We need money to grow, but from where?

The Finance Ministry has lowered its growth forecast for the current financial year to 7-7.5% from an earlier prediction of 8.1-8.5%. Politicians quibble about minor differences in the rate of growth of the economy presumably to impress financial institutions, such as the IMF and World Bank, and credit agencies so that they write good things about us, which will encourage foreign investors to invest precious dollars, euros or yens in India. For us living in India such figures have no meaning. Our feel-good depends on our quality of life, on prices of what we buy, on availability of jobs, a smooth delivery of essential services and relief from the tyranny of government thugs. There is some progress but it is slow because the Congress left behind a moribund economy and has blocked all progress in parliament so far. Even at 7% India will be the fastest growing economy in the world with China second at 6.8%, the US at 2.6% and the Euro area growing by 1.5%, while Brazil contracted by 2.5%. For growth to continue millions of jobs have to be created which can only come from new investments. And therein lies the problem. Public sector investment is limited by the need to contain fiscal deficit while the private sector is completely frozen. The reason is that companies borrowed merrily during Congress regime because the Reserve Bank was bullied into holding interest rate at unreasonably low levels, in the face of soaring inflation, and they were given the impression that they would not have to repay their loans. The Reserve Bank has taken a tough stance against public sector banks on restructuring loans, which was a way of keeping bad loans off their books. The rot in the banking system is gradually coming to light and the figures are terrifying, at over Rs 6 trillion. Banks are reluctant to lend until their previous loans are repaid and taking over assets of leveraged companies will not clear outstanding loans because there is no market for stressed assets. Thus, the quality of loans is getting worse. Private sector debt has reached 52% of GDP and External Commercial Borrowing, which is loans in foreign currencies, has increased by 9% of nominal GDP. Only 39% of such loans have been hedged against a fall in the value of the rupee, which is expected to fall to around 70 against the dollar as interest rates rise in the US. That will make it more difficult for companies to service their debt. So, why not increase government spending to kick-start the economy and allow the fiscal deficit to remain at 3.9%? Trouble is that India has one of the highest fiscal deficits in the world, at 7.2%, if central and state government spending are added. Consumer inflation is also high at 5.4% while that in China is at 1.5%, in the US at 0.5% and in the EU area at 0.1%. Why? Because real estate prices increased at 13.7%. Property prices have to come down. But how?