Industrial production data released earlier this month confirmed that the Indian economy was passing through a prolonged phase of deceleration. Gross domestic product (GDP) growth in the just-concluded fiscal year is expected to have dropped by 1.5 percentage points to 6.9 per cent over the previous fiscal, led primarily by slowdown in industrial growth rate.
While the key objective is inclusive growth, adding to purchasing power through targeted interventions defeats the purpose in the absence of sound strategies to expand availability of goods and services. In fact, it puts pressure on prices, as we have seen in the high inflation rates of previous years. The tepid performance of manufacturing is additionally disturbing, since the sector is expected to add millions of new jobs in the next decade. Getting growth back thus involves reviving industrial production immediately. The fall in industrial growth rate is preceded by decelerating fixed investment growth rate. Private corporate investments, which came down from 14.3 per cent of GDP in 2007-08 to 9.9 per cent in 2010-11, continued to be stagnant in 2011-12. Further, as the Reserve Bank of India (RBI) recently pointed out, foreign direct investment (FDI) inflows to India during 2011 did not recover at the same pace as experienced by other emerging economies.
A fresh spurt in growth can only come from boosting investor sentiments, both domestic and overseas. Although global conditions over the last year have been vitiated by troubles in the eurozone and sluggish recovery in the U.S., several analysts have pointed to delayed policies as a factor in the current slowdown of the Indian economy.
Immediate steps
What are the immediate steps that would revive flagging investor confidence and get the growth back?
First, monetary policy action to cut interest rates seems to be the most critical factor for the economy today. With costs of other inputs going up, high interest outgo has deferred new investment plans at a time when gaps in infrastructure and large manufacturing facilities are manifest. The RBI annual monetary policy review last week reduced headline rates by 50 basis points, citing lower inflation in recent months. However, in order to really boost investments, we believe that interest rates should be further rolled back by 100 basis points by the end of this fiscal year.
Second, oil price correction has been on the anvil for some time. Passing through some of international oil price increase would send a quick signal to investors.
Third, the disinvestment process must begin speedily without waiting for markets to trend up. The previous year saw disinvestment decisions being postponed in a volatile equity scenario, and the year ended with disappointing missed targets. This year, the stock markets will continue to be subject to fluctuations, but a disinvestment push itself could help stabilise the situation. Perhaps, disinvestment could be conducted in stages over the year.
Fourth, quick action on key large infrastructure projects could help rejuvenate confidence. Rapid implementation of mega projects such as the Delhi Mumbai Industrial Corridor, National Investment Manufacturing Zones, roads and highways and power would boost production of cement, steel, and other basic goods, imparting a huge boost to demand. Since public private-partnership is envisaged in many of these large projects, undue burden on the fiscal deficit could be minimised. Some issues that are coming in the way of investments are land acquisition, slow clearances and environmental issues. Clarifications are needed on these matters.
Finally, foreign investors were concerned over the retrospective nature of tax amendments covering acquisitions overseas of Indian assets, as well as other tax measures announced in the budget. The stability and certainty of Indian policy is being questioned. There is need to reassure investors that these steps are in line with global best practices.
Tax reforms
Apart from these quick announcements, steps for boosting growth in the medium-term are high on the agenda. The foremost among these are tax reforms, which industry has been eagerly anticipating. The Goods and Services Tax would greatly improve overall competitiveness of the Indian economy while rationalisation and simplification would come from the Direct Taxes Code.
In the ultimate analysis, growth emanates from a complex set of factors, and we need to work on multiple fronts in partnership to get growth back.
The author is Director-General, Confederation of Indian Industry
