A Different Stroke

http://www.thehindu.com/business/Economy/article3412445.ece

A different stroke

Two numbers, two tales. What do we make out of them? Is India the happening place? Or, is the country slipping rapidly? The answer is ‘yes' and ‘no' for both! Given the all-pervasive gloom in Europe and the U.S., India still is an attractive destination for many. The sheer weight of the population adds up to this love for India. After a hectic two-day visit to Chennai, where Renault has a production facility in alliance with Nissan, Carlos Tavares, Chief Operating Officer for Renault (who is also a member of the Renault Managing Committee), asserts “India is a very magnetic country.” According to him, “India is a place where things happen and where lot of value can be created.” So saying, Mr. Tavares returns to his base all “re-charged and with even more energy” as he claims. With markets turning bad in Europe, Renault-like companies are out on a de-risk mode and “going aggressively in emerging markets” as Mr. Tavares says. For Renault, RBI (Russia, Brazil and India) are the focus countries. Negative economic numbers, notwithstanding, Mr. Tavares reiterates, “we are bullish on India and here for long-term.”

FDI flow

Well, the views of Mr. Tavares read in tandem with the data released by the Reserve Bank of India on FDI (foreign direct investment) flow into India are silver linings in the sky. A 34 per cent spike in FDI flow to $46.8 billion in 2011-12 sort of reaffirms the ‘Love India' story. The upbeat sentiment on the FDI front is in sharp contrast to the mood of FIIs (foreign institutional investors). FII flow fell by a steep 43 per cent to $16.8 billion in 2011-12. FII flow into Indian global depository receipts (GDRs) and American depository receipts (ADRs), too, has fallen sharply. Given the volatile stock and financial market situation, hot money is not what the country should aim at. The focus should be on FDI. India may be slipping in critical numbers. It is yet shining relatively speaking. Given the global gloom, the challenge lies in converting the ‘relative shine factor' into a permanent advantage for the country. It is easier said than done, however.

Tough times call for tough actions. While the monetary authorities have been swift — be it in dousing the inflationary fire or in stemming the rupee slide — the fiscal bosses have, for a variety of reasons, not been able to move in line with them. Far from correcting a situation, the RBI actions, especially on the interest rate front, seem to have triggered unintended fall-outs on the economy if one were to go by the latest IIP (index of industrial production) numbers. Factory output for March 2012 contracted 3.5 per cent, a sharp fall from the 4.1 per cent growth registered in February and 9.4 per cent growth in March 2011. Predictably, panic buttons have been pressed into service. For the entire 2011-12, the IIP grew just 2.8 per cent as against a growth of 8.3 per cent in the preceding year. Capital goods, mining, manufacturing et al — the decline in production was palpable across the industry canvass.

Avoiding baby-step

With the benefit of hindsight, it could now be argued that the RBI had indeed assessed the ‘coming decline' and avoided the baby-step to lower the repo rate by a surprising 50 basis points. The RBI Governor had justified the big drop on the ground that monetary transmission took a longer time when rates were cut. That the RBI wasn't entirely whole-hearted in its action came out sharply when the monetary authorities kept insisting that there was little leeway for further cuts in the absence of tangible efforts on the fiscal side. The non-alignment of steps between the two managers — monetary and fiscal — is hurting the economy. Time and again in the past, the RBI has reminded the fiscal mandarins of the need for discipline but with little result. The poor IIP numbers could well see the voice of rate cut protagonists raise to a crescendo. That could put the RBI in a spot. With the rising sentiments in favour of a further rate cut, the apex bank is in danger of being portrayed as the villain in the ‘India slide story'. Pulled as it is from all fronts, a battered UPA government is long on a pause mode and quietly getting into the poll mood. Surely, it won't mind the RBI running around with the ‘villain' tag!