When Home Minister Rajnath Singh was recently taking the delivery of the first Rafale fighters at Bourdeaux, Olivier Andries, chief executive officer, Safran Aircraft Engines, company that manufactures the M88 Rafale engines, went off on a strange tangent. Revealing that his company was investing $150 million in India for training and maintenance, he said: “But we need to make sure that the Indian tax and customs system is not terrorizing us.” Does that remark of the Frenchman reveal a broader, negative perception about India’s investment climate?
In this respect, India slipping 10 notches to 68th position from 58th last year, among 141 countries surveyed by the Global Competitiveness Index (GCI) is a matter of concern. While Asia-Pacific performed better than earlier, and Singapore nudged ahead of the US to become number 1, India fared worse than other BRICS nations.
The GCI, brought out by the reputed World Economic Forum (WEF), is a yardstick for long-term productivity that uses 12 pillars of performance: Institutions; Infrastructure; Information and Communications Technology adoption; Macroeconomic stability; Health; Skills; Product market; Labour market; Financial system; Market size; Business dynamism; and Innovation capability.
While performing well on corporate governance (15th) and shareholder governance (2nd), and high up on market size and renewable energy regulation (3rd), the GCI found India had a poor banking system, which has a high delinquency rate. The GCI rankings also showed information, communication and technology adoption to be weak; health conditions poor and the expectancy of life low. India also was a lowly 107th in respect of skill base despite all the talk of the ‘Skill India’ mission.
An important driver of growth is foreign investment, and India so far has performed well on this front. The international community has been bullish on India, as can be seen by almost doubling of foreign direct investment (FDI) flows from $22.42 billion in 2012-13 to $44.37 billion in 2018-19. However, there was the first signs of slippage as FDI fell for the first time in six years by one per cent from $44.85 billion in 2017-18.
As we enter a period of international slowdown (it is still not as bad as the 2009-10 phase), FDI flows are going to dip; and to add to that, the growth story is going to become weaker. Moody’s Investors Service has just slashed its 2019-20 gross domestic product (GDP) growth forecast to 5.8 per cent from the earlier 6.2 per cent. According to Moody’s, the slowdown is long-term. It started with withdrawal of investment and has now spiraled into a consumption slowdown because of financial stress among rural households and lack of job creation.
NITI Aayog vice chairman Rajiv Kumar has put up a brave front and said he expects growth to pick up in the second half of this fiscal to 7.5 per cent, but most long-term forecasts have rubbished this claim.
The signs of a long-term slowdown and even recession are all over. Goods and Services Tax (GST), which determines the size of the government’s spending, has fallen to a 19-month low of Rs 91,916 crore in September, and it has fallen for the second straight month.
In respect of the target of Rs 1.2 lakh crore a month, GST is falling short month-on-month by 16 per cent to 20 per cent. Government advisors are now accepting that GST is perhaps the main drag. Bibek Debroy, chairman, Prime Minister’s Economic Advisory Council, concedes growth is on a decline, and the fiscal deficit will balloon way past the estimated 3.3 per cent.
Back to the Global Competitiveness Report that comes from a stable that advocates ‘compassionate capitalism: What the media has missed is the chilling forecasts particularly for the less developed countries and the failure of the global economy to meet growth and sustainable development targets. The report notes that while growth is the critical pathway out of poverty and for expanding education, health and nutrition levels, the poorer countries have consistently missed the target of seven per cent growth since 2015.
“As of 2015, 46 per cent of the world’s population struggled to meet basic needs. Hunger is on the rise again and affects one in nine people in the world. The “zero hunger” target set by Goal 2 will almost certainly be missed,” the report said. The report also underlined that a narrow focus on growth without inclusiveness and keeping it environmentally sustainable will ultimately harm long-term productivity.
“Accelerating climate change is already affecting hundreds of millions around the world,” the report said, adding, “In parallel, rising inequality, precarity and lack of social mobility are undermining social cohesion with a growing sense of unfairness, perceived loss of identity and dignity.”
Moody’s cuts GDP forecast
Moody’s Investors Service had slashed its 2019-20 GDP growth forecast for India to 5.8 per cent from 6.2 per cent earlier, saying the Indian economy was experiencing a pronounced slowdown, which is partly related to long-lasting factors