Green shoots

The Pak Banker - - OPINION - R. Sukumar

Ev­ery­thing points to a bet­ter sec­ond half of the year (Oct-Mar) in terms of in­dus­trial and eco­nomic growth, and then, to a bet­ter sec­ond half of the decade (2016-20) Car sales in In­dia rose 17.5% in July, the ninth con­sec­u­tive monthly in­crease. Mar­ket re­search firm Nielsen says de­mand for sev­eral prod­uct cat­e­gories has grown, es­pe­cially in ur­ban In­dia. The con­sumer pack­aged goods mar­ket grew 11% by value in the three months ended 30 June, as com­pared with around 7% in the pre­vi­ous quar­ter (the three months ended March), the firm said. And the growth is led by cat­e­gories that are ur­ban-cen­tric-de­odor­ants, choco­lates, hair con­di­tion­ers and other per­sonal care prod­ucts.

The Re­serve Bank of In­dia (RBI) said on 4 Au­gust that it looks like de­mand is pick­ing up again, es­pe­cially in ur­ban In­dia. Are the good times back in Asia's third largest econ­omy? In­vest­ment growth is yet to re­vive; then, in­vest­ment growth al­ways leads con­sump­tion growth dur­ing a down­turn and lags it dur­ing an up­turn. Even there, signs of ac­tiv­ity are vis­i­ble.

For in­stance, Fox­conn's an­nounce­ment of a $5 bil­lion in­vest­ment in Ma­ha­rash­tra and the open­ing of its plant in Sri City in Andhra Pradesh bode well for elec­tron­ics man­u­fac­tur­ing in In­dia. Fox­conn has said it will bring its sup­pli­ers to In­dia. The en­su­ing clus­ter ef­fect will at­tract other con­tract man­u­fac­tur­ers to In­dia. Ev­ery­thing points to a bet­ter sec­ond half of the year (Oc­to­ber to March) in terms of in­dus­trial and eco­nomic growth, and then, to a bet­ter sec­ond half of the decade (2016-20). In some ways, that was only ex­pected. Both in the 1990s and the 2000s, In­dia had a bet­ter sec­ond half of the decade than the first.

Three fun­da­men­tal changes will help In­dia break the cy­cle and also break through to higher lev­els of growth-maybe even dou­ble digit. The first, changes in the law to make it eas­ier for com­pa­nies to ac­quire land for large in­dus­trial projects. The sec­ond, the uni­fi­ca­tion of the In­dian mar­ket through a goods and ser­vices tax (GST).

The third, labour re­forms. At this point in time, the first doesn't look pos­si­ble (although the Na­tional Demo­cratic Al­liance gov­ern­ment tried). The third seems to have been aban­doned. The GST leg­is­la­tion lives on, and, de­spite hav­ing been di­luted from its orig­i­nal form, the tax prom­ises to add its bit to the gross do­mes­tic prod­uct. To­gether, the three were ex­pected to ad­dress the so-called sup­ply-side (or ca­pac­ity) is­sues that plague the In­dian econ­omy and which, left un­ad­dressed, will en­sure that high growth re­sults in high in­fla­tion, caus­ing RBI to tighten rates, ap­ply­ing the brakes on the eco­nomic en­gine.

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