Year 2014 not likely to be good for business in India

by rawemotions Fri Nov 29, 2013 12:41 pm

http://www.firstpost.com/business/modi-or-no-modi-2014-is-not-good-news-for-business-1238021.html

Excerpts
The problem is that many of the changes made by the UPA have created long-term structural rigidities in the economy that will not be easily overcome. The problems the economy faces now have their roots in the UPA’s welfarist and interventionist policies, and they will not be ameliorated just by installing a new government.
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The labour market, for example, has grown more rigid under UPA. Not only has the labour law not been eased, but the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), where wages are indexed to inflation, has created a permanent wage cost escalator for everybody. MNREGA wages now put a floor under rural wages, and the indexation makes this base a moving target every year. As higher wages chase higher wage-goods, rural inflation (and also the linked urban one) will be on a permanent escalator. For industry, this means faster shifts away from labour usage – which can’t be good for employment growth.
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The broader point one is getting at is simple: all important factor markets – land and labour – and several sectors (agriculture, energy, aviation, telecom, infrastrcuture) have been distorted so much over the last 10 years by government interference that inflation and market rigidities have become more structural in nature. This means, inflation is not going to be easily tamed, and untamed inflation is the biggest roadblock to growth. Consider investment in infrastructure – which has been lagging seriously in the last few years. Conventional wisdom says it was due to delayed environmental clearances, but that is not the whole story. The more important reason is inflation. When inflation is rising close to double-digits for years, almost no infrastructure project, with long-gestations and low rates of return, can be viable. Inflation has been out of control for more than three years now. Actually, it has never been under control since 2008, but thanks to the global financial crisis it seemed to magically disappear in 2009 (the price index turned negative in mid-2009) till it reappeared with renewed vigour in 2010-11. The net result is we now have inflation and inflationary expectations on steroids.