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Are India's glory days over?

Unless major structural changes are effected, India will miss an economic take-off for many years

Shyam Ponappa 

Shyam Ponappa

Underlying the varied narratives on the Budget is the persistence of structural inflation, especially in food items. India has sunk in an inflation quagmire, moving from a ranking of around 60th until 2008 to about 120th since then, with lower rankings indicating worse relative inflation. Most analysts opine that growth will be slow, and agree that the revenue deficit needs to be reduced much more than in the Budget. The planned reduction of expenditure or increase in revenues needs to be something like five times the budgeted half a per cent of GDP to reduce the risk of the external account imbalance.

Slow growth is inevitable
This year's Budget, according to one commentary from the Heritage Foundation, "leaves India on the same, failing course it's been on of undisciplined spending and unrealistic expectations". The report goes on to mention high expenditure, inadequate revenues and very high consumer inflation, with no reforms.1

Another analyst articulates a different view that in fact actually demands low growth. Focusing on the balance of payments risk because of a current account deficit, he argues that the Budget had to constrain growth, or risk triggering a crisis. This view suggests that we cannot export more until the world recovers and can buy more, and until it does, our unfavourable external balance puts us at risk.2

Or is it?
There's no denying the conclusion of the Heritage report, although there may be disagreement about some of the professed remedies, like opening up banking and insurance to foreign direct investment (FDI). However, the gap arising from the trade imbalance, while making India's economy more vulnerable, doesn't preclude interim strategies and limit our options to necessarily constraining growth. The current account deficit calls for convergent management of expectations that result in unrestricted foreign capital inflows, not the scattershot confusion of mixed signals. To what extent this should be at the cost of the growth that is so essential for the stability of our social fabric is debatable.

For instance, is there the possibility, as in tourism-driven economies, that there could be a consistent inflow of capital to tide over the deficit until exports recover, ie, traditional export markets recover? Or that if we shifted to an unambiguous emphasis on FDI over time instead of encouraging short-term, anonymous, even incognito, inflows through Participatory Notes, that the gap could be bridged? Or that if our enterprises could start designing and manufacturing new products for sectors such as broadband and wireless communications, we might develop new markets in more growth-oriented areas in Asia, thereby improving our trade balance?

Infrastructure : the enabler and multiplier
No matter what direction we take, unless our governments - the non-monolithic, disparate powers that operate in the states or at the Centre - start dealing with realities, our glory days are over for years together. For instance, unless radical action is taken to increase food production and distribution, the curse of inflation will stunt growth, and hamstring our ability to improve infrastructure. In all this, the centrality of infrastructure as enabler and multiplier cannot be overemphasised.

Within infrastructure, there's little doubt about the crippling of telecommunications, now reduced to a shambling wreck by misconceived policies to capture revenues for the treasury, whether by governments' greed, or by the clamour of ill-informed and irrational public opinion, or courts misinformed by self-proclaimed guardians of the public interest whose ignorance overwhelms their good intentions by far.

Meanwhile, at the Mobile World Congress at Barcelona
Around the same time, half a world away in Barcelona, there was an annual convention on mobile communications. People from companies around the world congregate for the Mobile World Congress, which ran from February 25 to 28 this year (for the first day's highlights, see: This convention drew over 70,000 people, where Samsung and Nokia made their announcements about new smartphones, as did LG, Huawei, Intel and a host of others. It is also where the producers of systems for the delivery of these services, such as Qualcomm, Ericsson, and Nokia Siemens Networks, showed what they were doing to prepare for the vast anticipated increase in mobile broadband.

The Mobile World Congress has relevance to India because our Trai and the DoT representatives were there, studying developments in managing spectrum and communications. If they're allowed to formulate solutions to solve some of our problems, instead of being restricted by ignorant litigants through the courts to incur more self-inflicted harm, their actions could revolutionise India's approach. Of particular interest for India were Ericsson's "Supplemental Downlink", which uses access to a predefined spectrum band to augment existing licensed capacity, and Nokia Siemens Networks' "Authorised Shared Access", which enables access to spectrum assigned to a primary holder, government in this case, to be used commercially without compromising the existing incumbents.2

Need for capacity and productivity hikes
Major structural changes are required to create conditions to move India out of its growth doldrums. Take the collapse in the telecommunications sector. The first step is to give network owners the benefit of infrastructure status to lower borrowing costs. Radical changes to spectrum and network management to maximise service delivery while reducing costs, including extending the principle of revenue sharing from licences to spectrum use, can further improve outcomes with the same input. Also, sustained efforts to support the design and manufacture of products - whether through FDI in joint ventures or licensed local manufacturing, or the creation of products from scratch - could reduce the trade burden of ICT imports, which otherwise threaten to exceed our oil imports over time.

Our authorities must now develop ground rules that can lead to a potential revival, while corporations and the government work together to ensure success. Apart from this, sectors that can help with the balance of payments, like tourism, and domestic coal for power, must get focused solutions. Such developments are required in diverse sectors to break out of our tailspin.
1. "India Stays on Path to Economic Failure", Derek Scissors, The Heritage Foundation:
2. "Budgeting in hard times", T C A Srinivasa-Raghavan,
The Hindu:
3. (a) Supplemental Downlink and (b) Authorised Shared Access:a)

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First Published: Wed, March 06 2013. 21:50 IST