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- Growth rate struggle: After the early years of 2000s, the Indian economy has struggled in its attempt to boost the growth rate of its national income. The coveted double digits growth rate is a mirage now.
- Aspects of demand: Statisticians estimate national income on the basis of demand which comprises personal consumption, investments, government expenditure and exports less imports (current account surplus). Growth can be revived by increasing one or more of these demand aspects.
- Dampened spirit of recent years: A long period of economic downturn, coupled with demonetisation and other disruptions, have been a dampener. The impact of sluggish consumer spending are being felt in a wide range of industries. Experts say it is unrealistic to depend now on increased consumption to enhance economic growth.
- Government finances: To expect the govt. to do much is not feasible, as any more deterioration in the government finances is likely to adversely impact our rating with the credit rating agencies, besides raising inflation. The Indian economy is paying the price of the artificial fiscal stimulus naively undertaken in 2012-13. Modi govt. tried to control the deficit strongly, which is praiseworthy.
- Exports as the big driver: The 2003-2008 high growth period : During 2003 to 2008, exports grew at 23% per annum. Sadly, India's merchandise exports have been practically stagnant at the absolute level of approx. $300 billion over the last six years! Any reliance on exports to help us is silly. Exports sector faces fundamental, structural issues that have not gotten resolved.
- Private investment only hope: So private investment is a big hope. But investments as a proportion of the national income have come down from the peak of 38.70% achieved in 2007-08. Today, there is a consensus that private investments must increase substantially, for the Indian economy to experience sustained high growth.
- Where are the animal spirits? The role played by “the animal spirits” in influencing investments that the business community undertakes, is perhaps overlooked. Investments are not just an outcome of dispassionate analysis, of discounted cash flows, internal rate of return and net present values. In reality, the future is uncertain and investing large sums in long term projects is a brave thing to do. The corporates will loosen purse strings only if they feel they will make profits in future.
- "Animal Spirits": The term was initially coined by John Keynes who used it in his book ‘The General Theory” referring to the “spontaneous urge to action rather than inaction”. It refers to the emotions and the feelings that guide the behaviour of investors and consumers in a market economy. It has five different aspects like confidence, fairness, corruption and anti-social behavior, money illusion and stories.
- Disruptive demonetisation: The recent past, starting with demonetisation, has been highly disruptive. The outcome of a series of such policy measures has been obvious – suppression of liquidity, depression in demand, disruption in supply chains and a looming uncertainty. And the psychological impact it has had on people’s thinking and behavior is likely to be long-lasting.
- Later on came GST: Further disruptive policy measures such as the introduction of the Goods & Services Tax (GST), the Real Estate (Regulation & Development) Act (RERA), attack on shell companies, and resolution of non-performing assets (NPAs) under the Insolvency & Bankruptcy Code (IBC) have combined to deal a deathblow to human psychology and confidence. Taken together, they have created a doubt and an uncertainty that business abhors. And then came the scandals like the Punjab National Bank (PNB)-Gitanjali Gems and other bank scams have come to light, denting confidence even further.
- Government's approach: It has used its might to tackle all problems. The result is there for everyone to see – suppression of animal spirits in the economy. Predatory pricing by a large corporate house may change the dynamics of the entire sector, as has happened in telecom. The dairy and the leather sectors find themselves unable to carry on normal business due to what is ‘cow politics’. Real estate, already suffering for years, finds it difficult to conform to new regulations under RERA. Sector after sector are in bad shape, mostly induced by policies that fail to take into account the intrinsic nature of business. A stable, steady and supportive business environment is missing.
- Sermonising: Governance is not about sermonising, telling people what to do and how to behave but of creating an environment of hope and expectations. There needs to be certainty about policies, economic or otherwise. Industrialists are partners with the government in this endeavour and not adversaries to be treated with suspicion.
- 2018 hope: There was early optimism that the investment cycle was turning. One key reason for the belief that investment is picking up was the increased pace at which gross fixed capital formation is rising. Seen as a broad indicator of investment in the economy, this component of GDP has seen accelerating growth for the last three quarters. The contribution of investment to GDP has also increased over the past few quarters. At current prices, it now stands at 29.1 percent. Economists, however, are not convinced that this pick-up is driven by the private sector, but say that it is coming from the public sector.
- Capacity Utilisation below peak: The MPC said that capacity utilisation by manufacturing firms increased significantly in the fourth quarter of 2017-18. But as per Crisil data, capacity utilisation remains below peak levels. At the end of December, capacity utilisation stood at 74 percent, compared to 81 percent in March 2011 - the last time we saw increased private investment activity.
- Surge in capital goods output: Capital goods output saw a growth of 13 percent in April 2018. Capital goods output, as reported in the index of industrial production, has grown in double digits since December 2017, with the exception of a dip reported in the month of March. In India, however, the capital goods category includes commercial and utility vehicles and is not restricted to just machinery.
- Capital Goods Imports volatile: Capital goods imports, another indicator of investment activity, rose 33 percent in April. Imports of capital goods, led by machinery and transport equipment, saw the highest growth since September 2017. But longer-term data shows considerable volatility in imports, which have also been impacted by domestic disruptions such as demonetisation and the GST.
- Credit growth is due to Working Capital: A pick-up in credit growth is also being seen as a positive indicator for the economy. The latest fortnight for which data is available shows that scheduled bank credit rose by over 13 percent. However, apart from a base effect, higher cost of commodities may be leading to the increased demand for working capital. Also the sectoral data on deployment of credit shows that credit to industry rose by just 1 percent in April 2018, in line with the trend since the start of 2018.
- Broadly positive: While current data does not show a return to animal spirits for private enterprise, the signs are positive. Economists believe that if domestic and external demand remains strong, excess capacity will slowly get used up. Also there has been some deleveraging of balance sheets. Private banks are also sitting on a considerable amount of capital and would be willing to deploy it if new and bankable projects come up. Public sector banks, however, are still capital-starved but are hoping to recover capital, should large stressed accounts get resolved.
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