EDITORIALS

may 17, 2014 vol xlix no 20 EPW Economic & Political Weekly
8
A
ll eyes are on 16 May. Big business and the markets, in
particular, have bet heavily on what they see as the
turning point Modi Sarkar. For that is what they feel is
the only aphrodisiac that will revive their animal spirits and spell
the return of the Indian economy to the golden years, 2003-04
to 2007-08, when the forces driving private investment-led growth
were at their potent best. They are not expecting a scal stimulus,
a la Pranab Mukherjee, to revive the sagging economy. What is on
the cards, if they are to be believed, is a strong dose of structural
reforms accompanied by improved governance.
If the Bharatiya Janata Partys manifesto and Modis Gujarat
Model is any guide to the action that is supposed to unfold, then,
among other things, the failed public-private partnership (PPP)
model in infrastructural investment is going to be transformed
into a 4-P (people-public-private-partnership) model, whatever
that might mean. The Foreign Investment Promotion Board is
going to be more efcient and more investor friendly. Intellec-
tual property rights, including patents, are going to be rendered
stronger. The labour laws are outdated; they are too compli-
cated and even contradictory. So they are going to be reviewed
and amended. To what effect, one might ask? Industry owners
and their workers will be made to bond like a parivar authori-
tarian paternalism will be the order of the day as far as capital-
labour relations go. The tax regime will be rationalised and sim-
plied, made non-adversarial and conducive. And, as regards
clearances, well, it is going to be a single-window system,
with close coordination and synergy between the centre and
the states, especially for mega projects. Speed with no delays
that is how decisions will presumably be taken as regards envi-
ronment clearances. And, in keeping with the Gujarat Model,
big business can always count on the rm authoritarian hand of
decisive governance, and, of course, transfers.
Is the economy then going to return to the golden years of
2003-04 2007-08? The industrial sector is presently in the
midst of stagnation. Industrial GDP at factor cost at 2004-05
prices has recorded growth rates of 1.0% and 0.7% in 2012-13
and 2013-14, with the manufacturing sector in the doldrums.
Overall GDP growth rates over the last two years, at 4.5% and
4.9% in 2012-13 and 2013-14, respectively, are a shadow of what
they were in the golden years. The growth of gross xed capital
formation in the private corporate sector, even at current prices,
has fallen very signicantly, from 23.2% in 2010-11 to 4.7% and
0.7% in 2011-12 and 2012-13, respectively. And, gross xed capi-
tal formation in the public sector, unsteady as it has been, has
not complemented its counterpart in the private corporate sec-
tor. The high relative prices of food necessitating higher ex-
penditure on food by households have crowded out their ex-
penditure on manufactured goods. The tight monetary policy
leading to high interest rates on consumer and business credit
has led to a postponement of consumer purchases of durable
goods and business investment decisions.
It is not that liquidity is a problem; net private nancial
capital inows have been of the order of $75 billion in 2013-14.
And, with the expectation of Modi Sarkar, and despite the US
Federal Reserves impending tapering of its Quantitative Easing
programme, net capital inows are expected to be even higher
in the current nancial year, though not as high as in 2012-13. In
the period 2003-04 2007-08, net nancial capital inows (in
search of better yields), far in excess of the current account de-
cit on the balance of payments, took the markets to a new high,
triggering the wealth effect, the expansion of liquidity and, in
turn, consumer credit, self-indulgent elite consumption, and
the release of animal spirits to boost private investment, lead-
ing to high growth. But why has this not been happening over
the last two years?
Net capital inows have been substantial during 2012-13 and
2013-14. But why has the resulting liquidity not translated into
consumer credit and debt-nanced investment? Perhaps all is
not well in the state of consumer nance. The upper middle class
and the rich may largely be overloaded with housing, automo-
bile and other consumer durable-based debt and this may be
hindering the further disbursal of credit from the commercial
banks. The Reserve Bank of Indias (RBI) tight monetary policy
that has raised the cost of consumer debt may have exacerbated
the problem even further. The banks themselves are also in
deep trouble, at least as far as their infrastructural and retail
credit portfolios are concerned. It is not just the consumer debtors
that have taken on more than they can chew; business debtors,
in the context of the rising cost of debt capital and receding
d emand in their product markets, seem to be faced with declining
prot rates. The RBIs sample of non-government, non-nancial
public-limited companies witnessed, between 2010-11 and 2012-13,
a rise in its interest payments to gross prots ratio of 10 percent-
age points which contributed to a signicant decline in its prot-
after-tax to net worth ratio.
Clearly, even with a more aggressive commitment to neo-
liberalism, a return to the golden years of big business is going
to be difcult.
Modi Sarkar and the Economy
Will the wielding of an aggressive neo-liberal foot and hand revive the economy?