Build through the storm

At the beginning of the year, the economy was on track for growth above 7 per cent. This was a step up from the rate of growth of the last 2 years. But the war in Iran, which started in early February, started disrupting the economy.

But looking back, both the world and India have managed to minimise the disruption.  Whether it was China drawing down on its oil reserves, or India stepping up purchases of Russian oil, as well as oil and gas from the US. Also, the world now has a much larger capacity for solar and wind energy. This meant that, after the initial spikes, oil settled down to manageable levels.  But there were other disruptions too. With its large Indian workforce, the GCC countries, which hosted American bases, were greatly impacted by the retaliatory strikes by Iran. This led to large-scale flight cancellations from India and Indian carriers have had to take circuitous routes to fly to the West. It also disrupted trade with our major partners like the UAE and Saudi Arabia, hitting exports to the GCC. The spike in oil prices and the supply of LPG was quickly felt by consumers. And for a while it seemed there could be a prolonged impact. However, the world economy and the Indian economy proved more resilient than was initially expected.

The main reason for India bouncing back is that, as Business India has long argued, our economy is, and will for years be, a consumption-led economy. We cannot be an export-led economy, a path which the East and South-East Asian nations chose as their growth model. Yes, China did both raise its consumption levels and build a massive export economy. But that was at a time, 40 years ago, when the Western countries happily exported their manufacturing bases and supply chains to China, so that consumers at home could get ultra-low prices, which in turn allowed consumption to grow rapidly without causing inflation. 

Business India has long argued that our consumption levels are so low that even in 10-15 years we won’t be able to catch up with much of Asia, let alone the West. The demand for steel and cement (and other building materials) will keep growing relentlessly as we build more highways, railways (including high-speed trains), irrigation and water supply systems, power stations and energy lines, factories, schools and colleges. And, above all, housing for all. The path is very clear: build, build, and build. The materials used – cement, steel, etc are all locally produced with little import content.

But it is also true that the faster we grow, at least for several more years, imports by many manufacturers will continue to rise. Oil, fertilisers, electronic goods and assemblies, edible oil, copper and gold will continue to be imported. But even now, our service exports are growing faster than imports, partly covering the deficit. 

However, we have an advantage no other country has to the same degree.  Our diaspora continues to remit billions of dollars home. Last year it was about $140 billion. This was more than the FDI and FPI investment put together! The government has recently announced measures giving relief to FPI investors. Sadly, the government continues its stepmotherly treatment of the vast diaspora – apart from token recognition on Bhartiya Pravasi Divas! Ask any NRI how easy and attractive they find it to invest individually in our stock markets. Yet the government does not even think of extending the same capital gains exemptions to them as to FPIs! Our government could double remittances in 5-7 years, with the right measures. This would solve the foreign exchange issue that has dogged us for 70 years!