India Economy

Of rate hikes and debt overhang

J Mulraj | Updated on January 20, 2018


Why the Fed’s loud noises about monetary tightening ended in a whimper

Janet Yellen, head of US Fed, did not raise interest rates citing global concerns. The true reason, as mentioned in the last column, is the whopping $550 trillion overhang in outstanding debt and derivatives. The postponement of a hike merely kicks the can of the break-back debt problem down the road.

The RBI Governor has been under pressure to drop rates but has been circumspect — rightly so. As he cited in a recent CII organised lecture, Brazil grew too fast in 2010, at 7.5 per cent, with low interest rates spurring demand, and is paying the price five years later. Its debt has been downgraded to junk status.

The stock market rallied sharply after Yellen’s silence. If it expects a large cut by Rajan, it is likely to be disappointed.

Demographic dividend

Of the four BRIC countries earlier beloved of foreign investors, only India remains a good story. The India story is based on the demographic dividend of a young population; when the young get jobs, they start spending money (on vehicles, cars, education, clothes, etc.) which boosts the economy, which creates demand for more goods, which encourages entrepreneurs to invest, which creates more jobs, thus becoming  a virtuous cycle of growth.

But will enough jobs be created? Because if they aren’t, the demographic dividend cheque would bounce. Creating jobs is a function of good governance. And recent data shows cause for concern.

India ranks a lowly 142 out of 189 countries in the World Bank’s Ease of Doing Business study. So, a 98 point action plan was identified by the World Bank in consultation with Chief Secretaries of all the States. The recent study to find out the steps States are taking to create an environment welcoming of business was released last week. It shows that there are no States which have achieved more than 75 per cent implementation status.

To appreciate the scale of the problem, India would have a working population of 906 million in 2020, out of a population of 1.3 billion. A little over half our population is engaged in agriculture, which gets only 14 per cent of national income.

So, States are now competing with each other to attract manufacturing and service jobs, and this competition is generating more sensible economic policies.

With good governance, implementing GST and creating a dedicated freight corridor to ease goods movement, some of the bottlenecks can be removed and jobs created.

Then there is technology. This is a two edged sword, for it can both create and destroy jobs.

Last week a Chinese company developed a robot that could write a financial news report. That threatens my job!

But it can also be an enabler. There are today 900 million citizens having a unique ID through Aadhar. NTT DoCoMo has launched a phone with iris recognition, thus enabling a transaction using a phone and verified using Aadhar.

This means there will be a huge move towards a cashless society; 95 per cent of transactions today use cash.

This, in turn, would be a step in the fight against corruption. Banks would need to shape up for these changes. Every mobile phone can become an ATM because, together with mobile wallets, it can be used to borrow money from another person and repay through the mobile wallet, boosting financial inclusion.

The BSE Sensex ended the week at 26,218, up 608.

So, if India gets good governance, if the government manages to push through more economic reforms, especially things like GST, and if we harness the power of technology, the India story remains a great one.

(The author is India Head, Euromoney Conferences)

Published on September 20, 2015

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