Opportunity in adversity

Starting mega projects will not only benefit the population, but can also spur the order books of many firms. As basic inputs are cheap, infrastructure will be created at low prices. This is the chance to get more bang for your buck.

Dipen Sheth | Print Edition: January 22, 2009

Dipen ShethGlobal recession has shaken the world's economies, but I believe this is India's moment of truth. If we seize this opportunity, it can catapult our economy into a different orbit altogether. Here's how India can become economically stronger.

Opportunity 1
Low commodity prices: After oil's ignominious fall, the oil import bill— at $150/bbl this could have been 10% of GDP—stands reduced by 70%. Can you imagine the good this will do to our balance of payments problem? The government's finances will also improve as it saves on all the subsidies that would otherwise have to be 'monetised' out of thin air. Falling coal prices mean that steelmaking will become cheaper. Name a commodity—copper, zinc, urea, sulphur, corn or wheat—and you will see it's fallen below all imaginable supports. I think it's time to stimulate demand.

Opportunity 2
Create demand, spend meaningfully: What stops the government from initiating mega projects, such as MRTs and bus corridors, that will benefit a wide cross-section of the population? If there is a public-private partnership in these projects, so much the better. And why not spend on drainage, roads, ports, water supply and public health projects too—a little more effectively and quickly, if you please? All this can spur the order books of construction, capital goods, steel and cement firms. As basic inputs are cheap today, infrastructure will be created at historically low prices. This is the big chance to get more bang for your buck.

Opportunity 3
Nudge consumption: There are at least 300 million middle-class Indians who are willing to spend, but are frightened. Once they see government spending picking up, they'll spend more confidently, improving prospects for sectors like telecom, banking, insurance, FMCG, real estate, healthcare and automobiles. The government's largesse via pay hikes and loan write-offs for farmers has already provided a boost. Won't eliminating small tax loads on basic consumption items make them cheaper and spur demand? Tax reforms, especially for indirect taxes, are far from complete. For example, state-specific taxes on diesel and petrol are holding back a nationally consistent VAT structure.

Opportunity 4
Governance and legislation: Encouraging long-term capital formation is important now that foreign capital is not coming easily. The government should provide stronger incentives for savers to put their money in insurance, infra-bonds and ELSS. Also, labour, land and legal reforms are crying for action. With a Union Budget a sixth of our GDP, it's not surprising that the government is the only real hurdle to progress— and action on its part can spur the economy back to good health.

Dipen Sheth is Head of Research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws.

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