To generate sufficient confidence that the country is on the right
track, the government needs to act, courts need to adjudicate and
Parliament has to legislate. Photo: Priyanka Parashar/Mint
Sun, Sep 08 2013. 11 39 PM IST
Charles Dickens
may lose his balance under our present conditions and be compelled to
say: it is the worst of times, an age of foolishness, the epoch of
incredulity, the season of darkness, the summer of despair, we have
nothing before us and we are all going direct to hell.
Our
economy is currently in a shambles. Several years of misrule and missed
opportunities have resulted in slowing growth, a plummeting rupee,
increasing indebtedness, and rising inflation and joblessness. It has
pushed us Indians into a panic. But, hang on before you buy that one-way
ticket. A silver lining is emerging on this very dark cloud.
Speaking
specifically of cumulonimbus clouds, we have had a very good monsoon
season. According to the Indian Meteorological Department (IMD), India
has had cumulative seasonal rainfall of 804mm versus a normal of 742mm,
resulting in 8% excess rainfall. The spatial distribution of this
rainfall (except for Bihar, Jharkhand and the North East) has been
excellent and should support a bumper crop. The Food and Agriculture
Organization (FAO) said that cheaper global food prices last month
reflected declines in corn, wheat and edible oil prices. Prospects for a
rebound in global cereal supplies to record levels have reversed the
price trend this year. The FAO price index, which measures monthly price
changes for a food basket, is at its lowest since June 2012 and is
expected to decline further.
So,
prices make up a bit of the silver lining. How, you may well ask, in the
context of generalized inflation can prices be an item of good news?
First, as the FAO index suggests agricultural prices are likely to
decline because of record global production and a good monsoon (this is
net of adjustments for imported items, and the increasing costs of
transportation and storage).
Second,
at the very time when the prices of ordinary things are going up, asset
prices in real terms are beginning to decline, in some cases sharply.
In particular, the rental price for commercial real estate has been
declining for some time on a real basis. The average current rental
yield for commercial space is only 2.5%. As the US Federal Reserve
tapers its quantitative easing, real interest rates in India will likely
rise. This will cause real estate prices to fall. Commercial rent,
which is a critical ingredient in the recovery of the economy, will fall
further. Additionally, declining equity and fixed income markets in
dollar terms begin to once again attract foreign investors—both foreign
direct investment and foreign institutional investors—since return on
investments look attractive. Sceptics would say that the decline in
asset prices is a necessary but not sufficient condition for economic
confidence to return.
To
generate sufficient confidence that the country is on the right track,
the government needs to act, courts need to adjudicate and Parliament
has to legislate. It may well take till the next elections for the
government to act cogently, but the good news is that Parliament has
woken up. In just this monsoon session, more important Bills have been
passed than for the entire second term of this government. To name a
few, the companies Bill, the food security Bill, the pensions Bill, the
land acquisition Bill, the judicial appointments Bill and the street
vendors Bill have all been passed.
Several
others, including an insurance law (amendment), are likely to be taken
up in this session that was extended by a day and may be extended
further. To be fair, some of these legislations may exacerbate the
problem (food security and land acquisition, for example). Nevertheless,
completed action and removal of uncertainty hold a premium for economic
participants. Investors will engage the long-term case making some
allowances for the negative perceived effect of these actions.
The
long-term case for India is well-known and I seek only to update it in
light of recent developments. The most important learning is that it is
not inevitable but must be consciously delivered with good policy and
action. The reduction in poverty reported recently is real (the
controversy over the poverty line is a sideshow) and points to the
impact that can be made with strong growth and targeted social
assistance. For the median Indian, born twenty-plus years ago, this is
the first taste of the cost of inaction and misrule. If this young
Indian gleans that good governance and continual action is required for
prosperity, then this crisis would have served a very valuable purpose.
Last
week, markets surged and the rupee reversed when a young man, the new
governor of the Reserve Bank of India, made a speech. In economic terms,
the speech was unremarkable. But, he telegraphed from the podium that
he was an adult who was in charge and accepted the responsibility. The
good news for India is that it may require only a few such (wo)men to
put us back on track.
Don’t lose faith in Dickens’ idea of a “beautiful country and a brilliant people rising from this abyss”.
PS: “A living faith will last in the midst of the blackest storm,” said Mahatma Gandhi.
Narayan Ramachandran is chairman, InKlude Labs. Comments are welcome at narayan@livemint.com
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