6

Special Feature Economic Growth

THE ECONOMIC TIMES | NEW DELHI | THURSDAY | 7 JUNE 2012

Seven Ways to Reclaim 7%
Four years ago, the India story read like a Dan Brown novel: fast-paced and packed with thrills. Today, it’s an anti-climax. As GDP growth tumbled to its lowest in nine years, Kausik Datta taps into India Inc to find a way back to crank up the growth engine into the 7% realm

O

ctober 2010: Pranab Mukherjee is addressing the seventh India Investment Forum in New York. Global investors still reeling from the aftershocks of a financial crisis are hanging on to every word of a gung-ho finance minister. Mukherjee makes a fervent pitch for foreign investment, with the promise of a return to an average economic growth rate of 9%. Investment, private consumption and manufacturing are on a revival path, exports are surging, capital flows are picking up, as is business sentiment, the FM told investors. Less than two years on, that scenario has gone spectacularly awry, as a soaring fiscal deficit, untamed inflation and uncertainty in the Euro zone have conspired to take the wind out of the India story. A slowdown in agriculture, manufacturing and mining has caused India’s gross domestic product (GDP) growth to sink to a nine-year low of 5.3% in the fourth quarter of fiscal 2012. Visions of double-digit growth—which looked a distinct reality when the economy conquered the 9% bastion in fiscal 2008—are now a pipe dream. The story isn’t over—not yet—but reactions from India Inc suggest the end may be not too far away. Furrowed brows are everywhere, from industry bodies (the CII has voiced its “deep concerns” at full volume) to international brokerages (the Indian GDP is “paying the price of a comatose government”, screamed the headline of a recent CLSA report). Economic growth of 9% and above is not worth fantasising about at this time, but there are CEOs who believe that 7% is, at a pinch, achievable. Here’s their recipe to the government on what it needs to do to get there:

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CLOSE TO

THEIR GDP PROJECTION FOR 2012-13

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AROUND

7%
We must have a facilitating environment to push investments in the last mile of completing projects

7%
We seek a predictable regulatory environment that will provide comfort and con dence for further investments

Chanda Kochhar
CEO & MD, ICICI Bank

Anil Agarwal
Chairman, Vedanta Resources

7%

LOOKS AMBITIOUS

CLOSE TO

6% 7%
AM Naik
Chairman, L&T
IS DIFFICULT BUT NOT IMPOSSIBLE

Open up FDI, expedite approvals, especially environmental ones, consult the corporate sector more, and communicate for positivity about the economy and business

7%
FDI in multi-brand retail, higher FDI in insurance, amendments to pension and banking laws are needed to restore investor con dence

India must accelerate on the reforms front and bring in money into capital heavy sectors to help keep its GDP at desired levels

Harsh Goenka
Chairman, RPG Enterprises

1

Create a Favourable Environment

Rashesh Shah
Chairman & CEO, Edelweiss

Baba Kalyani
CMD, Bharat Forge

Before the onset of the global financial crisis, the Indian economy was on song because a number of factors came together swimmingly well. “The political and economic situation was stable,” says Baba Kalyani, chairman & managing director, Bharat Forge. All key macroeconomic indicators reflected an economy that was in good health. Exports were rising and the current account deficit was at a manageable 1.3% in fiscal 2008 as against 4% last year. The investment climate was conducive, foreign capital was flowing in—both as direct and as portfolio investment—as business and consumer sentiment hit a peak. Today, investors are conspicuous by their absence. The reasons for their apprehension include a series of ostensibly regressive measures, the biggest one being the amendment of tax rules with retrospective effect. The short point is that the climate for investment needs to be made favourable once again. “We must have a facilitating environment to push investments in the last mile of completing projects,” says Chanda Kochhar, CEO & MD of ICICI Bank. In the nearer term, groundlevel execution of decision-making is more important than allowing foreign direct investment (FDI) in some sectors or introducing a goods & services tax (GST), she points out. To be sure, Investments have been steadily dipping. Total investment (private and public), which was 26.2% of GDP in 2008, is expected to fall to 18.2% in fiscal 2013, according to a Morgan Stanley estimate. “Initiatives like single-window clearance are crucial to improve the image of our country as a business-friendly destination,” adds SD Shibulal, CEO & MD, Infosys.

6-7%
Initiatives like a single-window clearance are crucial to improve the image of our country as a business-friendly destination

India needs to de-bottleneck core sectors like infra, power and energy. And if the decision-making process is expedited, India will once again witness an improvement in the investment climate

SD Shibulal
CEO, Infosys

RPG Enterprises with a shrug.

3

Put Infrastructure on the Fast Track

2

Consolidate the Fiscal Situation

Even as corporate capital expenditure as a percentage of GDP has dropped—from 6.5% in fiscal 2008 to under 3% now—the fiscal deficit has soared, from 2.7% four years ago to 5.9% in fiscal 2012. A depreciating rupee and high crude prices could derail the FM’s plans of reining in the deficit to 5.1% of GDP in fiscal 2013 by capping subsidies and raising service and excise taxes. Rashesh Shah, chairman & CEO of Edelweiss Capital, says the FM’s deficit control game plan is largely dependent on how oil prices pan out globally; he expects the fiscal deficit to settle at 5.5% of GDP by next March. The only option for the government is to bite the bullet and phase out oil and fertiliser subsidies in a defined, time-bound manner. But that looks difficult given the situation on the oil pool and currency fronts. An economic slowdown will also mean lower tax collections, making 5.1% a steep ask. “Controlling unplanned government expenditure is an option, but we have seen such poor discipline in the past,” says Harsh Goenka, chairman,

If there’s one thing that hasn’t changed since 2008, it’s the status of infrastructure creation—it continues to lag the economy’s potential by miles. The FM, in his last Budget speech, announced a slew of proposals to boost the sector. The government’s target is to cover 8,800 km of roads under the National Highways Development Project in fiscal 2013. The total investment in the 12th five-year plan is pegged at Rs 50 lakh crore, half of which is expected from private sector. The reality is that a large number of projects are stalled due to rising cost of capital and red tape. According to a Citigroup Global Markets report dated April 11, some Rs 7,57,800 crore worth of infrastructure projects under implementation were stalled in the March-ended quarter, more than three-fourths of which are in the private sector. India needs to de-bottleneck core sectors like roads & highways, power and energy, says A M Naik, chairman, Larsen & Toubro. “We need to address structural issues like land and water. If these decision making processes are expedited, India will once again witness an improvement in investment climate,” says Naik.

reforms that need to be implemented to restore confidence of both foreign and domestic investors, suggests Bharat Forge’s Kalyani. A top official at a textiles company who did not want to be named says a week ago the government sent letters to chief ministers seeking their support to allow FDI in multibrand retail. Also, US secretary of state Hillary Clinton is understood to have pushed for opening up of retail when she visited New Delhi a few weeks ago. Opening up FDI across sectors will bring the much needed foreign capital to stabilize the rupee. Such moves will also be read as positive signals by global investors, thereby helping restore confidence in the economy. Although FDI in insurance may not happen in a hurry, the government may open up retail in July after the presidential election, reckon a section of industry honchos. The government should grab the window of opportunity between the presidential election in July and assembly polls in February to push its reforms agenda, Montek Singh Ahluwalia, deputy chairman of the planning commission and a trusted aide of the prime minister told ET on 2 June.

will lower the average tax burden on companies. But the problem is that it needs to be implemented simultaneously by the Union and state governments. While most of the Congress-led states are in favour, others don’t want it so soon, fearing loss of revenues. Some states have demanded the inclusion of a compensation clause. “This is the biggest challenge,” Sushil Kumar Modi, chairman of the Empowered Committee of State Finance Ministers, told the media a few days ago.

From Dazzle to the Dark: How the Picture Changed
2011-12 2007-08

Inflation

Fiscal Deficit

8.8% 4.8%
Current Account Deficit

5.9%

2.7%

Interest Rates

6

Make Manufacturing Globally Competitive

5

Introduce GST, Implement Direct Tax Code

4

Relax FDI Norms for Retail, Insurance

Allowing FDI in multi-brand retail, raising the FDI limit in insurance, and amendments to pension and banking laws are some of the

Introduction of GST will, at a stroke, add 1-2% to GDP, says Kalyani. It will also increase the competitiveness of the manufacturing sector by eliminating the cascading effect of a plethora taxes and duties, he adds. GST is a comprehensive tax structure aimed at eliminating multiple indirect taxes levied by states and the Centre. Once implemented, it

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A few days ago the government announced the setting up of a Manufacturing Industry Promotion Board to help kick-start the national manufacturing policy. This policy aims to create 100 million jobs in 15 years and boost the share of manufacturing in GDP to 25% in the next 10 years, from 16%. If these objectives are to be met, it is imperative that bottlenecks in making the manufacturing sector globally competitive are removed immediately, says Kalyani. He adds the major hindrances for these sectors are unavailability of raw materials at globally competitive rates and high infrastructure costs for setting up new facilities. Agrees Anil Agarwal, chairman of London-listed Vedanta Resources: “India has the distinct advantage of having one of the highest reserves of natural resources like coal, iron ore and bauxite, and substantial reserves of oil & gas. Judicious use of these resources will help achieve India’s vision of achieving energy security and high economic growth.” Agarwal adds that the industry seeks a predictable regulatory environment that will provide comfort and confidence for further investments.

4%

1.3%

8%

8.5%

Rupee Against Dollar (`) As on 31 March

GDP Growth

50.87

40.02

6.5%

9.3%

Global GDP Growth

3.5%

5.4%

SOURCE: CMIE, IMF

Agriculture, Manufacturing & Mining have Led the Slowdown
GDP growth by activity (% year on year)
2012 2011

Agriculture

2.8% 7%
Manufacturing

L

56060
_

7

Rein in Inflation, Interest Rates and the Rupee

_

Rashmi Rash Ramesh

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High inflation, coupled with rising fuel prices and a weakening rupee, is the main reason for the slowdown, says Shibulal. Dealing with all these three evils is not easy as what is good for one may not be good for the other. For instance, a cut in interest rates can fuel inflation. “The poor growth number has increased chances of another rate cut, but elevated and sticky inflation limits the scope for aggressive rate cuts and suggests a need for continued caution,” says an HSBC Global Research report on May 31. Earlier this week, an RBI deputy governor hinted at an interest rate cut to boost sagging growth. “There are two factors that suggest there is room for a rate cut: the slowdown in growth and the fall in oil prices,” Subir Gokarn told reporters. He admitted that high food inflation, a weak rupee and a high fiscal deficit will continue to create inflationary pressure. Till June 18, let the guessing game continue.
kausik.datta@timesgroup.com

2.5% 7.6%
Mining

-0.9% 5%
SOURCE: CSO, CITI

The Guessing Game
Brokerage predictions for GDP Growth in FY 2013

6.4% 5.8%
Morgan Stanley Citi

6%
CLSA

6.2%

Standard Chartered

Forecasts keep changing depending on changes in economic situation

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