Economic Highlights

New Delhi, 9 January 2009

Economic Package-II

ELECTORAL MOVE, WON’T PEP UP DEMAND

By Shivaji Sarkar

The Government’s second monetary and economic package is unlikely to lift the economy. The prescription is inadequate, faulty and does take into account a holistic view of the situation. Sadly, the package ignores agriculture and labour, the key components of growth.

The package itself is a recognition that the first dosage announced last month has not worked. The steps taken are unimaginative and try to address only the short-term slowdown.  It does not acknowledge that it is recession – long-term slowdown and requires a different approach.

Worse, there is complacency too. The Government seems to have a feeling that it has been able to contain inflation. The truth is far from it. Essential commodities remain expensive and industrial and manufactured items are losing their sheen owing to lack of demand. Both the packages do not address the basic issue. They neither are able to create a demand nor add to the purchasing power – something the situation demands.

Simultaneously, the Reserve Bank’s move of cutting short-term interest rates by one per cent and the cash reserve ratio (the amount banks have to retain as cash reserve) by 0.5 per cent to free Rs 20,000 crore of lendable funds is no good. This is so as it does not take into account that neither the industry has the capacity to borrow more nor the banks are willing to lend more. Previous such moves by RBI have too largely fallen flat.

It should have spurred the Government to delve deeper and chart out the road map for Government investments to spur demand. Instead of announcing packages in a hurry, ostensibly to beat the Lok Sabha election deadline, the Government should have studied the situation in detail. Mere electoral political considerations should not have overshadowed the real concerns.

Besides, the finance part of the economy is unreal. Nor is it possible to depend on this instrument alone to pep up the economy. The Government’s concern had been the real estate sector, exporters, large corporates, and bus and truck makers. They depend on finance to further their business only if there is a demand. That is the vital oversight.

The present package, like last month’s Rs 35,000 crore economic stimulus, is misdirected at whetting demand. Besides, it ignores many essential aspects of the economy. Labour and agriculture have not found any place in both the packages. In short, it ignores the consumers, who can give the real boost to the demand.

Labour is in jitters. Huge job losses – five to 12 lakh as per different Government estimates – have severely affected demand. Jobs are being lost almost everywhere and in most sectors. Alternatives for creating jobs are not seemingly being considered though there is hushed concern. When people are losing jobs how would easier finance and low interest rate help them?

It raises yet another vital question: whether banks, which have become too stingy for obvious concerns of return of the capital, will be able to lend freely? If they do, it is likely to increase their non-productive assets (NPA), euphemism for losses. So freeing up of money by the RBI is of little help at this stage. The banking sector instead of lending has parked Rs 2 lakh crore in Government securities recently.

The real estate sector and corporates have been allowed to access overseas borrowings. It looks like a progressive move. But is fraught with two big “ifs” – global meltdown has made external borrowings difficult and even if funds are available the housing prices have been pegged so unrealistically high that buyers are difficult to find. Unfortunately, no step has been proposed to bring prices down. Possibly it is not an easy task for the political masters in an election year. Both the sectors are known to be hefty donors.

The Government has in fact thrown the nation into yet another crisis. The Reserve Bank has stated that the external debt increased by $ 51.5 billion, 30.4 per cent, to $222 billion at March-end 2008. Most of these are corporate debts and have grave ramifications on the national economy.

Many commercial vehicle makers have temporarily shut production. Raising the depreciation benefit on commercial vehicles to 50 per cent from 15 per cent looks a good move. It is again subject to the demand by the transport sector. When all sectors are facing a slowdown, it is not easy to comprehend how demand will be generated.

Pessimism is seen in the Planning Commission itself, with its Deputy Chairman Montek Singh Ahluwalia saying that “We should expect, from all the global projections that the next year is going to be a very difficult one,” while announcing the measures.

He is right. It calls for drastic measures to boost the essential engine of growth – demand. Importantly, it calls for giving the neglected sectors - agriculture, infrastructure, small and medium enterprises – a major push. This is not only necessary to increase production but also create more jobs, which would empower consumers with disposable cash. The Government is well aware that household consumption pattern is on the decline since October last.

The Government finances are also reaching a critical position as the revenue accruals are coming down. This puts pressure on the crucial decision-making whether to reduce taxes. If the Government does so, it fears its kitty would become thinner. On the other hand, if it does not, it would put pressure on the market, as consumers would be left with little cash for high tax liability.

Despite the pressures, reduction of taxes, including income tax would be pragmatic. Though it would create an immediate problem for the Government, in a year’s time its revenue accrual would also increase as the manufacturing and industrial sectors pick up.  It’s a bitter pill alright but the Government needs to swallow it. 

It must realize that without Government expenditure, the economy cannot be lubricated. Its decision to inject Rs 20,000 crore in an additional plan “in the remaining three months” is in the right direction. However, the Government machineries don’t run that fast. In 2005, Rs 60,000 crore spending plan to improve ports was presented. But the road map for the expenditure is yet to be prepared. The golden quadrilateral highway project was to be completed three years ago. Only the Delhi-Mumbai stretch is nearing completion. Simply put, the Government must think deeper if it is keen to keep the country on the right growth trajectory. ---INFA

 (Copyright, India News and Feature Alliance)