Will the Indian economy have a Rip Van Winkle moment in May?

29 MARCH 2014

The best years for the Indian economy was following the lifting of stifling controls by the Government, post the 1992 crisis. Set free, Indian entrepreneurs showed their mettle. The economy grew rapidly, so did employment, so did the stock market.

The past few years has seen the economy go into a Rip Van Winlish slumber, caused by the imbibing of the moonshine of corruption. As one scandal after another burst, and was sought to be covered up, Indian politicians and bureaucracy froze into inactivity. Economic growth was, naturally, affected adversely. Coal production, for example, was held up for want of environmental clearances as a result of which NTPC is having to import 15 m. tonnes in 2014-15 despite India having the world's largest reserves of it. To add insult to injury, none of the politicians involved in any of the scams are penalised, or the money stolen recovered (some have even got tickets to fight the coming elections as both BJP and Congress are disdainful of the mood of the electorate) even as honest bureaucrats are hounded!

Investors are relying on a new, cleaner, and more alert and effective Government to emerge in May. They are hoping that the new Government will start working, pushing economic policy in the right direction, and that the economy, like Rip Van Winkle, will awaken from its slumber.

The new Government will have its work cut out. The immediate action it can, and should, take, is to clear a lot of pending files.

Several of the problems are messes created by poor policy, implementation and oversight.

The absence of environmental clearances has hampered coal production and the industry now faces a reduced demand from some financially stressed distribution companies. They are financially stressed because of poor oversight, being unable, or unwilling, to prevent theft of electricity. In the road sector, it is absence of environment clearances as also the difficulty in acquiring land, now made more expensive by the Land Acquisition Act, that has stalled 2,500 kms. of road projects. These projects have now been cancelled. They will cost more when the new Government comes in, a legacy of UPA II. Much like the unpaid petro product subsidy that is also a UPA II legacy to the new Government, which will have to find ways to fund it.

One of the achievements the UPA Government has touted, viz the Aadhar card, or the unique identity project, has come into question. Due to lack of oversight, combined with the moonshine of corruption, it is possible to obtain a fake Aadhar card for just Rs 500 without any check on identity or any proof. The Supreme Court has also stated that making Aadhar card necessary to obtain entitlements is illegal.

So the next Government has some quick fixes if it can act decisively and clear the pipeline of investment proposals that Rip Van Winkle slept over.

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For the longer term, the Government has to address structural issues.

What is the main structural issue?

Any economy does well if there is growth in productivity of labour and of capital. This excellent article 'Are you Ready for the Resource Revolution' by McKinsey Global Institute should be read by not only readers of this column but by the new Government.

India has over 50% its population dependent on agriculture, which shares less than 15% of national income. This is primarily because there are far too many price and distribution controls on agri produce under APMC (Agriculture Produce Marketing Committee). Farmers do not get the best prices for their produce, translating to adverse terms of trade for over 50% of the population. This lowers their productivity.

So the new Government will have to improve agri productivity and terms of trade. Because of various reasons, primarily because so much of our population is dependent on agriculture, our methods have to be labour intensive. This, however, does not boost productivity. In the US, e.g., about 1% of its population is dependent on agriculture and so they have large, mechanised farming which use the latest technologies such as satellites to map their land for suitability of crop patterns. We can't do that.

We would have to get more labour intensive farming methods, which consume fewer resources. Such as drip irrigation.

We should, however, be very careful of genetically modified crops. Alas, V Moily, as Agriculture Minister, has approved their further testing. Nicholas Taleb, author of 'Black Swan' and the guy who predicted the 2008 financial crisis, warns that GMO could destroy the planet's ecosystem in a must-read article.

Terms of trade for agriculture can improve by giving farmers a larger share of prices (traders at the mandis eat most of the profits), by improving roads (so that wastage in transit, amounting to 33% of fruits and vegetables is reduced) and helping them with technologies to inform and guide them on cropping patterns.

Productivity of labour can also improve by finding jobs for youth compelled to live off farms, for want of opportunities. The new Government would need to accelerate urbanisation; the growth of new cities. By 2020 urban India will provide 70-75% of the country's GDP (up from 63% now). The setting up of these new urban cities will require a $ 1 trillion investment.

For this investment to come in, we must have sensible policies to encourage investors and to safeguard their interest. Not the sort we have now. Ramesh Abhishek, Chairman of Forward Markets Commission is surely joking when he claims to have revived the confidence of investors. It was his predecessor who authorised scam tainted NSEL to commence operations. It was his organisation that failed in its duty to oversee its operations, and to permit the scam to happen. And it is his organisation, alongwith investigating agencies, that has done nothing to recover the money stolen from investors and to return it. If this is his concept of restoring confidence then nothing more can be said.

Even Economics Affairs secretary, Arvind Mayaram, in charge of a committee overseeing the NSEL scam, says he is 'happy with the progress'. Is he happy that the exchange has defaulted on every one of its committed schedule of payment for over 8 months and that, although the EOW has seized assets amounting, they claim, to 95% of the amount due, none of the assets have yet been liquidated to pay the investors? What, exactly, is he happy with?

Without having confidence that they will get protection against unlawful acts, investors would be wary of saving and investing in infrastructure. In the case of Sahara, it is the Supreme Court, more than the Government, which is taking stern steps required. The political class tries to protect their own.

It is after years that Rajya Sabha MP Vijay Mallya, who has defaulted on loans taken by Kingfisher Airlines and has not paid his employees for years, is likely to be declared a wilful defaulter by SBI.

Government owned public sector banks are compelled to lend to political cronies and then to 'roll over' their loans through corporate debt restructuring schemes. These cronies are given a long rope, long enough to have an overcrowded tug-of-war match, to repay and are rarely declared wilful defaulters.

Coming back to the McKinsey article on Resource Revolution, the new urban cities will have to be properly planned, for these will be the growth engines and the job providers.

Take energy. Economic growth is closely linked to energy use and availability. We do not have a coherent policy on energy use and development of energy resources. Instead, the public sector companies tasked with the job of securing India's energy future, Oil and Natural Gas Corporation Ltd. (ONGC) and Indian Oil Corporation (IOC), are raided to fill the Government's fiscal gap and to bail out its failed disinvestment programme by buying out shares of IOC, instead of investing in new production fields.

As per the McKinsey study, cars spend 95% of their time sitting in garages. As per a book 'Natural Capitalism', the design of the automobile is such that it uses less than 5% of the energy in oil to move the passenger, whilst 80% moves the vehicle, in proportion to their weights. The weight of the car is linked to passenger safety. The next Government will need to look at new technologies, such as driverless cars, which can provide safety and thus help reduce weight through use of light weight material. The Government would also need to introduce and sternly implement fuel efficiency norms.

Better roads can greatly improve fuel efficiency. Tax paying citizens don't get them because of the endemic corruption that perpetuates the use of tar roads which need constant resurfacing, providing an annuity income to those dispensing contracts. Technologies such as those introduced by Zydex Industries using nano technology to improve road surface and longevity and reduce potholes, are not encouraged enough.

The new urban cities will have to be designed to have a near source of food. Agriculture is, today, highly dependent on fossil fuels for production, storage and transportation of crops. The cities would have to be designed looking to the decline in fossil fuel availability. Some smart cities, such as GIFT (Gujarat International Finance Tech-City) in Gandhinagar, will be built on a 'walk to work' concept. This makes sense if cars are kept 95% of the time in garages, as per the McKinsey study. The cities will throw up plenty of investing opportunities, and jobs, in various fields such as public transportation, waste management, energy supply, retail, water management etc.

The next Government will also have to sharpen its supervision and administration. Consider the Employees Provident Fund Organisation (EPFO) which has found that a whopping half million of its accounts had overdrawn, by Rs 1,000 crores, their PF accounts. How can this be possible?

Will the next Government be able to make all these, and more, structural changes? It is on this hope that the sensex is at a new high. Last week the BSE-Sensex gained 586 points to close at 22, 339, whilst the NSE-Nifty added 202 to close at 6,695.

There is a lot of foreign institutional money invested in India, hoping for a more effective, and cleaner, Government. One hopes that the electorate throws up one that is stable and does not have to depend, for its survival, on the mercurial whims of coalition partners. If not, and were the foreign institutional investors (FIIs) to decide to withdraw even a small part of their investment, the domestic institutions are not in a position to absorb the sale. So one hopes that this time around the electorate throws up a more stable Government.

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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5 Responses to "Will the Indian economy have a Rip Van Winkle moment in May?"

Amish Saraiya

Apr 1, 2014

Dear Mulraj Sir,
Great Article - as always.. I also went through the McKinsey Article and also Nassim Taleb's article that you said is must.
A Car - A-la- the Government. 80% of the fuel is needed to run only the Car and so with the Government. And about the GMO, it is the matter of our wisdom and not a pure scientific study that it will destroy the planet as mentioned by Nassim Taleb. We have already advised 1000s of farmers around our region (in Gujarat) to not follow the GMO fashion -more popularly known as BT seeds. And our work is on.. We are happy to know through you that now Nassim bhai joins us. And that you have believed in his research, we are much more happy. You are one of the beacons we hold to argue -for Capitalism.



Mar 31, 2014

all hopes and plans are just that. Hopes and plans.

If the bureaucracy is not pushed we will go nowhere. It is the biggest road block to our progress.



Mar 31, 2014

Reg increasing the agri productivity, it is suicidal to go in for mechanical farming.In fact there is a need to increase participation in agri by providing jobs in non farming days.There should be cooperative farming societies (not corporate farming by companies) to get the economies of scale, good storage facilities to avoid distress selling, cold chain to prevent spoiling of perishable veg and fruits, and of course controlling the traders, middle men transport and handlers from making a killing. For reducing oil imports alternative fuel uses like elctric cars should be encouraged. Why should govt tax the excise and many other duties on electric cars? Why should the private transport use diesel cars?



Mar 31, 2014

The seeds of all the scams that burst onto the scene during UPA II were sown during UPA I.The gullible Indian voter didn't have a clue as to what was going on behind his back and so,voted Dr.Singh's govt. back into power thinking that it was doing a great job.
The day the results were out,Nifty shot up by 600 points to get locked into upper limit.
Then scam after scam all hell broke loose.
The irony is the same stock market is now cheering the exit of Dr.Singh as the markets are at an all time high!


Purnima Toolsidass

Mar 31, 2014

All the point made about what the new Government will need to attend to are well made. I want to point out the omission of the urgent need to curtail chemical fertilizers and promote organic manure in agriculture. Food is a global requirement for which there is no substitute. Chemical fertilizers ruin the soil while organic fertilizers are 'earth food',. They are more nutritious and require fewer pesticides. Profuse use of pesticides in agriculture increased the toxicity in our food and water. Chemical fertilizers require huge amounts of sweet water, and the world is already facing an increasing sweet water shortage. This is an essential point that J.Mulraj ought not to have overlooked.

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