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The same quarter

Next set of GDP figures won’t be different. We need a public investment stimulus.

Written by Yoginder K. Alagh |
January 27, 2015 12:48:43 am
finance ministry, indian economy, investment, GDP, C. Rangarajan, Montek Singh Ahluwalia, NDA, public investment, RBI Chief economic advisor, Arvind Subramanian, highlighted the need to raise investment, beginning with public investment.

At long last, at least some in the finance ministry have recognised the importance of getting investment going to revive the economy and the causal role that public investment should play to trigger the process — a persistent demand of this writer. The Central Statistical Organisation holds up a mirror to policymakers every quarter. For over 12 quarters, its data has reflected our economic disaster — we have lost about 2 percentage points of the GDP in gross investment. Earlier, it was C. Rangarajan and Montek Singh Ahluwalia who kept up the dream that the next quarter would be better. This tradition has been carried forward by the NDA. The pink papers dutifully list out so-called policy initiatives, as if fund managers are just waiting on our electronic borders to click in billions of dollars. So it was refreshing when the chief economic advisor highlighted the need to raise investment, beginning with public investment. The details will need to be worked out in the weeks to come.

In the past few months, it is interesting that, in spite of the siren calls by officials that the “next quarter will be better”, some of the more astute fund managers who have visited India made sobering statements. Normally quiet people, they are not amenable to histrionics. They deal in vast sums of money — remember the billions that fled out of India in a single week in August last year.

So, when Christopher Wood, CLSA’s managing director and chief strategist, said that China could spoil the India party, it was not just another piece of verbiage. Generally appreciative of India, Wood was explicit about the need for a stimulus. Then there was the Blackstone chief’s similar message. CLSA, of course, followed through and increased the weightage of Chinese assets in its portfolio between November and December 2014. It was not the only one, and according to end-of-year reports, the Shanghai Composite had grossed a return of 49.23 per cent, against the Sensex’s 28.68.

One would have thought that there would be an intelligent response to this. But no, the drone continues: “the next quarter will be better”. So when the chief economic advisor says investment has to go up, the “reform-first” lobby goes to town against him. China implemented a stimulus 15 months ago and clocked a 7 per cent growth rate.

The first takeaway is that we will need to make sacrifices to realise “achhe din”. It is too early to give up the savings habit. The fall in gross investment started two years ago. The Manmohan Singh line, that “reform” itself, whatever that means, will turn around the economy, is a no brainer.

The second takeaway is that inflation is not going to go away. The fall in prices, apart from energy, is on account of the economic collapse. As growth falls, there is a line below which prices don’t rise — the long-term Alagh-Guha curve shows that the threshold is at 5.5 per cent. The RBI correctly heeded the call to cut interest rates. But if growth goes up, taking inflation with it, the central bank will not play ball.
One part of inflation is here to stay: food price rise. If you grow at 6 per cent then, given the elasticity of demand, demand for fruit, vegetables, eggs, milk and so on rises by 10-15 per cent. So if growth revives, grin and bear it.

More important is resource-raising. We need to divert demand to infrastructure spending on account of its spread effects. If borrowing goes up to finance investment in the PPP mode, there can be no real objection. Resource-raising and the stimulus are two sides of the same coin.

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