Have we got our mojo back?

Of late, there has been a surge of optimism over India’s growth prospects. The unflattering GDP report card for the second quarter was quickly forgotten, thanks to the positive projections from other quarters. The HSBC Composite Output Index, covering manufacturing and services, touched a five-month high in November, outperforming China. Core sector numbers for October suggest that a pick-up in industrial output is under way, with economy watchers expecting factory output figures for October to show a marked improvement. Maruti Suzuki sales were up nearly 20 per cent in November. The IMF’s World Economic Report says that India’s slowdown is bottoming out and that it may outdo other emerging economies. Industrialist Mukesh Ambani summed up the mood when he basically said that the economy had got its mojo — momentum and confidence — back. He should know: the biggest game-changer in recent times is the fall in oil prices to four-year lows, coinciding with exchange rate stability. It has created, to use Japanese financial major Nomura’s description, the conditions for a Goldilocks economy, with the right combination of high growth and low inflation. Recent government statements on land acquisition and environment laws also seem to have boosted sentiment. As Keynes said, investment depends crucially on psychological factors such as confidence, apart from the cost of capital, lower input costs and demand.

But has that confidence fairy arrived? There is still some uncertainty in the air. As the IMF points out, geo-political stability is at risk with falling oil prices squeezing Russia, Iran and other major oil producers. Recession-hit Europe could act as a drag on exports (up 4.7 per cent in dollar terms in April-October), while the US’ recovery is still at a nascent stage. The flood of portfolio flows is not merely an expression of faith in the economy, but also cause for unease; a shift to another country or asset class could have destabilising effects.

The government should create a strategic oil reserve to cope with shocks. It should keep a watch on whether investment picks up not just in large projects but more importantly in the smallscale sector where the effects on growth and employment are immediate. The NPA norm should be relaxed to 180 days for small industry so that a virtuous credit cycle comes into effect. While banks, weighed down by NPAs, are in no position to lend liberally, large companies sitting on a cash stockpile are still undecided on taking the plunge. Gross fixed capital formation is stagnant in absolute terms, the July-September figure of ₹4.9 lakh crore almost the same as that in Q2 of 2013-14. If this does not improve, the onus, besides RBI awarding a rate cut, would lie on the government to step up investment. Railways and road infrastructure are prime candidates. Only when the investment numbers look up can we rest assured that the growth story is for real.