Comment

• FY10 combined fiscal deficit, at about $127 billion, will be roughly about 59% of the aggregate incremental growth in bank deposits, insurance savings, postal savings and employees’ provident fund.

Once risk-free rates start rising, cost of capital across the borrowing chain will start rising. By definition, this is bad for equity and bond markets.

A possible sovereign rating downgrade, whether justified or not, will add to our woes. If conditions in capital and currency markets are not conducive, raising risk and debt capital may not only be expensive, but also difficult.

Foreign portfolio flows chase growth and if markets start worrying about risks to growth, that may slow down with attendant repercussions.

The acceleration in FY03-08 real growth to 8.9% (from 5.4% during FY98-03) was led by three key factors:

1) Normal monsoons, with average 4.9% CAGR in agricultural GDP;

2) A surge in private corporate sector capex, which contributed 33% of incremental GDP; and

3) A more-than-doubling of bank loans.

At this stage of the global economic cycle, private corporate sector capex may remain muted any way (and this can only worsen if capital becomes expensive). To that extent, this has to be replaced by infrastructure spend and there again, the higher cost of capital will be a major drag. If the investment cycle does not reaccelerate, then growth will falter.

Slower growth will lead to a further rise in the fiscal deficit as a percentage of GDP and slow down poverty alleviation; and we run the risk of getting caught in a vicious cycle, as there will be even more pressure to raise allocations to social sector schemes.

It is in your hands to mitigate this risk and possibly turn it into a virtuous cycle. A lot of foreign capital will hit our shores, if confidence in growth and the rupee rise.

A larger part of domestic savings will be available to stoke private sector investment activity, which will be needed to push up capital output ratio.

All of that will accelerate growth, buoy up sentiment, and have a benign impact on capital markets. That will help you to disinvest not only more, but at better prices as well, further helping the nation’s cause.

Akin to the first wave of economic prosperity ushered in by Manmohan Singh’s reforms in 1990s, the decisions you take or fail to take today will decide whether we capitalise on the opportunity staring at us, or lose it.

The economic survey lays down a number of prescriptions that can help address the issues that have been raised in this note, and administering just a few of them will be good enough to put us back into a road of high growth.

Yours faithfully...

Nemkumar and Datar are with institutional brokerage IIFL.