How to get the Indian corporate sector back on the growth track…

A senior banker asked me an interesting question, “If the Indian economy is growing at 7.5%, then why have corporate results been disappointing for the last 3 quarters”? It surely needs to be examined as to why the GDP growth is not being translated into corporate profitability. The answer probably lies across 5 major arguments. Let me explain!

We need big cuts in lending rates

While it is true that the rates have been cut by 75 basis points since the beginning of this calendar year, it is grossly inadequate. There is little demand for bank lending and therefore rate cuts are not translating into anything worthwhile at a grass-root level. One needs to draw an analogy with the period 2002-2004 when the bank rates were cut aggressively by the then RBI governor, Dr. Bimal Jalan. This went on to spur the bull market that culminated in 2008. Sharp and rapid cuts in rates not only spur commercial borrowing, but also spur retail borrowing. It is a virtuous cycle. Lower rates reduced the burden of leverage on balance sheets. At the same time, lower rates also spurs demand for retail and commercial property, which is normally the lead indicator for an economic upturn. Lesson No.1 is to embark on an aggressive rate cut program in a short span of time so that the demand-supply gap can be bridged.

We need to address the problem of NPAs

The NPA problem did not happen overnight. It has actually accumulated and worsened over the last 10 years, especially post the sub-prime crisis. With NPAs running close to $100 billion, neither banks nor corporates can grow. Piecemeal solutions will not work. The existing debtors must be classified into cyclical and chronic. The chronic problem assets must be wound up or sold off. Measures like extension of tenure, haircuts and concessional rates can be attempted for companies where there is a cyclical problem and where such measures can help them overcome these problems. It may result in the contraction of bank balance sheets, but it will make them healthier and meaner. Lesson No.2 is that we cannot wish away the problem of NPAs. The rate cuts suggested in the previous point can work only as long as the issue of NPAs are addressed on a priority basis.

Where are the jobs getting created?

No economy actually grows unless it is generating sufficient jobs. One only needs to compare the number of jobs that were created prior to 2011 and the jobs created post 2011. The sharp fall in job creation is a story in itself. In the last one year, we have seen some marginal accretion in job creation but that is against a much smaller base and also it is focused on the IT and BPO sector. The real manufacturing jobs are not happening. During the 2002-2006 periods there was an explosion of jobs creation due to massive investments in infrastructure. Similarly between 2007 and 2012, there was a substantial creation of rural jobs through the MNREGA programs. The current government needs to give a big and real push to its “Skill India” and “Make in India” programs to actually create substantial jobs at the grass-root level. Lesson No.3 is that unless jobs are created at a rapid rate, the benefits of GDP growth cannot be passed on seamlessly to the people.

The need for quality infrastructure

The government did show urgency in its coal auctions as well as its telecom auctions, which was a truly good start. But physical infrastructure in terms of roads, ports, railways and power is still lagging. The government in its last budget has already estimated that it requires $1.5-2 trillion to bring Indian infrastructure to Asian levels. More importantly, improved infrastructure adds 2-3% to a nation’s GDP and that by itself will be worth the investment. This is not going to happen overnight, but a positive start in this direction itself is sufficient to give the much needed fillip to growth. Lesson No.4 is that focus on quality infrastructure can have a multiplier effect on GDP growth and spending power.

What is happening to our trade?

The government needs to move on a war footing on the trade and commerce front. A consistent month-on-month fall in exports and imports is hardly conducive to a robust economy. You can complain about a global slowdown, but there has to be a Plan-B in place. India has lost its edge in textiles and diamonds and probably survives on its IT exports. That has been the case for over a decade now. What are the 5 sectors that India would like to be export competitive in the next 5 years and what are the next steps? What are the imports we would like to cut on and what policy measures are required? How to help exporters with incentives, easy finance and global support systems? India can be lulled into complacency by cheap oil. Lesson No. 5 is that your matrix is incomplete unless we get a hang of the trade front.

The moral of the story is that time is running out for the India economy. A 7.5% growth is predicated largely on cheap oil. That need not sustain. To make the best of a cheap oil dividend, India needs to focus on rates, NPAs, jobs, trade and infrastructure. The rest, as they say, will automatically follow!

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