That’s the key to getting growth back on track
Given the severity of the industrial slowdown, getting it back on track is not going to be an easy job. Not only is the slowdown a deep one, it is widespread. The Index of Industrial Production (IIP) contracting by 0.5% in March, after a 1.9% fall in February is bad enough, but the real problem is that IIP contracted 0.1% in the full fiscal, making it the first negative reading in the last decade since the index was re-based. How widespread the slowdown is can be seen from the fact that while capital goods contracted 3.7% in FY14—on top of a 6% fall in FY13—consumer goods also contracted. Commercial vehicles, the usual bellwether, contracted 20% in FY14 as compared to a 2% contraction in FY13; passenger cars contracted 6%; though 2-wheeler growth picked up a bit at 7%. If the response of consumers to sharp excise duty cuts in the interim budget has not been encouraging except for 2-wheelers for a month, it is because consumers need to see a growth path for jobs and salary hikes—with economic growth the way it is, and a possible El Nino-related drought likely to dampen growth prospects further, this is not happening.
Getting growth back on track is certain to be a long-drawn affair. With capacity utilisation at historical lows in various sectors, capital investments or purchases of commercial vehicles, for instance, are not going to happen overnight, never mind if a new government is in place. The revival approach has to be a multi-pronged one. Working with states to come up with a policy on allocating mines, for instance, will get jobs back. Clearing as many bottlenecks—sadly, most are at the state level—as possible to get stuck projects on track will be vital to get money flowing back into the economy. Clearing the policy on petroleum pricing—this includes not just gas, but even diesel—will get investment back into the economy quickly. Reliance alone has promised an investment of $4 billion in the current year. Telecom firms have just spent $10 billion in spectrum auctions and, were a policy on spectrum trading to be announced quicly, you can expect larger investments to flow here.
While a broad-based recovery will take time, fortunately, there are lots of low-hanging fruit. Most involve the government sticking to its promises, such as on gas-pricing for instance, and not trying to create all manner of hurdles for investors—after the telecom tribunal blasted the government for its ‘misleading’ policies on intra-circle, for instance, telecom minister Kapil Sibal wants the next government to challenge this in the Supreme Court. Apart from oil and telecom, getting back tax certainty will play a big role in reviving investor sentiment—just the Nokia case, by way of example, has resulted in large job losses. Indeed, with R1.75 lakh crore of income tax cases in just the last 3 years—the notices for FY12-14 are still in the works—it is clear, MNCs are going to be wary of making fresh investments. Fixing tax policy is probably the easiest and the most painless step for the new government. And it will deliver results the fastest.