15 January, 2014

Why is India’s Growth Lagging Behind?--Nirav Desai

1.High Inflation

✤ Persistently high inflation has raised the prices of essential goods beyond the reach of common man.

✤ Prices of vegetables have increased significantly especially onions.

✤ Oil and gas prices are increasing due to depreciating Rupee, increasing the input costs for manufacturers

✤ High inflation has reduced the purchasing power of the Rupee.

✤ Planning Commission of India characterizes inflation as a “Supply Side Phenomenon.”

✤ There is opportunity here in this difficulty.

2. Energy Security

✤ India imports 80% of requirements of oil and gas

✤ A weak Rupee makes these very expensive, leading to high inflation.

✤ Opportunities for corn ethanol and jatropha oil seeds as alternatives to petrol and diesel. Brazil achieved energy security through the use of corn ethanol.

✤ Electric cars as a means of diversification away from oil.

✤ Solar and Wind Power have become competitive on the free market.

✤ Solar Power and Wind Power Plants have 0 running costs unlike coal or gas based power plants. Makes solar very cost effective in the long run.

✤ Business opportunities in setting up of solar and wind power plants and also in corn ethanol production facilities.

3. Crisis in Fiscal and Monetary Policy✤ Government under constant threat of credit rating downgrades from ratings agencies such as S&P

and Fitch.

✤ Fiscal deficit target has been kept at 5% of GDP and is hard to meet.

✤ Tax revenues are not enough to meet the budgetary outlays.

✤ Goods and Service Tax which taxes consumption of domestic and imported goods and services on an even footing is the need of the hour.

✤ All countries that introduced VAT - Canada, Ireland, etc. have upgraded to GST as VAT cannot tax imports whilst GST can.

✤ VAT gives preferential treatment to imports vis a vis domestic products as domestic businesses are subject to VAT and foreign businesses are not.

✤ High costs of oil imports and peg of Rupee to trade deficit has put the Rupee in a tailspin which will crash this economy.

4. Liberalization✤ Liberalization started by Dr. Manmohan Singh in 1990s is the greatest thing to have happened to India.

✤ India got a trade surplus in the years from 1990-95 when the exchange rate was approximately 20 Rupees to 1 USD.

✤ This indicates a sweet spot for the exchange rate of Rupee vs US Dollar.

✤ Pre-liberalization India had a balance of payments crisis and today India has a currency crisis.

✤ Stable macroeconomics are a must to produce growth in any economy.

✤ India could experiment with fixed exchange rates in the band present in the 1990-1995 period as has been done by China to a great success.

✤ Fixed exchange rates will give stable inflation due to reduced cost of oil and gas imports.

✤ As oil and gas are inputs to all of the economic activities we see, this will solve one of the biggest problems facing India today.

5. Improvements to Food Security Bill✤ The government runs a Public Distribution System that buys produce from farmers at a Minimum

Support Price and sells through the Fair Price Shops

✤ Urban population prefers to buy food from independent vendors and not Fair Price Shops

✤ Large amounts of food in the Fair Price Shops goes to waste as there is no demand whilst the population complaints food from independent vendors is too expensive.

✤ Modern storage facilities and supply chains can only do so much to prevent wastage of food in the PDS supply chain

✤ FM Pranab Mukherjee spent large amounts of money in modernizing the PDS so as to eliminate wastage of food grains due to poor storage infrastructure.

✤ Food in the Government run PDS could be distributed under the Food Security Bill to reduce burden on the Fiscal Budget.

✤ Business opportunities for roof top and garden farming.