An agenda for the government to act upon
Srujani Panda / 07 Dec 2011
The economy and the markets are reeling under macro pressures, on the domestic and the international fronts. Factors like rising inflation, higher interest rates and higher input prices hurting corporate performance are already creating tremendous pressure on the
domestic front. Add to this the global scenario – with the US is reeling under fears of a double dip recession, and the European conundrum that is yet to be solved – and you have a scenario where no news is good news.
Key factors that are being looked upon as the root cause of all the misery, at least in the Indian context, are the government’s inaction and its failure to handle the situation aptly, coupled with charges of misgovernance, which have seen many a scam unfold. This is a sentiment that has been voiced not only by the common people on the streets, who face the difficulty of handling the monster of inflation, but also by industry leaders at various fora. They have all been openly sounding out their concerns on this front, asking the government to act now if it is to see the Indian growth story remaining on track. In fact, there are many problems that the government needs to address on an immediate basis, and corrective steps that it needs to take so as to put things back in order.
India is anyways looked upon as a land of multiple agencies and controls, which often work in opposite directions, thereby hampering meaningful growth as it should happen. Take for example, the disconnect between the monetary and fiscal policies. What can exemplify this better than the RBI’s stand of consistently hiking interest rates in a bid to tame inflation. The central banker has clearly not been on the dot, because even after increasing interest rates 13 times in a short span, inflation has not come under control.
There seems to be a lack of anticipatory action on the part of the RBI in handling the problem of inflation. What is really needed is some quick action by the government and the policy makers. Remember that dreadful situation in the 90s, when Asia was hit by a crisis? At that point, it was some quick and futuristic thinking by the government that had helped us out.
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If the government wants to reverse the situation that we are currently in and put the economy back on track to help improve the market sentiment, it is time that it takes some really bold steps and sticks to its stand. Here is an objective analysis of the situation, along with our take on what the government should do to mitigate it.
Political Paralysis
Once a political powerhouse, the UPA-II is currently in complete chaos. This was evident in the way the Anna Hazare protest was handled. It seems that the decision-making authority at the highest level is in a complete mess, and this has put the country in a very critical situation. The major worry is that the rot is no longer ‘episodic’, or confined to some outrageous event now and then. Over time, it has become ‘systemic’, spreading across practically all segments of society, including the governments at the centre and the states, public institutions, the corporate sector, sections of the media and so on. Among other issues, there is widespread deterioration in administrative and public accountability, rampant corruption, disparity in income among various sections of the people, the rising power of criminals in politics and the emergence of small parties as primary factors in determining the survival of multi-party coalitions in power.
“The problem with the current government is that they are not willing to recognise the problem. They feel that everything is all right, while the country is literally on the brink of a collapse, both politically and economically. And the government is not doing anything to sort out the matter. We urge the government to accept the fact that we are going through a crisis. And then, we should all work in unity, so as to put the country back on the growth track”, says Prakash Javdekar, spokesperson, Bharatiya Janata Party.
Parliament Adjourned, Yet Again
The responsibility of improving the economy lies not only with the ruling coalition, but with the opposition as well. They must come up with suggestions that can help in controlling inflation and improving growth. However, instead of doing so, these parties are busy disrupting the Parliament, and creating a chaotic environment to gain some mileage out of it.
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“You are talking about reforms and quick decision making. Let me tell you there are so many bills which are pending for the Winter session of the Parliament. I request all stake holders to please allow the UPA to at least put these bills on for discussion”, says Dr. Ashok Ganguly, MP, Rajya Sabha, and former Chairman, HUL. Ganguly further adds, “Everyone is pressurising that the Lokpal Bill be passed first, but do you really think that the bill is more important than FDI, direct taxes and various other issues. I don’t think so. Of course, it is important, but people must understand that the global economies are falling like a pack of cards, and we need urgent and effective reforms in place to be able to save our economy and the jobs of millions of Indians”.
Pending Reforms
Hit hard by the opposition as well as the civil society, the government could have gained some political points by pressing ahead with important reforms, including the Comprehensive Factories (Amendment) Bill, a new, simpler Labour Laws (Amendment) Bill on the furnishing of returns and maintenance of registers, the Companies Bill, the Forward Contracts (Regulation) Amendment Bill, the Recovery of Debts Due to Banks and Financial Institutions (Amendment) Bill and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill.
Another important issue on the anvil is the Goods and Services Tax (GST) amendments, which is regarding a comprehensive value-added tax (VAT) on goods and services. Once implemented, the provision would result in the reduction of the number of taxes at the central and state levels, a cut in the effective tax rate for many goods, the removal of the current cascading effect of taxes, reduction of transaction costs for taxpayers through simplified tax compliance and increased tax collections due to a wider tax base and better compliance. Being a consumption- based tax, dual GST will result in better revenue collection for states that have a higher consumption of goods and services.
The bill is so crucial for the country that even the Environment Minister, Jairam Ramesh, has advocated it. However, it is still with the Parliamentary Standing Committee, and looking at the developments in the Parliament, the possibility of implementing it from the next fiscal year seems remote. Same is the case with the Direct Tax Code (DTC), which would not only make the taxation system easy for the common people, but would also result in higher collections for the government. Unfortunately, though, the DTC is also stuck with the Parliamentary Standing Committee, with bleak chances of it being passed in the Winter session. “The reforms must take place soon, though we are happy that certain bills are pending, such as those related with Insurance, Provident Fund and so on. These bills are not in the interest of the country”, says Tapan Sen, Left MP and CPI (M) Union Leader.
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“The proposed bill on banking deregulation would seriously harm the country. Imagine, every bank at the global level suffered during the financial crisis, but the Indian banks did not, since they are properly regulated. They are not allowed to gamble so liberally. Now, if you deregulate them, this would have serious implications for the banking sector as a whole”, opines Sen.
On The Fiscal Front
‘Rough waters’ is what the prevailing circumstances can be termed as. Take the case of fiscal deficit, which had been set at 4.6 per cent of the GDP for 2011-12. This was being termed as ambitious from the very beginning, when the budget was announced. We, at DSIJ, had predicted in our Issue No. 21, dt. 9th October, 2011, that the fiscal deficit is likely to be missed by several basis points, and may end at 5.4 per cent of the GDP. We still stand by our estimates. Halfway through the fiscal, the point now is, how can this wide gap be filled?
There are three ways in which the government can bridge the gap of a higher fiscal deficit. These are through domestic borrowings, external borrowings or by printing money. Of course, each of these methods have several drawbacks. For instance, excessive domestic borrowing can exert upward pressure on the interest rates, while external borrowing may result in an external debt crisis. Printing money would invariably lead to higher inflation. Moreover, food inflation is already running high, close to the double digit mark, and printing money will only accentuate the problem.
What we really need the government to do to bring the situation on the fiscal front under control at this point of time is to take a stringent look at its policies going forward. Nothing much can be achieved in this fiscal, as we are already through with a major part of it. “The government is trying its best to keep the budget deficit under control. But to bring those people who are below the poverty line as well as the farmers into the mainline, we need to spend more on generating employment and providing basic infrastructure. As you know, our government waived off substantial amounts of farm credit and also allocated funds towards generating employment through the NREGA, MNREGA, etc., which didn’t help to narrow the budget gap. This year, the government intends to generate about `40000 crore from disinvestment, which will help to improve our balance sheet”, explains Rashid Alvi, Spokesperson, Congress. One way the government could have meet its fiscal targets is by disinvestment. However, many do not view this as an effective measure to control the budget deficit. “The failure of the government on the disinvestment front is known to all. Disinvestment is a primitive tool to divest the government’s stakes to a handful of corporates and offer the public assets of the country on a platter. The failure of the government
on the disinvestment front is welcome”, says Sen.
On The Economic Front
There are three “I’s” that are currently dominating the Indian economy, and none of them are in its favour. The first “I” would definitely be ‘inflation’, which has been stubbornly high since December 2010, at more than nine per cent. The genesis of such a sustained spell of high inflation can be traced back to food inflation, primarily caused by a deficient monsoon in the year 2009 and the resultant lower supply of food grains. At the same time, the economy had started getting back on its feet after the financial crisis of 2008, thereby leading to an increased demand. The confluence of these two factors led to an increase in inflation in general and food inflation in particular, which shot up to the higher 10 levels. Since then, we have already witnessed two normal monsoons and some slowdown
in economic growth, but the situation does not yet seem to have returned to normal. Food inflation is still hovering in the higher single digits.
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The second important factor is ‘investment’ in agriculture. Certain factors suggest that demand pressure will continue to haunt for some time. However, a part of the solution lies in better productivity and investment in the agriculture sector, which will improve supply. In the last few years, investment in agriculture has hovered around two-three per cent of the GDP, and public sector investment is lagging behind. We believe that both public and private investment needs to go up, and should be channelled through agricultural
research.
“We are looking at various steps to achieve improved agricultural output, better infrastructure and lower power tariffs so as to bring the prices of commodities to affordable rates. However, to improve our infrastructure and get better agricultural yield as well as higher
power generation, we need to infuse a lot of funds. Hence, it will take some time to put things in place. We are working to improve all these things, but you cannot expect the results overnight”, Alvi says.
He adds that these factors are in tandem with the market. “I don’t think that the existing pricing system is a problem. It is the whole logistics system and the presence of mediators in the market that is harming both the end customers as well as farmers. We need to improve the overall system, so that farmers can command better prices for their produce”, sums up Alvi.
Another major issue is related with the poor state of logistics and the supply chain. According to some estimates, anywhere between 20-40 per cent of perishable products suffer rot during their journey from the farm to the final consumer. Besides, the institutional logistics (including storage, packaging, grading etc.) framework needs to be revamped. ‘Intermediation’, which is the means of connecting farmers to consumers, has not changed in the last 100 years despite the volumes increasing massively. For example, farmers need to sell their products to commission agents, who often form cartels and indulge in collective bargaining from farmers, only to sell the produce at higher prices later. This drives food prices up for the final consumers. At times, the produce has to pass through five pair of hands before it reaches the final consumers – needless to say, each pair of hands adds an extra cost layer. We believe that it is high time that the government takes initiatives to bring in the required changes for upping the efficiency in logistics. “Moreover, the government has to be clear about the measures and the intentions it has behind it. Now, if you have to import food, then do it, rather than giving mixed signals. It seems that the government is not clear on its policies. It is high time it comes out with an agenda”, says Bimal Jalan, Chairman, Centre for Development Studies, and former Governor, RBI.
According to a thumb rule, every 10 per cent of depreciation in the rupee adds 60-100 basis points of inflation. The rupee has been depreciating very badly over the past couple of months, and this is a great cause of concern. The only way that the government, or rather the RBI, can manage this situation is by intervening in the market. However, the RBI has a clearly stated policy of not intervening
in this situation as yet. According to Subir Gokarn, Deputy Governor, RBI, “The RBI will be sticking to its longheld position of allowing the value of the rupee to be determined by the markets, and will act when market prices are not justified by market fundamentals”.
One of the reasons for such a free fall in the rupee may be the worsening condition in Europe. No one knows how long it will take for Europe to stabilise, and therefore, the RBI has to remain prepared for any eventuality and save on its ammunition. Though the current
USD 314 billion foreign exchange reserves of India shows a very comforting position, analysis shows that almost 48 per cent of these reserves will be required to repay foreign debts over the next one year. Moreover, if we deduct the short term debts, the situation does
not look so comforting.
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Adding to the complication is the problem of dwindling funds inflow from abroad in the form of foreign direct investments (FDIs) and foreign institutional investments (FIIs). Last year till date (as of November 26, 2010), FIIs had invested a record USD 29 billion in Indian equities as compared to the situation this year, when we have witnessed a net outflow of USD 58.85 million. Although FDIs have registered an impressive growth this year, going up by 95 per cent to USD 17.37 billion during April-August, this is still not enough to cover the shortfall in FII inflows. Steps need to be taken to improve the flow of funds from these two key categories into India. In addition
to this, there needs to be a lot of out-of-the-box thinking on the part of policy makers to shore up reserves. Remember the Resurgent India Bonds issued sometime in the past?
An Agenda To Act Upon!
Looking back at the events that have unfolded in the last few months or so, one thing stands out prominently. The government is not ready to accept the very fact that it has failed to implement policies and tackle significant issues in right earnest. The Parliament
continues to be dysfunctional, failing to pass many laws that are required for the economy to take off into the next orbit. Policies and laws like the GST, the DTC and the Lokpal Bill have been languishing for quite some time now. The legislature has gone ahead to
open up the retail sector to FDI, which is facing conflicting views. In a way, the views against FDI participation in retail seem to be on firm ground. The policy would only lead to the killing of the Indian manufacturing sector, with foreign entities literally set to control the
retail trade. The markets will probably be flooded by cheaper imports from China, a case which has already been seen in the western markets. Instead, would it not be a better idea for the government to pursue the development of the Indian manufacturing sector, and
make the domestic retail chains much stronger by creating the necessary infrastructure, like cold storage chains, etc.?
The government and all concerned stakeholders need to begin by recognising the problems that our country is facing today – the crumbling economy, rampant corruption and failed administration, for starters – and then can proceed to put their houses in order.
All these issues are visible in the slowing corporate growth and the economy as a whole.
The Q2 GDP numbers are out, and the Indian economy grew at its slowest pace in the last two years. GDP growth fell to 6.9 per cent in the second quarter of this fiscal. The government needs to put a system into place that can take quick decisions on policy measures.
Besides, now is the time for Prime Minister Manmohan Singh to showcase his exemplary leadership skills. As the Winter session of Parliament has been completely stalled over the FDI issue, the PM must emerge as a true leader and work towards bringing all the stakeholders (including the UPA’s allies, the opposition, the civil society and India Inc.) together to put the economy back on track. Do not forget, he possesses the Midas touch that bailed the country out of an economic crisis in the 90s. He can do so again, provided he is allowed to work without any pressures.
Let’s hope the UPA successfully implements all these measure. If this happens, the country would surely emerge a winner once gain.
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