Time to Smile: Growth Gains Momentum

Seated in his home at 8 Teen Murti Marg in Lutyens’ Delhi after a hard day at work where he says every day holds a surprise, Power Minister Piyush Goyal talks animatedly about a 22 June meeting with Masayoshi Son, founder and chief executive of Japan’s SoftBank Corp, who, after emerging from a high-level meet with India’s leaders, made a seemingly impromptu announcement that he will pump in over $20 billion for solar projects in the country. Hours earlier, 57-year-old Son had met Prime Minister Narendra Modi and his senior ministerial colleagues to apprise him of his plans here.

In late-2014, Son had said that his business push in India’s renewable energy sector would involve investments to the tune of $10 billion over 10 years. By the time he landed in Delhi to a warm welcome, he was more than charged up, notes Goyal, who helped the Japanese billionaire zero in on a location to set up a joint-venture facility with Taiwan-based Foxconn Technology Group—which makes iPhones for Apple—to make cell phones and other products in India.

“The enthusiasm of such people who have always had second thoughts about investing in India is contagious,” observes Goyal, who was in Raipur, state capital of Chhattisgarh, on 23 June while Son was in Hyderabad, scouting for land for the new facility. Goyal invited him to Chhattisgarh, a coal-rich state where corporates don’t have to lose sleep over reliable access to power. That the state is home to huge deposits of silica also makes it an irresistible proposition for cell phone makers. The SoftBank founder found the invitation tempting, but there was a problem: he had a crucial appointment scheduled in the evening in Delhi with Corporate Affairs Minister Nirmala Sitharaman. Goyal immediately spoke to Sitharaman and got the meeting postponed to the next day. There were hurdles still: Son was travelling on a US- registered chartered plane and it needed a nod from the Civil Aviation Ministry to fly to Raipur. Goyal rang up Civil Aviation Secretary Rajeev Nayan Chaubey to ensure that Son would be in Raipur that evening on time to meet the state’s Chief Minister Raman Singh who had already identified 50 acres for the Japanese hotshot. The result: the Softbank-Foxconn JV plant will likely come up in Naya Raipur, a new city 17 km south-east of Raipur.

“Times they are a changin’,” says Goyal, referring to how frosty desi receptions for overseas investors are a thing of the past. The 51-year-old minister claims that the Indian economy, after going through a few rough patches, now bears all the elements needed for a take-off to touch an annual growth plane of 8-10 per cent. This is the target rate which, Finance Minister Arun Jaitley has said, would pull the country’s most disadvantaged sections out of poverty.

Goyal may be presenting an optimistic picture of Asia’s third-largest economy, which had till recently been battered by a decline in investment, runaway inflation and slow infrastructural growth, to name a few problems, but then highly cautious observers also agree that a rebound is on its way. Bibek Debroy, a member of the NITI Aayog, which has replaced the Planning Commission, isn’t known for making token statements just because he works for the Government. As a key member of the panel that offered a set of proposals on how to restructure the Indian Railways, he has his ear to the ground and is extremely blunt when it comes to telling the truth. He reels out names of rail and road projects that are now off the ground after unwarranted delays under the previous regime. He is, this time around, upbeat that there has been a record growth in laying new rural roads. “People are thinking much differently now about the Indian economy than they thought four months ago,” he proffers, sipping black tea in his new office on Delhi’s busy Parliament Street.

Debroy is on the mark. Sample this: over a month ago, none other than the highly-lionised Reserve Bank of India Governor Raghuram Rajan, who had famously made prescient warnings about the global economic meltdown of 2008, offered a cautious prognosis of the Indian economy, stating categorically that the central bank was under no illusion that “the economy, especially investment, is up and running”. He made the statement after cutting the RBI’s policy rate of interest for a third time this year. By 2 July, though, the Governor appeared to have softened his stance, saying India’s economy may be on course for revival with myriad stalled projects being kickstarted. According to an HSBC report, stalled projects in the country—both government-owned and private—have declined for a fifth consecutive month. Says this report for the quarter ended 30 June 2015: ‘Across sectors, the April to June unstalling activity was largely focused in manufacturing and transport services (primarily roads and rails), which together account for half the stock of stalled projects; not as much in mining, electricity and construction, which account for the other half. Across states, we find that the fall in stalled investment rates has become broad based over time.’ The report notes that since March 2014, projects worth about 2 per cent of GDP were ‘unstalled’. ‘Progressing steadily, they have now reached a critical mass and can potentially start impacting domestic activity notably,’ in the report’s words.

Signs of a rebound do not end there: according to Centre for Monitoring the Indian Economy (CMIE), new investment announcements during the quarter ended 30 June rose 33 per cent to Rs 1.15 lakh crore compared with a year ago. By the figures of India’s Central Statistical Office (CSO), the country’s gross domestic product expanded 7.5 per cent in the first quarter of 2015 over the same period last year. Data compiled by the Organisation for Economic Cooperation and Development (OECD) also showed that the Indian economy saw the ‘strongest growth’ in the first quarter of 2015 among major economies, including China, the US, Germany and Canada.

“From a plumbing stage, we are moving on to a stage of where the water has started flowing through the tap,” says Petroleum Minister Dharmendra Pradhan, capturing the change underway in the national economy. Economists such as Debroy are enthused by the speed with which the Narendra Modi-led Government has built new roads, especially in rural areas and in hitherto largely unconnected areas in northeastern states and in Jammu & Kashmir. According to a Credit Suisse Report published last month, India built 36,883 km of all-weather rural roads connecting 10,990 habitations in the fiscal year that ended on 31 March 2015, the highest rate for constructing new roads since the 2010-2011. ‘We estimate road construction took the share of rural population living in habitations connected by all-weather roads from 76 to 88 per cent. The economically weaker states of Madhya Pradesh, Chhattisgarh, Rajasthan, Uttar Pradesh, Uttarakhand, Bihar, Odisha and West Bengal represent two-thirds of new rural roads built,’ says the report.

Debroy, also an economist of repute, dispels doubts about an economic revival. The NITI Aayog member admits that many people find it unbelievable that investments are increasing while bank credit is not rising. “How can investments be happening? What is increasingly happening is that companies that are sitting on cash are actually using their internal resources to fund investments,” he explains. He adds with a mischievous smile, “The signs are that the investments are beginning to happen. Some investments that were stuck in the pipeline have been unclogged.”

The ruling coalition and several economists are upbeat that the country received $34 billion in foreign direct investment in 2014, a 22 per cent rise from a year earlier, making it the ninth largest recipient of foreign investment last year. India, which has dislodged several countries on 2014’s chart as an FDI gainer, was ranked fifteenth a year earlier, according to recent report by the United Nations Conference on Trade and Development. It is not that most observers expect 10 per cent growth to happen in the blink of an eye, says a Finance Ministry official. “But there are strong rays of hope now. There’s unprecedented enthusiasm and sense of hope among officials and others thanks to swift policy decisions and execution of various programmes to attract investment. I would say the stage is set,” he adds.

And perhaps the tone, too.

The government said in May that the economy grew 7.3 per cent in the last fiscal year, using a new method of calculating GDP. The CSO used a new method to reveal that India’s real or ‘inflation adjusted’ GDP in 2013-14 grew 6.9 per cent instead of the earlier 4.7 per cent and by 5.1 per cent in the year before compared to 4.5 per cent under the earlier calculations. The new method makes India the fastest growing large economy, surpassing even China. Debroy notes, “I think all of us are still trying to get a better understanding of the new GDP series. Contrary to what the media often reports, it is not about the changing base. It is not about switching from GDP at factor cost (which is GDP minus indirect taxes plus subsidies) to GDP at market prices. Those are not issues. The problem is that the source of data is completely different. And all of us are trying to understand what it means. But, whether you use the old GDP series or whether you use the new GDP series, it doesn’t matter. In 2014-15, compared to 2013-14, growth increased by about 0.5 per cent in India. Whether you used the old or new method, in this year (2015-2016), growth will increase by about 1 per cent.”

The rise in FDI numbers is music to the ears of key officials Open spent hours with in the Department of Industrial Policy & Promotion (DIPP), which operates under the Commerce Ministry. DIPP secretary Amitabh Kant is buoyed by the response to the ‘Make in India’ programme that was announced by the Prime Minister in his 2014 Independence Day speech and launched on 25 September that year. The ambitious project is meant to boost India’s domestic manufacturing base, which is expected to contribute 25 per cent to GDP in 2020 from a mere 16 per cent currently. The key takeaway of the Government’s plan is this: we cannot continue to rely on agriculture, which employs more than 50 per cent of India’s working age population and contributes only 16 per cent to the national output. “You have to mechanise agriculture, but also grow manufacturing prowess,” says Railway Minister Suresh Prabhu in his typical tone of urgency. “This is the beginning of a recovery. Each year ahead is going to be better than the previous one,” he hopes.

The ‘Make in India’ programme has indeed created a buzz about the country abroad. But it is not to be misconstrued as a campaign for protectionism, cautions Atul Chaturvedi, joint secretary, DIPP. “On the other hand, we encourage foreign countries to set up manufacturing bases in India as part of an effort to convert the country into a hub for their production and sales,” he adds, emphasising that since the launch of the programme that is close to Prime Minister Modi’s heart, FDI inflows have risen more than 38 per cent between October 2014 and March this year. “The response to the grand and colourful initiative has been tremendous. Which is why [rail technology leader] Bombardier Transportation is making machinery meant for sale in Queensland, Australia, in India. Which is why helicopter cabins for the use of President Barack Obama are made in Hyderabad,” he offers.

“Such a buzz about India has never happened before,” points out Kant who oversaw the spectacular ‘Make in India’ fair held at Hannover in Germany. Kant, who has earned fame earlier for spearheading India’s highly successful ‘Incredible India’ campaign to hardsell the country to high-end global tourists, says, “This is the toughest job of my career.” DIPP has circulated 98 action points to states for “creating an enabling framework for stimulating investment in manufacturing” with deadlines. Kant says the states will be ranked on various categories that include ease of setting up business, registration of property, labour compliance, ease of exiting business, finance and tax issues, inspection reforms and so on. “The ranking should be ready by this month-end,” he says, adding that the idea was to instill a sense of competitive spirit among the states rather than foisting federal recommendations on states. “All such initiatives mean there is no way for our economy to go, but up,” he declares. In fact, without making much hue and cry, officials of various government departments have been working closely— ever since the NDA came to power last year—to make it easy for companies to do business in all parts of India with an eye to promote manufacturing. “The excitement within has been great. Nothing has moved in any government with this kind of speed before,” notes Kant, who gets a stream of visitors at his Udyog Bhavan office, offering to pitch in to help spread the message wider and quicker. While he doesn’t seem to need their service any more, he knows that he has to lay emphasis on the promotion of local manufacturing, especially in 25 identified segments—central to the ‘Make in India’ agenda. These sectors include, among others, auto parts, automobiles, construction, defence manufacturing, ports, oil and gas, pharmaceuticals, wellness, and space. Professor Kunal Sen of Manchester University says that NDA Government’s commitment to supporting manufacturing, big or small, was evident from its ‘revolutionary’ move to dismantle the Inspector Raj for small firms. He compared the decision to the one undertaken for large firms by PV Narasimha Rao in 1991. “Inspections of these firms had to be taken away from the whims and fancies of labour inspectors, and rationalised in such a way that it was not arbitrary and highly discretionary, as it has been for all this while,” he reasons.

The Government has taken more steps to ensure ease of doing business, says Ravinder, a director at DIPP, who seems to have all details on his fingertips. He says that several cumbersome processes for setting up factories have been done away with over the past few months. Restrictions on the use of power lines to factory sites have been relaxed further to help entrepreneurs. “Various redundant processes and physical filing of applications for licences and so on are now history,” he says, offering specifics. Over the past several months, setting up a business in India has become easier than ever before, Ravinder states. “All this has contributed to the growth of the economy so far and will contribute on a great scale in the years to come,” says Kant, formerly chief executive, Delhi-Mumbai Industrial Corridor DMIC, an ambitious infrastructure project to develop smart cities.

Prime Minister Narendra Modi leaves no stone unturned because he knows that this is the last opportunity for India, notes Kant, referring to the mega manufacturing push. “He is interested in big- bang to minutiae,” says the senior Kerala cadre IAS officer, also an art aficionado who is a custodian of several Husains gifted to him by the late legendary painter himself. Interestingly, when Kant, his colleagues and artist-friends met Modi to show him a proposed symbol for the ‘Make in India’ campaign, an elephant, the Prime Minister asked them to return with something that symbolised “wheels of progress”. It was then that the ad men chose the lion of the national emblem and fashioned it with mechanical cogs and wheels.

Modi believes in collective leadership, but he does so by making everybody accountable, says a senior government official. Goyal discloses that the Prime Minister has asked him to rid the country of ‘blackouts’, a pejorative associated with lack of development. Modi wants to ensure that the Government is able to provide everyone with at least the most basic power needs. “The PM wants to replace blackouts with brownouts,” says the Power Minister. “A sector which people looked down upon with cynicism for failing to perform is today focused on delivering 24×7 power to all by 2019 through integrated planning and time-bound execution of defined targets and bold plans,” adds Goyal, referring to new initiatives of the NDA Government.

“Things are moving fast in this government. Nobody has any doubt about it. There is of course a perception that the Government might need to coordinate more with the opposition to get major reform moves cleared,” says a Finance Ministry official. Meanwhile, Ashok Jhunjhunwala, a professor at Indian Institute of Technology Madras, will shortly launch a pilot ‘brownout’ project covering 100,000 homes in Bodh Gaya, Bihar. The Government has also raised its solar power generation capacity addition target by five times to 100,000 MW by 2022, which will entail an investment of around Rs 6 lakh crore.

Various officials that Open spoke to say that the Government is keen to back out-of-the-box thinking to make the most of opportunities to spur growth. Besides, the leadership also wants public sector companies and government agencies to break old habits, embrace new ideas and help with social initiatives that don’t directly generate growth rightaway. For instance, it recently gave a go-ahead to a collaborative project in geo-thermal research suggested by Anil Kakodkar, former head of the country’s nuclear programme, between IIT Jodhpur and the Government. This was a project kept in cold storage by the previous Government, citing no reason. “The Government has been not only putting back on track stalled projects, but has also been doing things at a rapid pace, sometimes within hours,” says a Commerce Ministry official. For his part, Debroy notes that the NDA Government has been very quick at reviving various airport and rail projects with gusto. When TCS veteran Ramadorai brought to the Government’s attention the need for building a dormitory for cancer out-patients in Calcutta, the Centre did not hesitate in clearing the long- pending request promptly.

Finance Minister Arun Jaitley also believes that the investment cycle is slowly turning around with stalled projects being unblocked at a faster pace. The lawyer-politician expects the passage of the Goods and Services Tax (GST)—which will eliminate barrier-point ‘octroi’ taxes and allow hassle-free freight movement across inter-state borders—and reforms of the land acquisition law to accelerate this investment turnaround. “To reinforce the effects of growth on alleviating deprivation, and also to help those that may be left out, we need targeted schemes and policies,” says the Finance Minister, “The Government has been helping the poor by giving them subsidies. But these are poorly targeted and leaky. If we can realise the Government’s JAM—Jan Dhan Aadhaar, Mobile—vision, we can ensure that money goes directly and more quickly into the pockets of the poor, and from the savings we achieve, we can put even more money for the poor.”

The Finance Minister says that he also found the experience with the Direct Benefit Transfer scheme in LPG very encouraging. He says that research by the office of the Chief Economic Advisor shows that about Rs 12,700 crore will be saved this year from the DBT scheme, which eliminates leakages and duplication. “If we can be careful in our design and implementation, we can extend DBT to other commodities, so that the poor get more money to spend for their uplift,” Jaitley says. He also hopes that thanks to the Socio-Economic and Caste Census (SECC) done by the Government, it is now easier to identify the poor. “And in this survey, ‘poor’ was defined beyond the traditional definition of consumption (which is also called one- dimensional poverty) and included other deprivation characteristics like nutrition, education, gender, caste, etcetera,” says the Finance Minister. According to him, the ‘brilliance’ of SECC is that it allows policy planners— based on the deprivation matrix—to target specific needs of the poor and fix them, rather than following a one-size- fits-all approach.

In the financial sector, one of the key challenges for the Government is to create a deep bond market to finance projects with long gestation periods. “It is an irony that commercial banks are now offering loans to such projects, which are bleeding in the process and sitting on huge debt,” says a senior government official. According to a newly published report by UBS, several banks are sitting on a pile of debt thanks to their exposure to many financially stressed companies. Says the report: ‘Our analysis indicates that banks continued to lend to potentially stressed companies over [fiscal years 2012-13 to 2014-15], despite deteriorating cash flow and increasing leverage at the group levels. At least 15-20 per cent of companies we analysed are already categorised as non- performing loans (NPLs) or have been restructured and, therefore, are already part of the banks’ impaired assets.’ A Mumbai-based bank official says that he doesn’t think much “work is being done by the Centre to free public sector banks of bankrolling major infrastructure projects”. He rues, “There’s a lot of inertia, and this government, too, is being status quoist on that front.”

However, a senior Delhi-based government official vouches for the fact that efforts to create a strong bond market are “very much on”. The Government is creating the conditions for it, he says. Jaitley can’t agree more with that statement. “The Government is going to implement the GST and create a common market, reform the land law, ease the costs of doing business and unblock stalled projects,” he says, “All these will improve investment inflow.”

At a time when the ‘Make in India’ programme boasts of breaking several existing barriers and encouraging foreign investors, various ministries, including power, have done well. The power deficit in the country has fallen to its lowest point ever, at 3.6 per cent. Coal output also has seen a record growth in over two decades, going up by 8.3 per cent from a year earlier. The Government has also managed to expand its renewable energy capacity five times this year from last year. The ruling coalition also says it has rapidly brought down transmission and distribution losses in the power sector.

While challenges persist, global confidence in India’s economy continues to rise, as the numbers show. According to a report by global rating firm Standard & Poor’s, weaker global trade and a Chinese economy still weighed down by the property sector suggest slower growth ahead for the Asia-Pacific region—with India an exception. A new report titled ‘Asia-Pacific Could Be Entering A Steady State Of Slower Growth’, says: ‘In India, confidence continues to rise despite concerns about investment quality. Our forecasts of 7.4% growth for 2015 and 8.2% for 2016 are the highest in the region.’ Besides, India has negligible exposure to the Greek crisis, and the knock-on effects of China’s stockmarket crash on India’s equity scene are expected to be small and temporary.

As for the clamour for so-called ‘big bang’ reforms, a senior defence official says that since the leadership in India has to “take care of all political and other sensitivities, they can’t opt for economic shock therapy. That is not to be seen as a weakness, but as a mark of their compassion. Their commitment is sincere and the momentum is picking up fast”.

Clearly, these are good times for billionaire businessmen like Masayoshi Son looking for greener pastures. Notwithstanding trigger-happy cynics, for India, too, there is enough and more scope for cheer.

Arun JaitleyCMIEIndian economyNarendra ModiOECDRaghuram RajanRBI Governorrebound