Investor confidence is up
D.S. Rawat
The New Year has begun on a positive note with the government allowing foreign individual investors, pension funds and trusts to directly invest in equities. This is a bold step to shore up investor confidence and attract dollar inflows.
Foreign investors will now be able to invest directly in Indian capital markets for the first time. It’s a positive signal to high-net-worth individuals who have been routing their investments through mutual funds or FIIs by way of participatory notes.
Food inflation has started coming down due to good agricultural crop. The bumper rabi crop due in March will be an additional booster dose for the economy.
This may prompt the RBI to start rolling back interest rates to boost the industrial sector. There are signs — however bleak they may seem at present — that the government is inclined to alter the perception of policy paralysis and take radical policy measures to kick-start the economy. But funds will come only when the economy and the corporate sector’s performance take a definite upward turn. The reforms process has not been put on the backburner and is likely to come with full force once the government manages to evolve political consensus on issues like the direct taxes code and goods and services tax. However, the challenges of high inflation and falling industrial production still remain. High interest rates have forced the industry to put the brakes on fresh investments. Much still needs to be done.
First, the government must fast-track the process of granting clearances to mega-infrastructure projects. This will lead to infusion of much-wanted investments into the economy and help re-gain the momentum. Three projects worth Rs 25,000 crore have been cleared in recent times.
Secondly, the RBI should start reversing its monetary policy. It has raised interest rates 13 times since March 2010 to control inflation. Now a new approach is needed — one that encourages production rather than curtails demand and, hence, increases the production of upstream industries and those of intermediate goods.
Thirdly, the government must take bold initiatives to encourage and further increase the flow of foreign investments. It needs to invite long-term FDI debt funds in the infrastructure sector. FDI should also be opened up in pension funds, which can then create lakhs of new jobs. The agriculture sector needs to find ways to reduce wastage of farm production and improve efficiency of its highly-fragmented food-supply chain. More than 30 per cent of agricultural produce is spoilt even before it reaches consumers. FDI in multi-brand retail will bring in huge investments in the expensive cold-chain infrastructure, like warehousing and refrigerated trucks, to service the front-end businesses.
The rupee’s depreciation by almost 20 per cent has made domestic production more attractive as imported components and raw materials have become costlier. Import-based industries should be encouraged to invest in manufacturing in India.

Growth will slow down further
Mohan Guruswamy
Between January 31 and December 31, 2011, India would have lost a full one per cent of its projected GDP growth. In terms of purchasing power parity of money, this would translate into 40.57 billion dollar. During the same period the value of the rupee declined from Rs 43 to Rs 52 per dollar, and we ended with a trade deficit of 122 billion dollar. The Sensex almost scaled 20,000 and then returned to languish at just below 16,000 at the time of writing.
Yet India will grow at about seven per cent this year and will be the second fastest-growing major economy in a world slowed down by financial turmoil and recession. Many in India think we had a bad year, while many abroad look to India as a source of robust growth, which along with China could pull the world economy up by its bootstraps.
That’s the bad news and the good news rolled up together. If you think you saw it all in 2011, wait, 2012 promises even more interesting times. When the Chinese say, “May you live in interesting times,” they are actually cursing you.
In a society that prizes tranquillity and predictability, to live in interesting times is the worst hell one can be in. But we in India are used to living in interesting times. We revel in it. For little is tranquil in our society and even less is predictable.
The global economy will continue to be in turmoil. Growth will be slow, and growing GDPs will be few and far between. Europe will hardly budge in terms of GDP growth. Twenty-two per cent of our exports go to Europe and have a higher value addition. But we could look forward to stable or even lower oil prices, unless the US
provokes Iran into jamming up the Strait of Hormuz.
In the last quarter of 2011, Indian exports grew at about 30 per cent. But this growth is unlikely to sustain because Europe is slowing down. The US has not begun a full recovery as yet. Mid-2011 figures give rise to some
optimism, but it is too early to predict a full recovery. If the US recovers smartly, Indian companies, particularly in the IT sector, will post big growths.
But the big driver of growth is investment. That, unfortunately, has begun to taper down, as much due to the uncertainty in New Delhi and the inertness of the government as due to the global conditions. The government finds itself hamstrung to spur investment. Populism has become its main weapon to deal with discontent. The burgeoning subsidy bill precludes any massive investment on either housing or infrastructure to lead recovery. This does not augur well for investment, which needs a surer climate and firmer hold at the helm.
So what is my prediction? It is simply this: India will still be among the fastest-growing nations in the world. But the GDP growth would slow down even further, maybe by another one per cent or 45 billion dollar in terms of opportunity cost. Maybe we can live with that. But money lost is money lost.