Govt needs to spell out the new rules of the game for industry, economy

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Monika Halan

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It looked as if the rain would derail the annual Mint Mutual Fund Conclave in Mumbai where every year we debate issues related to the industry and investors. This year since we had the chairman of the Prime Minister’s Economic Advisory Council, Bibek Debroy, giving the keynote, we decided to have a closed-door roundtable where he would interact with some financial sector leaders to have a candid conversation about issues like the real GDP numbers, the budget, the slowdown that industry says is palpable and the changed rulebook of this government. There is worry among employees, investors and the industry on the slowdown in the economy. Wealth managers peg their advice and asset management decisions on potential growth, and if this number is in doubt, the ground moves from under the feet. But as the rain did not keep away the financial sector leaders or the delegates, there was an animated debate. Here are a few takeaways from the conversation and the event.

One, yes, the GDP numbers are lower than 7.5%, but the 4.5% number calculated by former chief economic adviser (CEA) Arvind Subramanian is understating the GDP by at least 200 basis points. The reason for the bad math is the change in the way GDP is calculated, and that process began in 2008. Also, the problem is with the deflator used and not with the real GDP number. The GDP is a nominal number and GDP deflator is used to deflate it. The simple story is that the GDP deflator is not perfect.

Two, the budget disappointed the industry and investors alike, both of who were looking for measures that would clear up the clogged credit pipelines, give an enabling environment for encouraging private sector investment and a higher public spend on infrastructure. But given that the annual budget exercise is no longer about making big bang changes, we’d do well to look for structural reform measures outside of the budget. So, the structural reform is far from over, but the budget is not the place to announce these measures.

Three, the industry is worried that while the rules of the game have changed with this government, what exactly is the new playbook is not clear. The government needs to communicate better and give policy certainty and continuity to the industry. Long-term investment decisions happen in stable policy environments and that has been lacking.

Four, the industry is afraid of how far the economic vigilantism will go. The earlier rules of the game were that there were no rules of the game—deals and power brokers got the business clearances and loans. That is how business was done. To pull that thread will be to trip up the entire system. Investors will find it easier to just buy government securities rather than face the prospect of jail at a future date. If the ecosystem that makes the business happen—creditors, rating agencies, independent directors, accountants—feels unduly threatened, the system begins to freeze. The industry believes that the electoral mandate should give the government the courage to stop worrying about suit-boot-ki-sarkar-like allegations, the trust deficit with the industry needs to get worked out for the investment cycle to begin again.

Five, judicial reforms are essential since they are unable to keep pace with the changed economy. The executive, legislative and judiciary need to work in tandem and one leg of the system cannot be out of sync with the rest.

As an employee, entrepreneur and investor, your takeaway is simply this: the economy is adjusting to a new political rulebook. The government needs to communicate the new rules of the game much better than it does today. The pain on wage growth, liquidity and investment returns will not disappear overnight, the adjustment is going to take some time. The one hope we can all hold onto is this: the government has the capacity to take giant steps as it did in sanitation, public health, financial inclusion and rural electrification in its first term. It now needs to bring that focus on the economy and do it in mission mode. Without growth, there is nothing to redistribute. A contraction at a time when India is poised to reap the biggest population bulge in its young workers will be crippling.

End note: As the clouds poured out their guts over Mumbai, Debroy told the packed hall of mutual fund junkies, at Four Seasons Hotel in Mumbai, that he is a mutual fund investor and likes to make tactical calls between equity and debt. Not a fan of systematic investment plans (SIPs), he believes it is the right time for him to make the shift to equity again. Of course, readers of this column know that what works for Debroy need not work for them—so continue with your SIPs and your chosen asset allocation!

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation



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