Content from the Brookings Institution India Center is now archived. After seven years of an impactful partnership, as of September 11, 2020, Brookings India is now the Centre for Social and Economic Progress, an independent public policy institution based in India.
We have messed up the present. Can we still recover the future?
We are in the midst of a severe economic crisis. Our macroeconomic indices are weakening. The first quarter growth figure has come in at 4.4 per cent and some analysts are projecting a figure for FY 2013-14 of below 4 per cent — the Hindu rate that we all thought was a historical memory. Inflation in critical items is well above double digits — year-on-year the prices of vegetable goods have increased by 46 per cent; that of cereals by 18 per cent and proteins by 11 per cent (I quote the numbers recently published by Ashok Gulati, the chairman of the Commission for Agricultural Costs and Prices); the rupee is hovering close to Rs 70 to the dollar and the Sensex is gyrating, but in fall. The finance minister has pronounced a 10-point programme to narrow the fiscal deficit, balance the current account, stabilise the currency, contain inflation and bring the economy back onto the growth path. Whether he succeeds or not remains to be seen. The odds are against him. He has to contend with populist political colleagues, and the immune system of the economy has been so weakened that it seems no longer capable of countering the convulsions of the international market. But even if he does succeed, there is doubt that potential investors will bring India back onto their radar screen. Sure, “hot money” might flow back, but investments into the more stable and longer term “bricks and mortar” and services sectors will most likely remain lacklustre.
This is because the current crisis is not just about “poor economics”. It is also about the loss of confidence in the government’s commitment to upholding the constitutional checks and balance of governance. It is about the weakening of the pillars upon which Brand India has been built and which so positively differentiated us from other emerging economies.As every marketer knows, there is a difference between “advertising” and “branding”. Advertising is a tangible instrument for hawking a product. Branding is an intangible asset that embodies the qualities, values and experience of the company. The two are, of course, interrelated. Advertising helps build the “brand” and the brand reinforces (hopefully) sales. But they are conceptually different.
When India was growing at 8 per cent plus, it was not difficult to develop a compelling advertorial for the country. The pitch was pegged on the fundamentals of the economy — the large market, our youthful population, the reservoir of talent — and the ingredients of Brand India. Economic growth had not done away with corruption, red tape and shoddy infrastructure, but these negatives were offset by the assurance that if and when the entry hurdles were overcome, the strength of our institutions would ensure a level playing field, respect for contracts and protection against the arbitrary and discretionary exercise of power.
Today, these assurances have been dented. Investors see not only an economy on the skids, but a governance process that is opaque and unpredictable. The government may have had “good” reasons for the spate of tax charges that have been slapped on the multinationals and for unilaterally rewriting binding contracts and passing orders with retroactive effect, but the result has been to make investors nervous about the operating environment. For the first time since the onset of economic reforms, boardroom discussions are not about specific investments but about the fundamentals of the Indian polity. People are asking generic questions. What is the nature of India’s democracy? How strong are the institutions of the executive, legislature and judiciary? Have these institutions got so hollowed out that there is a power vacuum? And if so, where does power reside? Investors will want satisfactory answers to these questions before they bring India back on to their investment agenda.Investors invest in a country’s future. Whilst they may be influenced by its present they do not invest in it. Nor do they invest on the basis of a comparison between a country’s past and its present. Herein lies our hope. We have messed up the present, but we can still recover the future. To do so the government will have to no doubt first resolve the current crisis. This will not be easy. The PM and FM are confident they can bring the fiscal and current account deficit under control. But unfortunately, the numbers are not adding up and the international market is not helping. Ashok Gulati has estimated, for instance, that the food security bill will cost Rs 2,00,000 crore; the Syrian crisis has roiled the oil market and the petroleum marketing companies are looking at an under-recovery of over Rs 1,50,000 crore unless the prices of petrol and diesel are hiked substantially, and there is uncertainty about the Fed’s “tapering” of asset purchases. However, even if they do meet their targets, it will not be sufficient. They will still need to convince investors that India
is a secure investment environment subject to transparent and impartial due process and constitutional checks and balances. In particular, they
will need to persuade the handful of leaders in key corporations and institutions, whose personal and subjective predilections are the determinants of investment decisions, that the past was an aberration and that while “populist politics” and “good economics” make for uneasy bedfellows, the government is committed to the restoration and strengthening of the pillars of Brand India.
The writer is chairman of Brookings India and senior
This post was originally found here on www.indianexpress.com