Can we maintain GDP growth at 9%? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Can we maintain GDP growth at 9%? A  A  A

18 FEBRUARY 2008

Prime Minister Manmohan Singh states that India can maintain GDP growth at 9% even if there is a global economic slowdown, led by the the US, which accounts for more than 40% of it. Perhaps it can, but he must do a lot of things to ensure it. As head of Government he must ensure that the covenant with tax payers is upheld. Citizens pay tax in return for getting security, within and without, and infrastructure, physical and social. The record of successive Governments in upholding their side of the bargain is abysmal. Unless this changes the dream of growing at 9% would remain one.

One has only to see situations in other countries to appreciate how bad governance affects economies. In Kenya, where tribal leaders are fighting and killing one another the economy has been destroyed. If we do the same thing here, on communal or religious basis, we stir up a storm that may not be controllable and which definitely will have an economic impact.

Long before other countries started forming economic blocs (EU, Mercator, ASEAN etc) to take advantage of access to the larger market thus formed, the founding fathers of India had formed a federation, with constitutional guarantees of freedom of movement and employment, with the very same thought. Splintering India on regional lines will not help it achieve a 9% growth and it is Manmohan's job, as Prime Minister, to act decisively.

The physical infrastructure is inadequate and crumbling, with no thought for future planning. The auto industry is encouraged to grow, for obtaining the enormous tax revenue it generates, with no thought on future implications of its growth on our import bill, on the environment and on roadblocks. There is little effort to promote the growth of public transportation, which is the only long term viable option. Ownership of cars is, in fact, encouraged, by stupid things like keeping petrol/diesel prices low even though crude prices have shot up. The Government finally mustered the political courage, against opposition by its Left partners, to raise petrol prices by Rs 2/liter and diesel by Rs 1. We are not going to achieve a 9% sustainable rate unless we improve our physical infrastructure and also take steps to change our energy mix.

The political class shows no responsibility for the future. To sustain India's GDP growth at 9% we would need enormous sources of energy and to rebalance our energy needs to face the inevitable reduction in fossil fuels. For one, the nuclear deal, which would have provided one alternative, has been stuck, again, on myopic recalcitrance by the Left, which cannot seem to see beyond the tips of their upturned noses.

The other, and most promising, part of our future energy needs, viz. gas, is stuck in a dispute between RIL and RNRL. They have been asked by a court to try and resolve it internally but, having been unable to, the Mumbai High Court will take up hearing daily from Feb 25. Not a day too soon, for the gas output is expected from June.

In social infrastructure, there is a shortage of both quantity and quality. Witness the criminal lack of supervision, indeed of collusion, with an illegal kidney transplant racket. It is the same sorry state in education, where there is a crying need to allow greater private sector participation. Without education and healthcare, the sustaining of a 9% GDP growth rate would be impossible.

So Mr Singh, if you really wish to turn your prediction into reality, you must be less of a politician and more of the honest statesman you are known for.

All this is starting to tell. The Index of Industrial Production has, during the 9 month period to Dec 07, fallen to 9% from 11.2% in the corresponding period of last year, with lower output from manufacturing and from electricity.

We need foreign capital to supplement ours, especially in different infrastructure areas. The best way to attract it is not to flip flop on policy, as the Finance Minister seems to be doing when he asks for a withdrawal of tax concessions to SEZs, despite the concessions having been legislatively cleared earlier.

In the secondary market, a whopping $ 13.5 b. of FII money has left during the past 3 months, a fifth of all that came in over several years. Just like the fall from a mountain is faster and easier than the climb to the peak, so also the exit of foreign capital is swifter and easier than attracting it.

Foreign capital does get attracted, though, when the opportunity is good. Commodity exchange MCX has succeeded in selling 5% to NYSE-Euronext, valuing the exchange at $1 b. Indiabulls Power has pulled in Rs 1580 selling a stake to LN Mittal and Farralon Capital.

Last week started badly with the listing of Reliance Power, the IPO which attracted the largest ever application at the issue price of Rs 450. It ended the first day of listing at 372, 17% below the issue price, dragging with it sentiment, and the secondary market. Subsequently the market bounced back and ended the week with a gain of 650 points on the BSE-Sensex, which closed at 18115, and 173 on the NSE-Nifty, which closed at 5302. Of the 650 points gain in the sensex, ICICI Bank contributed 250, Reliance 179 whilst the biggest loss was in Reliance Energy (-61).

The big event now will be the Union Budget, to be presented end Feb. This will be the last budget of this Government, unless it is voted in again in the general elections. Expect populist sops to please the largest number of voter constituencies, and not tough measures needed to sustain a 9% GDP growth. When short term political factors weigh far more than long term economic ones, there would be a price to pay. One should, therefore, get lighter in the continuation of this rally prior to the Budget.

Have you read the latest Honest Truth by Ajit Dayal?

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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