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Economy: Need to slog out! - Views on News from Equitymaster
 
 
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  • Jun 14, 2005

    Economy: Need to slog out!

    As the rain Gods still showing no signs of giving in to the prayers offered, especially by those at the Jeejeebhoy Towers (the BSE), the mood in the Indian equity markets remains that of utmost caution. Interestingly, this is despite the fact that certain agencies have 'once again' spelled out their new highs for the BSE-Sensex citing reasons like the new found optimism among Foreign Institutional Investors (FIIs), continuation of the growth story of India Inc, and of course, the sustainability of the Indian economic growth story.

    Now, while much has been written about the above three positives factors affecting stock markets, what we need to understand is that a strong and sustainable economic growth is not possible without conscious efforts to implement the stated plans.

    A famous analogy relates economic growth with the game of cricket. It states that economic, or GDP growth is like chasing a target score in a cricket match. When you are chasing a target, be it the cricket score for 50 overs, or GDP growth for 5 years, the performance in every year will affect the target in the remaining period. If you perform poorly in the early part of the innings, the pressure is relatively higher in the later part. Something similar happens with the Indian GDP growth, as targeted in the five-year plans.

    The tenth five-year plan (FY02-FY07) for the Indian economy envisaged an annual GDP growth rate of 8%. If we take this into account and assume that the size of the Indian economy was US$ 100 bn at the beginning of 2002, consistent 8% growth rate per year will get us to a GDP of around US$ 147 bn a the end of 2007, or 47% growth over a period of 5 years.

    Now, if one were to take into account the 4.0% and 8.7% growth achieved in FY03 and FY04 respectively, the total growth has been nearly 13%. Also, if we take into consideration the 6.5% growth expected for FY05, the total rate comes to 20%. This leaves us with another 27% growth to be achieved in the next two years (FY06 and FY07), which means a CAGR of almost 11% over these two years, which seems an uphill task. Though be are on our way of missing this mark by a mile, growth at such a rate is not practically impossible.

    The Indian economy needs significant acceleration, if we wish to achieve this high level of growth in the future. More simply, we need to move faster on the path to reforms. And this will require combining the pro-business policies with the pro-market policies. The former is meant to favour the incumbents (existing players) by providing a level-playing field. This can be done through a host of measures, the more important including easing restrictions on capacity expansion of the existing players (for instance, the fertiliser industry), removing price controls and providing a strong infrastructure support. On the other hand, the latter involves liberalisation of trade and services, free movement of labour and capital, promoting foreign investment and competitive practices.

    The Indian governments of the past have also failed to focus on fundamental issues like education, healthcare and poverty. In fact, though we are one of the fastest growing economies in the world, the per-capita GDP trend and the overall development of the populace fail to inspire confidence. If we are to move to the new growth trajectory, these fundamental issues have to be addressed seriously. Ultimately, they are the pillars that would enable us to achieve our objective of sustainable long-term growth. Policies that are aimed to please one section of the economy will never work in our favor. Hope those at the North and South blocks are listening!

     

     

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