It’s only fair, then, many small investors are wondering why what was a red hot story until some months ago is suddenly an emerging market pariah. The superficial answer, of course, is that India’s surging inflation—especially in food prices—will slow consumer demand, eat into corporate earnings and eventually slow growth.
But it would be a mistake to attribute the sudden change in investor sentiment to inflation alone. The series of scandals that has hit India over the past several months raises serious questions about governance. That has always been India’s bugbear, but now it’s telling on our economic and social structure.
And governance is what we need to sort out at the earliest because it has a bearing on just about everything, including inflation.
How? Let’s take food inflation, for instance. There’s no doubt that demand for cereals, pulses, fruits and vegetables has gone up. But that’s happened at a time when farm production has either stagnated or actually declined. Between 1990 and 2010, foodgrain production grew at an average of 1.6 per cent compared to the average population growth of 1.9 per cent.
Not surprisingly, the daily per capita availability of foodgrains has shrunk today compared to 1991. What that points to is long years of neglect. Although Five Year plan after Five Year plan paid lip service to boosting farm productivity, the truth is little has happened after the rise and fall of the Green Revolution.
As a result, while our population has exploded, farmers are still eking a living out of small parcels of land, still dependent on monsoon for irrigation and the techniques they have traditionally employed. There has been no attempt to build a modern supply chain that will give farmers direct access to markets, reduce wastage, and give consumers a greater variety of produce at lower prices. Result: the middlemen still pocket most of the profit in the farm value chain. Is it difficult to fix any of these problems? Absolutely not.
But, for starters, one needs governments to focus on that. And I don’t think that’s really happening.
Real estate, especially in Mumbai, is another industry where there’s rampant abuse of political and bureaucratic powers. Town planning has been held up in this country simply because black and white rules would take away discretionary powers from ministers and babus. Which developer then would want to bribe or offer a stake in his project to our political masters?
The 2G scam, cash-for-loan scam and some others that CBI hasn’t even started investigating (in case you are wondering, infrastructure projects are sitting ducks) expose the deep malaise that afflict the country’s governance. And what that does is raise the country risk. With the result, an investor who may have been happy with, say, a 20 percent return on his investment, will want a higher rate of return.
If he can’t get it, he’ll take his money elsewhere. The worst we can do is to believe that governance is not really an issue and continue hoping that we’ll somehow muddle our way through this crisis.
