Tuesday, October 09, 2012

India would grow almost as strongly

Ten reasons why India would grow almost as strongly as it has done in the past many years

SIXTH PAY COMMISSION: Of course, there is no Barack Obama out here calling a $20 billion bonus payout for Wall Street honchos in 2008 as ‘shameful’. But the fact is, the largest employer in the country, the State, has recently handed over a pay hike that ranges from 40% to 100%. Not just that. The hike is to be implemented with past effect from January 1, 2006, ensuring that government employees will get hundreds of thousands of rupees as arrears. The results are visible. Maruti and Hero Honda sales have either remained stable or actually grown when everyone is crying about tumbling demand. Sure, extravagant spending has fallen drastically; but that anyway accounted for a miniscule proportion of total consumption expenditure.

WELFARE SCHEMES: One of the better known – and controversial – features of the UPA government has been the emphasis it has put on welfare schemes for the poor. The most important of this is the National Rural Employment Guarantee Program (NREGP) that promises at least 100 days of employment to the poor in rural areas. Sure, there have been many valid criticisms of corruption and leakages. But the fact is that rich farmers in Punjab are finding it desperately difficult to find labourers to work in their farms. NREGP has a lot to do with this, despite the leakages. Of course, the rural poor who benefit from NREGP will not be buying plasma TV sets; but the small amounts they will spend keeps the economy chugging along. No matter what prejudiced critics say, companies like ITC and HUL have shown that there is a fortune to be made at the bottom of the pyramid. The NREGP is consistently broadening the base of the pyramid!

INTEREST RATES: If every crisis is an opportunity, here is the mother of all opportunities. A few years ago, when major economies of the world had started cutting interest rates because of recession worries, the Reserve Bank of India kept hiking them to combat inflation. After the September 2008 meltdown, there has been a move to once again cut interest rates. But the fact of the matter is that no other major economy of the world has interest rates as high as India’s. The prime lending rate is still more than 12% and there is enough scope to reduce it drastically. The positive impact on the Indian economy will be monumental. Please remember: more than 7% of average GDP growth rates of the last decade came after interest rates in India were cut drastically to single digits from peak levels of about 16% in the mid 1990s! No other major economy in the world can boast of this incredible cushion and opportunity.

HEALTHY BANKS: This is arguably the biggest advantage that the Indian economy enjoys in these turbulent times. In Europe and the United States, it has become habitual for the once mighty and envied banks to report losses to the tune of tens of billions of dollars. Nobody knows for sure the position of Chinese banks when it comes to bad debts; but analysts are deeply worried about the Chinese banking system anyway. But the once derided Indian banking system is literally in the pink of health in contrast. Profits for most banks have soared and there is no doubt that bad debts are simply not a problem for the Indian banking system at the moment – barring a few aggressive banks that will anyway be bailed out by the government if the need arises. This is a slap for the free market fundamentalists who were repeatedly pushing Indian banks to adopt the American model. Have you heard any comments from Western analysts and their ilk about Indian banks adhering to Basel-II norms by 2009!!!


Source : IIPM Editorial, 2012.

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