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In a country of doubting thomases

Jun 4, 2007

We Indians are not used to the economy clipping at straight 9% YoY for four years in a row. These GDP growth numbers have a slightly unreal aura when the common man on the street grapples with frequent power failures, traffic snarls and shortages of essential commodities. But the fact is in the last few years, the common man in India is indeed taking more home, though some more so than the others.

If we dissect the national income numbers released yesterday by the Central Statistical Organisation, the slight changes from CSO's earlier estimate stem from better growth in the manufacturing, construction, and trade and hotels. Electricity, as we can well believe, has slid from the earlier estimate, and so has growth in financial services. Net net, the real economic growth at 9.4% is a shade better than the earlier estimate of 9.2%.

Capacities have expanded
The credit for this spurt in the economy should go to the structural reforms undertaken in bits and pieces over the last decade or more. They have allowed innovations in financing as well as in production processes in the country. This improved efficiencies and productivity and of course bettered margins. Indian industry has bankrolled a major part of its growth through internal accruals. And what is significant, this growth has happened in an era of lower tariff barriers to imports.

CSO's data shows a definite increase in fixed capital - as a percentage of GDP it has increased its share in GDP from 29.1% to 30.5% in FY07. What it means is, investments in production facilities in the past one year have gone up. The Index of Industrial Production as well as the data on capital goods imports bears out this trend.

Altered premises
In the last one quarter, the business environment has changed. The Reserve Bank of India (RBI's) actions in raising the interest rates in its efforts to contain inflationary demand have reduced profitability and also easy availability of funds for most companies. An appreciating currency will work against the exports - 25% of FY07 GDP. The joker in the pack is Chinese policy - if Chinese policies make exports from China expensive, Indian goods will regain competitiveness despite an appreciating Rupee.

All these changes have muddied the waters. Normally interest rate hikes would put brakes on the growth process. But as the RBI gingerly steps in to intervene, one is assured that a complete stop to growth is not what they have in mind. So the aggressive among the companies seek cheaper funds from abroad.But in general, the financial costs for the economy have gone up. It also has to deal with higher cost structures thanks to its bad infrastructure. Cost per unit of power doubles if a company has to generate its own requirements in the event of the State Electricity Board being unable to provide the necessary load. High transport costs due to slower freight movement with shoddy transport lines, and now higher staff costs, as India Inc comes to grips with the failures in the Indian education system that has shown up in the paucity of skilled technical labour.

Can we overcome?
We estimate these bottlenecks to slow down GDP growth in FY08 to about 8% levels. In the interim, if Dr Singh is able to galvanise his fellow party members into action, and reach a consensus for the setting up a transparent and clean process to channelise the teeming billions of dollars and rupees into bettering India's infrastructure, the GDP growth rate has the potential to vault into double digits for some time to come.

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