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Business Commentary/ Jay Dubashi

Lesson for the next govt: agriculture matters, but industry and foreign investment spur growth

(This article was written after the Vajpayee government was voted out of office in the Lok Sabha and before the LS dissolution).

For the past ten days, there has been no proper government in Delhi. The Vajpayee government was ousted on April 18. (As there were no signs of an alternative government, the Lok Sabha was dissolved.)

Fortunately, economic news is reasonably hopeful. At least three forecasts predict an upsurge in gross domestic product growth, from less than six per cent last year to something like 6.5 per cent in the coming year.

A survey by the Reserve Bank of India puts the figure at seven per cent, if the monsoons are favourable. There will be a pick-up in industrial growth rate too, from last year's four per cent to six per cent.

The outlook, therefore, is not as gloomy as it was made out at one time. But one should not rely too much on official forecasts, many of which have turned out to be misleading in the past.

The fact remains that the main hurdle to growth is not government instability but popular distrust of government and those who manage the economy. In fact, we have a situation akin to that in Japan for the last so many years.

Governments come and go in Japan, but the economy refuses to move. In India, the economy is stuck at around five per cent GDP growth, and it takes a hell of an effort by the government managers to make it move even one per cent.

On April 21, the RBI bought down the cash reserve ratio, or CRR, to ten per cent, which means that banks will have to keep only ten per cent of their cash in reserves. There will be more cash available for business, and this should bring interest rates down further. This is supposed to stimulate investment and ultimately GDP growth.

In practice, however, things do not work that way. Companies do not invest just because interest rates are low, especially when there is so much idle capacity on their hands. What they look for is demand, and if overall demand does not pick up, investment does not pick up either.

At the moment, there is demand only for three kinds of products: items of daily consumption: which housewives cannot put off longer than a month, medical products, and maybe tractors.

India has had the good luck to have a series of seven good monsoons in a row, with not a dry season in sight. This has helped tractor manufacturers as also fertilizer companies. The new financial year is expected to be as good as the last few years for agriculture.

Although agriculture does matter, it is industry that ultimately sets the pace for growth -- and foreign investment. The Vajpayee government went all out for foreign investment, so much so that it upset its own hardline swadeshi supporters, who do not much care for it.

If Congressmen form the next government, possibly with good old Dr Manmohan Singh as finance minister once again, it will also rub foreign investors on the right side. This is one reason why the stock market always perks up in the wake of rumours of a Congress-led ministry at the Centre.

But foreign investors should not push their luck too far. Sonia Gandhi's Congress party cannot form a government on its own, since, like the BJP, it simply does not have enough numbers.

In fact, there can be no alternative government at the Centre without the backing of people like Mulayam Singh of the Samajwadi Party, which does not like foreign investors at all. One of its conditions for support is that foreign companies will not be allowed in the new insurance sector, and the patents bill will be reviewed before it is passed.

There is no other way of resolving the stalemate at the political level but a mid-term poll some time towards the end of the year. Everybody in political business wanted to avoid it, including the President, but how on earth can you avoid something that is unavoidable?

Jay Dubashi

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