In the various messages and opinions analysing Modi's first year in office, what I find most perplexing is that nobody is talking about the obvious!
The first and the biggest point is the REAL RATE OF INTEREST prevailing in the country. The current Base Rate of most PSU Banks in the country, who provide the bulk of the lending in the country is 10%+. Assuming that an average borrower pays 2% above this, this translates to an average lending rate of 12%. This translates to a Real Rate of Interest of 7%+ over the CPI (currently the benchmark for inflation). Against the WPI (the benchmark that I grew up with), it translates to 14.5%+!!!!!!!!! In this globalised world, this leads to a serious competitive handicap for the Indian industrial sector.
If we want to 'Make in India', this is the first thing that needs to be tackled and immediately. We are in the vicious cycle of decreasing domestic consumption, increasing imports due to domestic uncompetitiveness against imports, increasing current account deficit and thence a sliding Rupee - inspite of the incredible bonanza that lady luck provided us in terms of lower crude oil prices. Methinks that keeping interest rates high to prevent a slide of the Rupee is having the opposite effect!
The second point is the complete inability of Indian companies to raise equity and deleverage themselves inspite of India being one of the best performing equity markets in the last 12 months.
There is no way that India can grow at near double digit numbers unless we provide easier access to equity to the SME sector and our budding entrepreneurs.Unfortunately, we have all but closed our capital markets to the SME sector and new enterprises. This used to be real strength of India, when Mr Ambani created Reliance and Mr. Murthy created Infosys on the back of Indian Capital Markets and the Indian Retail Investor - in an era when we had neither the institutional investor, nor the FII. The rules to access capital markets have to be made easier! At the same time, we must bring back retail investor participation too. We have destroyed the infrastructure to sell to retail investors by restricting their quota to a measly 10%. We must abolish the institutional quota and take back the market from the hands of the FIIs. They have neither the ability, nor the inclination to invest in the SME sector or new enterprises. Compulsions of size alone preclude them from these companies! The Indian Retail Investor is the only one who can provide capital to the vast majority of Indian enterprises! The common (wo)man was our strength; she/he can again become our strength; we just need to bring them back!