I used to be an entry strategy consultant and helped foreign companies invest in India. However, I was struck by someone’s joke the other day that it’s time I became a consultant of exit strategy because most multinationals, frustrated with knotty regulations and a general dip in investor confidence, are looking for just that.
Of course, the remark was drawn in jest. There is no frenetic exit taking place. However, it captures a riddle facing the country now. What punctured the India story, after having a good run of over 8 per cent growth for much of the last decade? The skew is so tight right now that it’s hard to presage the targeted 8 per cent growth during any one fiscal year during the 12th Five Year Plan.
In this issue of INCLUSION, our staff and guest writers try to dissect the reasons behind the India’s economic slowdown. They provide enough clues about the problems that put further stress on an economy already slowing. We have ample reasons to worry about the fault-lines in the economy, but the articles also lend credence to the imperative need for redirecting the economy.
For growth with equity to happen, first, we need to attract foreign investment on a big scale. Most sector-specific caps on FDI can easily be done away with, without compromising the often ill-defined national interest. But then, some recent moves have inadvertently heightened anxiety about the capricious nature of India’s policies. Foreign investors are skittish about the tough transfer pricing norms and clumsy handling of the retrospective taxation issue.
Addressing inflation is a crying need for growth with equity to take place. As some sectors, like agriculture, deemed out of bounds for reforms, how will we ease inflationary pressures, to begin with? Through an ordinance, the government has just cleared the food security plan that aims to provide subsidised food to two out of three Indians. However good the intentions are, such subsidy-bloating exercises are no substitute to courageous reforms in the long term.
We must worry about how to deepen financial markets in order to get more and more small and medium enterprises (SMEs) into the fold. We have SME exchanges. Both National Stock Exchange and Bombay Stock Exchange have SME platforms, but capacity constraints prevent SMEs from getting listed on them. There are huge amounts of problems and that need to be addressed: systematic, governance or IT. Corporate governance is another area of concern for SMEs as well as family-owned businesses that swarm the corporate sector. Unless we really pull up our socks on SMEs, I don’t think there is hope.
Policymakers and regulators were either tone-deaf or half-hearted towards financial inclusion. In this issue, we run a story on new bank licences, for which the RBI has decreed 25 per cent branches in rural unbanked areas as a condition. But how would we make the whole rural business model viable? We already have a business correspondent model that is gasping for breath. Lack of financial inclusion makes room for ponzi schemes, and the recent fiasco in West Bengal is only tip of the iceberg. Yet, until financial inclusion and literacy programmes make business sense, they will be anything but.
Finally, much of the charade about demographic dividend misses two central points: a new blueprint for reinvigorating manufacturing and services sectors (insufficient growth rate is blamed on the slump in these sectors), and training a skilled workforce and then giving them productive jobs. Is there much difference between having trained unemployed and untrained unemployed? A socially combustive mix, both ways.
Even the Chinese are thinking about rebalancing economy in the face of an economic slowdown, because the growth model that yielded double-digit growth once has apparently run its course. We in India require no less, through the long-pending next waves of economic liberalisation.