The dangers to society of slow economic growth

5 JANUARY 2013

Two excellent editorials have given a context for the brutal rape in Delhi which has so enraged the nation. One is in Business Standard, "India's two futures" and the other in Business Line, "The political economy of rape".

The India story is attractive because of a young population entering the job market, getting jobs, and spending their income to drive the economy. But if jobs are not adequately created, then the story turns into the sort of nightmare that leads to such brutal acts of violence.

According to the 12th 5-year Plan document, employment in the manufacturing sector fell by 5 million jobs in the 5 years upto 2009-10. This is appalling.

We need to create at least 12 m. jobs a year. Agriculture, on which over half the population is dependent, is steadily declining and now constitutes only 15% of India's GDP. This is iniquitous. It cannot last.

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The jobs would then have to come from manufacturing and services. But manufacturing lost 5 million jobs in the 5 years to 2009-10. We have put so many hurdles in the way and, to top it all, there is a policy paralysis after various corruption scandals have erupted. If we fail to immediately change our policies and become more pragmatic, the 12 m. jobs required will not be forthcoming. Then there would be more cases of wanton violence.

But even presuming the jobs are created, would the skill sets of the employees be good enough? Not if 99% of teachers, who provide the skill sets, are found unable to pass a test.

So as a nation we really are in a serious mess. Agriculture, the livelihood for over half the population, is not going to be able to absorb the growing population. Our methods of agriculture are such that productivity is one of the lowest in the world. Then we have set up control systems for almost all produce, which ensures that the terms of trade are against farmers, but which favour middlemen.

Manufacturing is hobbled with a whole host of issues. Availability of contiguous land has become a political issue; the Trinamool won a state election by opposing State intervention for it, and other State Governments are shying away from it. Some, like Maharashtra, are trying; lately the Government made it easier to denotify SEZs, and allowing 40% of the land to be used for residential purposes, in an integrated township. Manufacturing is also hobbled with stringent environmental clearance norms (Posco's application for a steel plant in Odisha is stuck for nine years, and Vedanta had to shut down a $ 1b. plant because it did not get the raw material, bauxite, in a state which is rich with it, due to environmental clearances).

Industry is also seeking more flexible labour laws which would allow them, if the market conditions turn, to scale back, after payment of compensation. This is being opposed by organised labour.

The service sector, which now has a share of over 55% of GDP, did provide lots of jobs, especially in the IT/ITES sector. This export driven industry is struggling to cope with the slowdown in Europe and the US and it is doubtful that, until the developed world starts growing, it can provide large number of jobs. The construction industry has provided jobs; this is now facing the strain of high interest rates, difficult access to more funds, and increasing burden of levies (Maharashtra has raised ready reckoner rates, used for collecting stamp duty, by 30%).

So one does not know where the 12m. jobs needed annually will come from. It will require pragmatic approach by the political class, and a higher degree of co operation between them than has been displayed. This stems from a national, long term vision, which most seem incapable of.

The solution is to free industry, agriculture and services from the complicated web of controls introduced in a different era, and thus to boost productivity.

Perhaps recognising this the Government is trying to do so, albeit half heartedly.

One of the biggest challenges is the current account deficit (excess of imports of goods, services and transfers over exports of them), which is now over 5% of GDP, thanks, in large part, to imports of crude oil, and of gold. A high current account deficit is bad because it devalues the currency, imports inflation and requires foreign borrowing to finance it, adding to the debt burden.

The Government is seeking to curb import of gold, which would be wrong, as it denies the common man a chance to diversify his portfolio of savings (high net worth individuals can remit $ 300,000 abroad each year, to diversify theirs). The Government ought, instead, to concentrate on trying to reduce its dependence on imported crude oil. It can do this in a variety of ways. Instead, it subsidises certain petro products, such as diesel, which boosts, instead of curtailing, demand for it.

The Government is now trying to boost domestic production of oil and gas. A special committee under C Rangarajan, the Chief Economic Advisor to the PM, has recommended a change in the production sharing contract between operators of oil and gas fields and the Government. The current PSC only encourages operators to 'gold plate' their capex, which is fully recoverable, with or without any increase in production. In the new PSC suggested by the Rangarajan committee, capex will not be cost recoverable, thus incentivising the operator to reduce it, instead of gold plating it, and revenue will be shared as per a formula based on international pricing. The issue is that there is no norm for international pricing of gas, and this will be a tricky one to solve. It is expected that, when gas price revision, due 2014, take place, prices will shoot up from $ 4.2/unit to closer to $ 8.

That would, of course, also drive up other prices. Electricity rates are expected to rise 20% on average this year, which will increase inflation and make it even more difficult for the Reserve Bank of India (RBI) to consider reducing interest rates.

Again, the solution is to stop theft of power. But the administration is unwilling to do so, since it provides a second income stream to a handful, and it is easier to impose the burden of it to a silent, stoic public.

Just how relatively easy it is for some people to flaunt the rules is observed in the case of the two Sahara group companies, which raised some Rs 17,000 crores by issuing optionally fully convertible debentures (OFCDs) from two private group companies. Securities and Exchange Board of India (SEBI) tried to stop this, as it amounted to a public issue to more than 50 persons; the Sahara group thumbed its nose at SEBI and went ahead to make it, after obtaining a stay on SEBI's order from a lower court (this speaks poorly of how jurisdictional issues are handled).

Now it is being asked to refund the Rs 17,000 crores, with interest. The group maintains that it has repaid all but some Rs 2,600 crores of it! SEBI is asking banks to furnish details, on the apprehension that the 'repayment' is actually a unilateral transfer of liability to another group company.

Meanwhile, newspapers report that an investigation into the money flow shows that the money went from one of the companies that collected through OFCD into Aamby Valley, a group company, from where it was transferred under automatic transfer rules of RBI (no prior permission needed) to an overseas subsidiary, in order to enable the group to buy the famous hotel Grosvenor House, in London. It is thus possible for businesses to circumvent, or take advantage of, rules and there is not enough prompt scrutiny of transactions to prevent it.

Value investors invest in companies which have good businesses and good management. During calendar 2012, India did not have good businesses (the success stories of telecom, civil aviation and auto were derailed and, combined with policy paralysis and high interest rates, other sectors also limped along) and certainly did not have good management, witness the erupting corruption scandals. Yet, Indian stock markets did well, with one of the best performances globally. The sensex rose 25.7% in calendar 2012. This was due to the $ 24.4b. inflow from foreign investors, the highest but one (we got $ 29.4b. in 2010). This, in turn, was prompted by easy money policies being followed by the developed world.

Last week, too, global markets went up in relief that a deal, signed just before Cinderella's carriage turned into a pumpkin, between the two political parties in the US, helped avoid the nation tumbling over the fiscal cliff. The BSE-Sensex gained 339 points, to end at 19,784, and the NSE-Nifty added 107 to close at 6,016.

The market is expecting the RBI to cut interest rates in mid January. Should it do so, the sensex could hit 20,500-21,000 levels, before it hits resistance. It may be a good idea to get lighter then.

Over a longer term, one must watch out for signals that the Government is, indeed, taking economic growth more seriously. Voters in states like Bihar and Gujarat are rewarding good governance by re-electing the Government that gave it to them. Hopefully the one at the Centre will heed that message. For without economic growth leading to job creations, India is sitting on a powder keg.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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4 Responses to "The dangers to society of slow economic growth"

Ragini Ghanekar

Jan 6, 2013

Comments are exactly to the point, specially about gold. Mr. Chidambaram is looking for easy target instead of taking hard measures. It will only lead to corruption and smuggling as before. other point about job creation is also just right. To encourage businesses we need to cut bureaucratic jungle. But who is listening?


sultan fazelbhoy

Jan 5, 2013

YoYour logic is very sound, dear Mr Mulraj. Now please focus on one area of very high production, which is what you want. I refer to our "baby factories" and uncontrolled population growth. Next is wasting money on failing companies like Air India on grounds of national pride and not economic common sense. Third is defence, blue eyed activity of myopic politicians unwilling to take a wider look at the high cost of enmity and suspicion. True of all nations ....
Without much better control of the above three factors, the cancer of corruption will increase as also inflation whilst the "aam admi" will continue to be deprived of all hope of a better life for another generation. There is a perceptive thought here about "intelligent life on other bodies in the universe -- the fact they have not tried to contact us foolish, warring mankind, is proof enough that there is intelligent life else where from the Earth ... !

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surajit som

Jan 5, 2013

it is alarming that agriculture constitutes only 15%. it clarly shows that the populist schemes like NREGA , NRHM are not helping. they are merely vote seeking policies.shortage of water ,electricity,infra are the main reasons. secondly labour market is shrinking. no doubt our GDP is actually majority of people are stagnating particularly rural while the minority is prospering through service and manufacturing sectors. this is ominous.

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Anupam Garg

Jan 5, 2013


One measure of IQ is vocab...while the author, undoubtedly, has a strong 1...i need to catch up so as to make sense of the sentences more quickly

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