We are seeing irrational pessimism: Tendulkar

STATE OF THE ECONOMY (A TURN-OF-THE-YEAR SERIES)

Suresh Tendulkar is not a pessimist when it comes to the economic situation. Indeed, he is almost sanguine about the outlook for growth — 7 per cent this financial year, give or take half a percentage point, and even better next year, possibly 7 per cent plus.

This contrasts quite sharply with other forecasts (like those by Citigroup and Goldman Sachs) which have tended to drop the number for next year to between 5.5 and 6 per cent, if not lower.

Tendulkar succeeded C Rangarajan four months ago as chairman of the Prime Minister’s economic advisory council, of which he has been a member since 2005. The council itself is in the midst of revising its growth forecast for this year, which it had placed in August at an optimistic 7.7 per cent. The new number will be out in late January, Tendulkar says.

 

“We have had many downturns since 1991; the one at the end of the 1990s was of a higher order. People now say this one is worse, but that will be a self-fulfilling prophecy. I don’t share the pessimism that this downturn is worse than the previous ones,” he said.

Tendulkar argues that the sustainable rate of growth for the Indian economy is not the 8.8 per cent average of the past five years, but something in the region of 7 to 7.5 per cent. From that perspective, he does not think the economy faces a massive crisis.

The main problem that he sees today is the psychological factor, which is over and above the real issues confronting the economy. People are talking themselves into a self-fulfilling crisis, especially the larger companies. This, then, manifests itself in reduced consumption demand, lower investment and bankers stopping to lend.

“The fear that this is the worst crisis we have faced is irrational, because the fundamentals are quite sound,” he argues. He goes on to list the healthy state of bank finances, the absence of a sub-prime housing problem as in the US, comfortable foreign exchange reserves, a stable foreign exchange rate after a downward adjustment, the end to substantial FII outflows, more than adequate food reserves amidst another good crop year and much lower oil prices.

Indeed, a large part of the Indian market remains unaffected by the downturn, says the former professor of the Delhi School of Economics who has been a member of several commissions and boards, including until recently the Reserve Bank of India. Wearing one of those many hats, he has travelled recently through Punjab and some southern states, and he finds that people are not talking of a major problem. Indeed, some markets are quite dynamic even today.

“We must understand that when the economy has been growing at 8.8 per cent, that growth is not just from large firms but also from small and medium enterprises, which means there has been an overall improvement in competitiveness as a result of the economic reforms.”

Asked about the large-scale job losses that have been reported in export-oriented sectors like textiles/garments and diamond processing, Tendulkar responds that there is of course hardship, but that “job losses and gains are part of the economic process”, and that even today many sectors face a serious skills shortage.

The one step that Tendulkar endorses forcefully is increasing the rate of investment in infrastructure, stating that “we must push this as hard as we can”. The problem, he adds, is not a lack of finance but a lack of projects. “We are not able to implement projects,” he says.

Asked to comment on the criticism of the monetary tightening and interest rate hikes that the Reserve Bank undertook till three months ago, Tendulkar says “I was on the RBI board and knew the thinking at the time. Inflation was rising, and I cannot argue now that what was done was wrong.”

He adds that there is political impact in an inflationary situation and you cannot sit back and do nothing. And he points out that the government has already announced specific measures to help the troubled sectors.

Asked whether further interest rate cuts can change the psychology of business players, he says that it would lower the cost of credit and that helps because in a downturn there is a reduced rate of return that people get. It might also help in areas where demand has slackened. But he sees companies caught by falling raw material prices: “They have bought the raw material at a higher price, and cannot cut the price of their finished goods because of that.”