There are small signs of optimism in the air. These could have been sparked by the festival season with strong growth in sales of two wheelers, consumer durables, retail etc., RBI’s guidance of a rate pause ahead, the new manufacturing policy, the pick up in the October PMI with rise in new orders, FDI inflow recording high growth in the first eight months, the stabilisation in international food and crude prices over the past few months. Whatever the reason, there is a sense that the run of negativism is touching the trough. Optimism, pessimism are all relative terms and what does this really mean for growth? We know that industry in general has been in doldrums with manufacturing and mining at low points and construction has of course dipped. Yet, with the second and third quarters of this year expected to turn in 7.6-7.7% growth, this spark does have the potential to translate into a better than expected fourth quarter.

The strong underlying growth momentum has been hit hard so far, on one hand, by relentless rate hikes and on the other, by lack of support from the government on policy moves. On both these fronts there has been some movement now. The RBI signalling the possibility of a pause comes as a very big positive. It has of course made it very clear that the pause is hinged on inflation heading downwards, but more importantly the RBI has moved beyond the headline number to measure the trajectory. On all accounts, inflation is heading downwards slowly, though small spikes will remain. A pause therefore is imminent by the fourth quarter – will the rates begin to go down next year? If they do, how fast will the rate cuts be? All these questions will be better answered once we know how the fisc plans to cooperate next year. The problem with the fisc is that it is going to get even more strained, with the focus on subsidies growing in every dimension. What’s worse, these subsidies push the possibility of a 4% inflation level even further away, we are looking at about 6-7% inflation levels through the next year if growth is to be maintained at 7-8% levels. That’s the best we can do with a lazy government that appears to be resigned to such mediocre aims. It appears that the RBI has factored this into its policy now.

The other point of a new manufacturing policy however is not such an optimistic story. The policy says all the right things – simplification of regulations and procedures, exit mechanism, tax incentives, skill initiatives, green audits and so on. But the central focus is on National Investment and Manufacturing Zones (NIMZs) – the simple question that begs to be answered is that even if these NIMZs work out as envisaged, what happens to the rest of the country? If the laws can be avoided for some areas, why can’t all industries and industrial areas be declared NIMZs? Why shouldn’t there be a shift in business regulations and procedures all across the country? Why shouldn’t there be exit mechanisms for all units? Not every state can pull these NIMZs off, more importantly, not every entrepreneur has the capacity to locate in these areas; effectively creating islands of excellence, without even trying to bring the others up to par with the basics, may push growth up a few points for a few years, but why go this route? Why will NIMZs work when SEZs did not? The government has wasted its and everyone’s time.

The issue is that the policy focus is not on the long term at all. If we have to resolve the pressing problem today that impacts the long term potential of the country, it’s the need to kickstart investment in a sustainable fashion. Getting the investment story right would also reduce inflationary pressures. If that is really so difficult, then we should reconcile ourselves to a 7-8% growth maximum being the best that India can do and focus on construction and services.