The price of inaction

Fertiliser and food subsidies have been mismanaged, allowing vast sums of money to be siphoned off.

At a regional CII conference recently, the conclusion was that despite all the internal and external economic crises, the Indian economic parameters will improve in six months. Optimism is a good managerial virtue in business.

In its absence the sense of being hemmed in by economic negatives could lead to decision paralysis and decline.

The paralysis of ideas, decisions and action in the Central government is too apparent. Corruption is all-pervasive. The bureaucracy is either unwilling to take decisions for fear of future retribution, or is busy guarding its turf and profiting from the large expenditure budgets. The Central government’s fiscal deficit is at levels not seen since 1991. The balance of payments deficit on current account has crossed the mark of extreme danger of around 3 per cent to 4 per cent.

Inflation has continued, especially of staples. Industrial production is also badly hit. The prognosis for the monsoon is not good and this will affect agricultural production adversely.

Interest rates remain high. The rupee has reached Rs 56 to the dollar and in a few weeks could go even higher. Profits of companies will be hit. Companies that raised external borrowings when the rupee was at Rs 43 or a little more will now have foreign debts rising in rupees by over 25 per cent and also interest rates. A silver lining is that a poor monsoon will reduce the vast sums government has tied up in foodgrain stocks.

It is not as if business confidence is high; it is much lower than it has been for a long time. Export markets are depressed. For example the Reliance company refinery had Europe as its best market. Both quantities and prices are down. The Chinese economy is slowing. Of course the low rupee value to the dollar will make our exports more competitive but will it raise exports?

In this situation the lack of action over the years by this government has created problems that cannot be dealt with now but are at the root of some of our poor macroeconomic factors. For years government has dithered on allowing consumer prices for petrol and diesel to be related to costs and oil refining companies’ accumulated large deficits. These add to the government deficit.

Fertiliser and food subsidies have been mismanaged allowing vast sums to be siphoned off or go into the hands of the wrong people. Government’s well-meant social welfare schemes have been almost deliberately designed to allow thousands of crores to be stolen by bureaucrats and others.

State electricity regulatory commissions have not allowed legitimate expenses to be passed on to consumers. These enterprises lost around Rs 1.2 lakh crore last year and the accumulations are humongous. These are only some of the items that have made for the large Central deficits and mounting state government debts.

Volatile money

Our agreement with Mauritius to allow investments from there to be charged as per Mauritius taxes, has meant that all short term capital gains in India that are subject to 20 per cent tax, go tax free because Mauritius has no capital gains tax. This has led to most of foreign institutional investments into India coming from Mauritius. It has also led to a thriving round tripping of havala funds of Indian politicians, bureaucrats and businessmen, from being laundered in Indian stock markets.

This volatile money has led to volatile stock prices and a volatile rupee. It is not surprising that the beneficiaries who are also decision-makers, do no want this route closed. Today with most of our foreign exchange reserves made up with this kind of volatile funds, the country cannot close it.
Rationalising subsidies and reducing the theft calls for administrative reforms. The UID is expected to target beneficiaries and cut cheating. But its use for the purpose is still some years away.

Meanwhile there seems to be little attempt to improve targeting. Subsidies on oil products have to be reduced but this government is a prisoner of Mamata Banerjee and others who want the subsidies on petrol and oil to continue. The cheap kerosene for the poor is stolen to a great extent for adulterating diesel for lorries.

Labour law reform is an old chestnut that is taboo to all political parties. Its absence prevents taking advantage of our expertise in products like garments, toys and leather which are labour intensive. Foreign direct investment needs opening up some sectors and less uncertainty on regulation and taxation. The European economy will take two years if not more to stabilise. The USA has to bring domestic and public savings up, which it will not do till the vast stimulus packages have helped the economy to recover. Meanwhile oil prices are high and will not come down by much since Japan is now fully dependent on oil imports.  

Our ruling politicians are inept and unwilling to take coordinated action. State governments are not any different. Karnataka has the millstone of the last chief minister who has prevented any major initiatives by his successor. Maharashtra is locked into inaction by a fledgling chief minister. Most other states are no different.  

Our economy is besieged on domestic and external fronts, by our inactions and by global events. It is clear that the optimism about an early recovery of the Indian economy is completely misplaced.

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