposure because they don’t possess the mandate to invest in junk-currency assets.

Seven months remain of this fiscal. The next (2013-14) will be focussed on electioneering, which means sops, not fiscal prudence. This reduces the investor to hoping for a global cyclical turnaround. Nobody is projecting that the global economy will come roaring back in calendar 2013. So, it is quite likely that the Indian economy will just about stay afloat for the next two years, rather than make a credible recovery.

It is clear now that, without determined policy action, the structural problems that have become obvious in the past three years will continue to bottleneck growth. Both short-term and long-term prospects are dependent now on policy action.

One key area is infrastructure. Higher economic growth cannot be sustained without the creation of greater infrastructure capacity. The grandiose Twelfth Plan objectives (The plan document itself is yet to be released) project investments worth roughly $1 trillion (Rs 55,50,000 lakh crore at current prices) will flow into infrastructure.

A large proportion is supposed to come from the private sector. But domestic savings will not be enough. So infrastructure plans depend on large foreign inflows.

The global economy will recover sometime or another. However, foreign investors burnt by the 2G scam and other arbitrary policy actions, are already wary of India exposures. Add a downgrade, and continued inaction about thorny issues like land acquisition, tax-related ambiguities, tardy project clearances, easier FDI shareholding norms, etc. The Twelfth Five Year plans will end up looking like science fiction.

India lived through a similar period in the 1990s. Between 1994-1998, the Indian economy stagnated. There were a series of governments in that period. First, we saw the closing years of the Rao coalition, then Deve Gowda, then Gujral, and finally the first Vajpayee government. None did anything of positive note.

The stock market also went nowhere during that five-year phase. It was late 1999 before the Sensex was lifted by the IT and Internet boom and finally exceeded its record peak values of September 1994. While governments played musical chairs, the market range-traded.

The last four years have been similar in terms of market action, though it’s been one government supposedly in charge throughout. The Nifty hit its all time peak in January 2008. It tested those levels briefly in November 2010 and is now trading about 17 per cent lower.

Investors might have to be braced for another year or two of meandering. Traders can make money through this period, by picking up intermediate trends and also, by going short judiciously. Investors can accumulate whenever prices seem right. But it will be a test of patience, until and unless there is a significant correction.

For what it’s worth, domestic GDP growth could pick up a little in the second half of the fiscal. By Q4, 2012-13, there will be a low base effect to contend with. There may also be a flood of liquidity if there’s yet another round of Euro-related bailouts and that could keep stocks buoyant.

Even if these two signals coincide, it may be a false dawn. A combination of several other things will be required to reverse the trend. There will need to be deep rate cuts. An enabling global environment will be necessary. India needs not only hot flows into equity but also a pickup in real economic activity to drive FDI and exports.

Above all, there have to be clear and unambiguous signals from the government that it is prepared to take policy action. Nothing in the track record of the past three years indicates that it is willing to do so.

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