India - planning the road to recovery

(Nipun Mehta is Executive Director & Head - India, SG Private Banking. The views expressed in this column are his own)

By Nipun Mehta

Clearly, whether it is spending on infrastructure, education or healthcare, the subjects lie predominantly in the government domain. This means each spending decision would generally be assessed by the government from a short term or long term ‘benefit’ and from a political point of view.

The National Rural Employment Gurantee Act (NREGA) scheme has clearly had its short term employment and income distribution benefits while at the same time creating infrastructure. One must remember that such schemes have GDP implications.

Purely from a GDP growth point of view, growth through pump priming via such schemes has had its contribution and any government needs to keep an eye on the same. On the other hand, long term investments through spending on education and healthcare are not ‘direct’ GDP contributors. They are a social responsibility which cannot be ignored.

An economic investment need coming out of a slowdown, can really be compared to a farm which has just seen a drought and needs to be brought back to ‘GDP contributing’ health. One needs to obviously look at re-planting trees which will bear long term fruits, but it also needs to recommence generating revenue in the immediate term.

Importantly, India as an economy hasn’t had a significant investment in social spending causes and hence is not in a position to ignore or delay investment in education and healthcare. In comparison, a country like China can probably afford to take a more short- term outlook.

For India which has lagged behind both in infrastructure and social responsibility projects, trying to maintain a more consistent pace between both these priorities is critical once the short-term inconsistencies have leveled out.

At the current juncture, coming out of a slowdown, pump priming will prove to be an ideal solution to get the economy back on the high growth trajectory. However such pump priming has its implications as well in the form of a high fiscal deficit. This in turn can lead to an inflationary spiral and higher interest rates, which can only impact long term growth.

All this also has its implications on exchange rates. Is the Indian economy and the corporate sector robust enough to bear the brunt of high interest rates and a sharply volatile currency? A few companies probably are, most aren’t.

Clearly, over time, there needs to be an acceptable balance created between infrastructure spend on the one side and education and healthcare on the other.

Let us also appreciate that better education and improved healthcare would be meaningless unless there is infrastructure to house the investment and to the bridge distances.

(You can e-mail Nipun Mehta at: nipun.mehta@sgprivasia.com)