THE EXCHANGE. Some lateral thinking on the economy

The Indian imagination went through anxious moments this past fortnight with speculation over Greece, then over Chinese stock markets. Reasonably so, because these were related in the immediate term to both currency and domestic stock markets, notwithstanding the view that their impact on us is expected to be, at best, low-key.

China’s transition from investment-led to consumption-led growth strategies will cause adjustment pains not only for it internally but also the world, particularly as a tempered Chinese appetite for commodities is likely to have global consequences.

India must focus on internal growth dynamics, as prime drivers of our performance derive from the real native economy. It is true that a soft global commodity scenario can have more positive outcomes for India than downsides if we are properly organised to milk advantages coming our way.

Doggedness in tailoring our thinking deeper to local situations can help us come out of a national “satisfactory underperformance” syndrome.

One can be forgiven for feeling that in aggregate, conventional thinking in government, business and (domestic and foreign) intelligentsia keeps us over-focused on standard obstacles. Resolution of these is necessary but not sufficient to take our economy to where it needs to go. We are sorely missing a dynamic thread running through all relevant areas, binding their policies and implementation cohesively. Without this thread, there remain many spheres where actions end up running counter to intentions in another area. In effect, time and again, we lurch two steps forward but one step back.

Some people complain that “we are not moving fast enough”, but put to test, they are unable to say what exactly must be done, leaving us with deficient or generic solutions.

My suggestion is to step back and examine key pain points in the economy, to generate comprehensive solutions and also see how global scenarios can be exploited to our advantage.

How to push forward On a macro level, there is consensus that the real economy needs aggressive continuing of public investment, strengthening of the financial sector, and speeding up the simplification of regulations. Even if land and GST laws are mired in politics, there is much that can happen outside legislation.

We can aggressively reform creaky implementation systems for public spending, and better integrate policy actions across monetary, trade, financial and governance space.

The ease of doing business occupies significant mind-space for existing and future businesses. But this exercise needs to go well beyond mere simplification of procedures and practices and must ensure that lawmaking processes shun any traces of a 1970s type command-doubt-and-control thinking.

Do our corporate laws end up over-emphasising ideas shaped by activism or cloned from jurisdictions with different needs? Can excessive stress on governance be moderated? Protection for the minority in many matters is intrusive to the extent of losing merit, if the minority dominates the majority. As a mature jurisdiction, we must enforce moral standards on tax and black money, but rules or loopholes that have the potential to unleash uncalled-for energies become deterrents to doing business.

Such issues are critical to investors. Ultimately, our system has to take equitable, apolitical calls to maintain a healthy environment in which the guilty are punished but stigmas are avoided.

Making strategies work Without massive public spending and a major return on industrial investment, the core targets of immediate job creation and ‘Make in India’ may get reduced to well-intentioned strategies. Let’s take account of the facts: India is demonstrating fiscal prudence, has done a good job on inflation, and is delivering good GDP numbers principally on the strength of its domestic market.

Is it time to reflect on ramping up government capital spends over the next 2-3 years even with a marginally higher fiscal deficit? Given the state of the world, this is an acceptable risk, particularly if much of the additional spend takes place in rural areas with specific targets of improving irrigation and infrastructure, safeguarding viability of agriculture and dealing with efficiencies in distribution.

India is facing a unique situation where it, in effect, faces deflationary pressures on products and produce even as volumes grow. Industry has lost much of its pricing power while operating costs have increased and margins get squeezed unreasonably.

India has traditionally never been good at managing surpluses and therefore struggles with deflation-cum-low demand stresses. It is as important that existing capacities stay healthy as it is to create new ones; it will be a shame if our market potency is serviced from across borders by others hungering for growth and jobs.

In deflationary circumstances real interest rates climb higher. This makes many business activities unviable from the word go, and has negative effects on both consumer demand and investment sentiment.

Some recent welcome interest by foreign investors (such as Foxconn or defence suppliers) could well be the result of leveraging the buying power of our markets, rather than a reflection of competitiveness or superior infrastructure.

Towards outcomes Meaningful outcomes can be achieved through coordinated policy moves on exchange rate policy (to improve competitiveness of domestic industry for exports or vis-à-vis imports), trade policy (to better balance inward and outward market access) and moderation of interest rates (to improve consumer demand and push future investment).

Simultaneously, Central and State purse-strings can be somewhat loosened to ensure effective implementation of public investment.

Banks can be recapitalised rather than wait for recoveries of current NPAs; to expect NPAs to drastically fall in a time of impaired viabilities could be a pipe-dream. A strong banking sector is essential to help fund investments at reasonable cost and adequate maturities.

A country with a growing GDP but a strained business bottomline cannot remain attractive for long. Our economic locomotive straining towards double-digit growth vis-à-vis the realities exhibits a dichotomy; this merits deeper analysis and thought to chart a sustainable course.

The emerging global scenario gives openings to think global but act local.

(This column explores ideas and opinions on Indian enterprise and economy. The writer is an entrepreneur and a former president of Ficci. The views are personal)