Economic woes not due to policy paralysis alone

By Saurabh Mukherjea

  • 11 Jun 2012

It is common knowledge that the Indian Government has played its hand badly over the past four years. For example, with regard to coal scarcity, most of the damage was self-inflicted as the environment minister dithered on the “go/no go” areas and then instituted an overzealous (and arguably faulty) process of checking emissions in the vicinity of Coal India mines. The totality of these measures has probably set back Coal India’s production by 5-7% per annum. Another example of self-defeating intervention is the hasty introduction of GAAR in the Union Budget.

However, is the Indian government so influential that its blunders have bought our economy to its knees? I do not think so. Three other factors have played a powerful role in India’s humbling.

Firstly, a range of problems which prima facie appear to be caused by the government’s “policy paralysis” are arguably linked to the global seizure in risk appetite.


  • The “under-the-table” model was used in the noughties to lubricate our political and bureaucratic system as aggressive promoters sought to build construction, infrastructure, real estate and mining empires. Now, many of these promoters simply do not have the means to use this model on such a scale (partly because with the QIP/IPO market shut the most obvious route for financing such large backhanders is gone).

  • Promoters these days are quick to blame “policy paralysis” for their inability to get projects off the ground. However, some basic number crunching and discussions with financiers suggest that in many instances these power, infra, real estate and mining companies are deliberately throttling the projects back because they do not have equity available.
  • The second reason for not joining the “fright club” being orchestrated by sections of the stockbroking community is that a number of regulatory institutions, which have come to the fore over the past two years, will help the Indian economy going forward. The actions of a number of regulators, most notably the CAG and the Competition Commission (CCI) are an obvious antidote to the excesses of the noughties. Whether it be CAG’s path breaking report on the 2G or the CCI’s landmark action against DLF for the alleged abuse of its dominant position in Gurgaon, it is hard to blame the government for these actions.


    In the natural resources sector, almost all our titanic promoters seem have hit a brick wall in New Delhi as they run into an array of opponents in the form of: (a) The CAG which is publishing report after report on different aspects of malfeasance in this sector; (b) The environment ministry which is no longer willing to give clearances to projects; (c) The Supreme Court which is unwilling to let illegal mining continue and has advocated the use of auctions for all natural resource allocations henceforth; and (d) The relevant Ministry (be it coal, petroleum, mining or steel) which is unwilling to play ball. It is hard to imagine that our enfeebled Executive is behind such a coordinated blocking of a range of powerful companies.

    If the Competition Commission continues its crusade against abuse of dominant positions by market leaders in industries from real estate to cement to sugar to LPG cylinders, this should help improve economic efficiency. If the CAG continues its practice of scrutinising public spending and regulatory decisions in the manner that it has over the past two years, it will revolutionise the way the Indian Government works. Without such interventions from well meaning regulators and from a powerful judiciary, India could go the way of numerous “banana republics” in Latin America and Africa.

    The final reason for not joining the fright club is that our GDP data is so compromised that drawing any conclusions about the state of the economy based on this data could result in poor investment decisions. First and foremost, India’s GDP data is subject to inexplicable retrospective revisions of a material magnitude. For instance, investment demand growth numbers have been revised upwards from 5% YoY and -4% YoY in 1QFY12 and 2QFY12 respectively to 15% YoY and 5% YoY respectively. Secondly, there is limited synchronisation between trade data as shown by the national accounts data and the same variables captured by the RBI.


    And thirdly, the share of ‘discrepancies’ in the CSO’s GDP growth data has risen by 50% from FY05-08 to FY12 (from -9% of the change in GDP to 42% of the change in GDP!).

    Investment implications

    A significant part of the blame for the dramatic slowdown of the Indian economy lies not with domestic factors but with the freezing of risk appetite in the wake of the European crisis. My colleague, Ritika Mankar, estimates that at least a third of the collapse in India’s growth can be attributed to the slowdown in investment growth, which in turn is most profoundly affected by the global risk environment given India’s capital scarce nature. Whilst investment growth accounted for 50% of India’s GDP YoY growth over FY05-08, this share has now fallen to 20% in 4QFY12. Our modelling process suggests that the global risk environment is the most important determinant of India’s growth engine.


    This “blame attribution” is important. If investors pull out of India believing that there is something “systemically” or structurally wrong with the country, they will lose a great opportunity to participate in the Indian recovery, which will come when global risk appetite recovers. This is main reason why I refuse to join the “fright club” of brokers who are sounding dire warnings about what will happen to India if the Government does not do X, Y or Z.

    (Saurabh Mukherjea is the Head of Equities at Ambit Capital. The views expressed here are his own and not Ambit Capital’s.)


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