Can't afford low growth PDF Print E-mail
Monday, 14 April 2014 02:31
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$40bn of FII money at stake immediately

Whether or not Narendra Modi is India’s next prime minister, what’s important is that the country simply doesn’t have the luxury of waiting for the next government to get its act together—it sounds clichéd, but the next government needs to hit the ground running. Apart from what slow growth means to jobs creation—employment growth has fallen 42% qoq according to the latest Labour Bureau statistics—neither corporate India nor the banks can afford slow growth. From 53% of GDP in January 2012, corporate debt as a proportion of GDP shot up to 56% in January 2013; the total debt of the BSE 500 rose 22% per annum over FY09-14 while their net profits rose just 10%. For 11 large over-leveraged corporates, who account for 11% of the banking system’s loans, debt rose 137% over FY10-13 as compared to operating profits by 90%—unless topline grows fast, both India Inc as well as banks are going to be in trouble. The impact on the markets could be even more dramatic. As Standard Chartered points out, FIIs have increased their India allocations based on the likelihood of a decisive government—were the government to not perform, and the weights to revert to the 8-year mean, this would mean $40 billion of FII outflows. While Standard Chartered estimates India needs around $80 billion of forex investment each year to fund infra needs, the larger issue is stagflation. If the government is not able to fix supply bottlenecks—gas and coal for power plants, for instance—India’s ‘output gap’ also reduces, raising the likelihood, as is happening now, of high inflation with low growth.

Which is why it is important for the next government to have a 100-day agenda. India’s dramatically rising incremental-capital-output-ratio (ICOR), ironically, offers quick solutions. Fix the gas pricing, increase the lease periods for oil firms who have already discovered oil/gas ... this will immediately raise output and, in the case of gas, allow stranded plants to start producing. In telecom, huge investments made in 2010 and now have yet to bear fruit— a clear policy on spectrum trading and sensible spectrum user charges will immediately boost output and so, lower ICOR, critical for GDP growth. Whether as part of the 100- or the 200-day agenda, Coal India’s monopoly needs to be broken—its production needs to grow at 10% per year in FY13-18 as compared to 3.5% in FY08-12. Most important, the government needs to send a signal to the bond markets—with yields at 9%, little investment can come in—and the only way to do that is to reduce borrowing targets. That means aggressive action on subsidies has to be announced in the budget. The other thing the budget needs to announce—to partly counter action on subsidies—is to change the existing tax structure where the top rate kicks in at a very low level of income. This will not only benefit the middle classes and spur consumption, it will bring in more taxes as high rates—at low income levels—is one of the biggest reasons for low tax compliance. If the BJP hopes to come to power, by now, it should be finalising its finance minister and the budget’s major direction.


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