"GDP Growth Will Be Well Below Six Per Cent"

How do you rate the person economic scenario of the country?

Certainly it is a grim situation but I have to make it very clear that crisis in Indian economy is of our own making and it is because of the policy of UPA Government, situation became worse. In addition to this, in the last couple of months, the global financial meltdown has added to this mess. Inflation emerged as one of the major factor in the recent past but I think there are many ways to tack let his inflation. The present situation is basically an outcome of supply crunch of products in the essential items on one side and inflation induced by rise in the price of petroleum products on the other. In that situation, there could be other ways of tackling that crisis. In the matter of spike in petroleum prices, situation could have been better managed had the government reduced the taxes on petroleum products, then persuaded the state governments to follow suit. Instead, they have decided to raise the price of petroleum products, which further pushed the inflation up. This is the biggest cardinal mistake this government has made. Another cardinal mistake government made was that together with RBI, it tightened the money supply and raised interest rates, which surely choked the growth.

How will this impact the economy in time to come?

First of all, these steps of the government affected the consumer demand. Secondly, it adversely affected the investment demand as well. The impact of this is that investment in infrastructure development has stopped and a lot of projects have been abandoned and for last couple of months no new project has taken place. This being the reason the index of industrial production has drastically come down to 1.3 per cent and manufacturing declined to 1.1 per cent. Now my point is that this is not an accident or effect of global financial crisis. It is of our own making and this cumulative situation is now choking growth of the country.

What is your view on fiscal defecit?

The government has run huge fiscal deficit but the finance minister has cleverly run it down and kept them off the budget. But nobody is a fool and fiscal deficit has climbed to 8-9 per cent, which is bad news for the economy. Also, another important fact is that this will leave behind lakhs and crores of rupees of unpaid bills for the future government. Another point I want to make is that fiscal deficit tends to translate itself into current[PAGE BREAK]

account deficit. Already, rating agencies have started downgrading India even before global crisis. Foreign exchange reserves are also depleting and have gone down by $30 billion. I can only say that, all of this was building up since last 4-5 months and then the global crisis hit us making the situation grimmer.

Government is saying that this is merely a liquidity crisis. Is that so?

No, not at all. The finance minister has given two shocking statements, that the fundamentals of the economy are strong and that it is merely a liquidity crisis. But my question is: with credit growth at 24 per cent and bank deposits not declining, how has the liquidity crisis arisen? Actually, banks are sitting on cash and not willing to lend. In fact, short-term lending, from where corporate fulfill their working capital needs, has come down drastically. Also, SMEs are getting loans at 17-18 per cent making their survival tougher. Actually, this has broken the cycle of banking and now defaults are bound to happen. Keeping these things in mind, future looks grimmer and fundamentals of economy are weak.

We find that the middle class has been hit by double digit inflation the most. Their EMI has increased by 40 per cent and due to the decline in the stock markets, their assets value has gone down, be it stock or mutual fund. In fact, liquid mutual funds are in real danger and need to be bailed out by the government. So, in this way, it is a 'gloom doom' scenario and the global situation just added to it.

Are the steps taken by the government and RBI to tackle liquidity crunch adequate enough to control the situation?

Certainly not, these efforts are too little to tackle the current situation. In fact, government is not showing the determination to tackle the crisis by coming out with policy decisions. We have given 12 suggestions to the government so that this situation could be sorted out and to tackle the real economic problems as well as industrial problem. In my view, another bad thing happening with the economy is that now excise duty collection has declined and direct tax mop up has also slowed down. Considering this, we are now in a messy situation where growth has declined, borrowing increased and taxes are declining, but the government is saying that this is merely a liquidity crisis making mockery of fiscal responsibility and budget management. We have to resolve problems concerning both money market and real economy. In this, the most important step on the part of government will be to cut its expenditure. [PAGE BREAK]

If you were finance minister, what steps you would have taken to insulate the Indian economy from this global financial crisis?

If I were the finance minister, then I would tackle inflation in a different way. This is a supply side problem and supply of essential items should be given the outmost importance. In fact, during 2000-2001 we faced similar situation where oil prices had shot up from $10 to $40 and dotcom crisis had emerged on the global platform. In addition to this, inflation had touched 8 per cent, but as finance minister in that situation, I didn't ask RBI to cut money supply. Most importantly, we have to keep in mind that it is not impossible to tackle inflation without hampering growth.

Do you expect more CRR cuts?
As far as the present situation is concerned, certainly there could be more cuts in CRR but as long as banks are not lending, situation will not improve. In fact, more than anything else, this is crisis of confidence which government has to take care of.

What signal should India give to the world in the present situation so that it continues to attract foreign investment?

One thing is certain that for next 3 years or so, no money will now come to India from abroad as no money is available with foreign institutions and foreign governments are coming out with trillions of dollar bail-out packages. In this situation, government should look out for other kind of investment such as Resurgent India Bonds for NRIs and PIOs.

What challenges will the future government face considering the current situation?

Challenges would be huge as the future government has to tackle problems of paying unpaid bills of fertilizer subsidy, loan waiver to the farmers, sixth pay commission salary hike and oil bonds issued to the oil [PAGE BREAK]

companies. In addition to this, global crisis will certainly take 3-5 years to get resolved. On the other hand, taxes are also declining and the base of GDP is shrinking, adding to fiscal pressures. Steps would have to be taken to revive the economy. Government has to encourage household savings and we can say we have to repeat steps taken in 2002 to boost economic development.

Will disinvestment of PSUs be a key initiative for garnering funds if you come to power?

Certainly, disinvestment will be helpful as it will provide necessary funding for the economic development. That's why if we come to power, we will obviously opt of disinvestments and it will remain as a funding source.

Do you think something is fishy in the operations of the stock markets?

In the present government corruption is at its peak as there is a huge scandal in wheat import, and the way commodity markets have been managed, there is a huge scandal. Also, stock markets have been manipulated, exchange market has been manipulated and I will not hesitate in saying that corruption is a major issue in economic management.

Should short-selling be banned?

Shorting is a serious problem and I don't know why government has not acted upon it. Our view is that naked short selling and PN notes should be banned immediately and SEBI and the markets should know who is short selling and what is the amount involved and which scrips have been short sold. There should be more transparency. [PAGE BREAK]

If you come to power, would stock markets operations be investigated?

It certainly calls for an inquiry. Also decisions taken by the government call for an inquiry. The glaring example was on 10 October when during the market session CRR cut as well IIP numbers were announced. On that day, market first crashed by 1000 points following Dow, which had crashed by 800-900 points. Interestingly, first CRR cut was announced and when markets were reviving, decline in the IIP numbers were announced, which spooked the markets. RBI could have made announcement well before the markets were opened and at the end of the markets IPP could have been announced. This is a clear case for holding an enquiry.

What according to your assessment, would be the GDP growth rate?

As far as GDP growth is concerned, I will not give a figure, but my assessment is that it will be well below 6 per cent.