Home arrow Archives arrow Economic Highlights arrow Economic Highlights-2011 arrow 2011-2012 Budget Jugglery:WILL IT SET INDEPENDENT PATH?, by Shivaji Sarkar, 12 Feb, 11
 
Home
News and Features
INFA Digest
Parliament Spotlight
Dossiers
Publications
Journalism Awards
Archives
RSS
 
 
 
 
 
 
2011-2012 Budget Jugglery:WILL IT SET INDEPENDENT PATH?, by Shivaji Sarkar, 12 Feb, 11 Print E-mail

Economic Highlights

New Delhi, 12 February 2011

2011-2012 Budget Jugglery

WILL IT SET INDEPENDENT PATH?

By Shivaji Sarkar

It is the most crucial time. Preparing a budget amid global and domestic crisis is a challenging task for the Finance Minister. Especially amid news of more and more scams coming out which are even touching the portals of the Prime Minister’s Office.

An obvious question agitating everybody is whether or not to go with the public-private partnership model. The 2G or Antrix Corporation-Devas scams have started a new thinking process. The loss of thousands of crores is not the only issue. What disturbs is whether we should go back to the era of public sector monopoly or do we need to learn from the failures of the mighty US.

Indeed, the Government cannot say that they are not aware of the ways that are bleeding the system. This is the usual refrain of any crisis hit nation be it the US or India. Recall, the Financial Crisis Inquiry Commission (FCIC) set up by the American Government nailed the lie on 28 January. The FCIC headed by Phil Angelides came to the conclusion that the crisis was in the knowledge of the US Government long before it became public knowledge leading to a global crisis, Euro zone meltdown and severe inflationary situation.

Wall Street bankers, regulators, Government officials and even home owners all share the blame for the 2008 crisis, according to the scathing US official investigation into the meltdown. The 545-page FCIC report reads like a financial thriller in which there are very few heroes. One chapter on the fiasco is entitled simply "The Madness".

So far, the 2008 financial crisis has led to few prosecutions in the US. The Commission concluded that the catastrophe was avoidable and caused by: Widespread failures in financial regulation, including the Federal Reserve's blunder to stem the "tide of toxic mortgages"; dramatic breakdowns in corporate governance, with too many firms acting recklessly and taking on too much risk.

This not all. Excessive borrowing and risk by households and Wall Street; policy-makers who were ill-prepared for the crisis and lacked a "full understanding of the financial system they oversaw".  Systemic breaches of accountability and ethics at all levels were the other reasons. Besides, mortgage-holders took out loans they never intended to pay; lenders made loans they knew the borrowers could not afford.

The last, systemic breaches, is the most significant observation. It has relevance to India’s situation. The other similarity is in continuously ignoring the potential threat. In the Indian context, the Reserve Bank needs to be credited for being orthodox and tightening the noose within its ambit unlike the US Federal Reserve, which ignored all potential threats for decades.

But the Reserve Bank has its limitations and cannot interfere in Government policy formulations that have made committing a lapse easy. Whereby, ethics is no more a concern for those sitting in the portals of power. Gradual diminution of Air India is an example of how the Chief of the Civil Aviation Ministry could turn a profit making organisation into a sinking abyss.

This is what the FCIC also states about the nexus between corporate and policy makers that led to the severe crisis wherein “It would take generations to come out of it”. Breakdown in corporate governance is not a monopoly of the US. India is also witnessing it in many spheres. Satyam is a blatant recent example. But the recent SEBI decision banning one of the biggest companies from trading its shares and the Radia tapes suggest the malaise is deeper.

Each of these activities led to loss of Government revenue and procedural problems that affect Government departments, financial institutions and the banking systems. These further add to the problem of the Finance Minister. Would he be able to make a simple budgetary statement or will he have to initiate a complex set of actions? Neither way is easy for him. If he tightens the noose, it might further lead to reduction of consumer spending and consequent fall in industrial production, as performing assets of the banks.

There are signs that the current account deficit might further increase as the Egyptian crisis would likely increase fuel bills, now touching almost $ 100 per barrel and lead to a further loss of exports. Some FMCG firms like Dabur, Marico and Asian Paints have stopped their Egyptian operations.

If the political unrest in Egypt spreads to other parts of the Middle East and North Africa it would have adverse implications for India’s current account deficit, according to economist Indira Makhijani of the Citi group. As the Middle East and North Africa account for 60% of India’s oil imports and 22.4% of exports, though Egypt’s share is only 0.5%.

Remittances are also likely to be hit as Indian workers face retrenchment. The Dubai crisis made thousands come back. The US and Euro zone mess also led to the return of many thousand families. Further, the widespread dissatisfaction against high levels of inflation, unemployment, poverty, and autocratic political systems is reverberating to other parts of the Arab world including Algeria, Jordan, Yemen and Syria. It could lead to loss of jobs for Indian workers along-with hike in the fuel import bill.

While remittance flows from Egypt were negligible at $3.7 million in 2010, total remittances from Middle Eastern economies are estimated at $26 billion or 48% of India’s total remittance inflows of $52 billion. Payments from the West have also significantly come down during the last two years.

The Government is wary that it might reduce the foreign exchange reserve. With increasing stimulus by Barack Obama’s Administration and similar steps by the European Union, there is a further threat of reduction in FDI flows. Moderation is being seen in FII flows as well.

If the crisis deepens in the Middle East with little sign of change in the Western situation, the Finance Minister has to carefully chart his course to set an independent path to boost the Indian economy. Following the Gandhian path of self-sufficiency is not easy but succumbing to Western pressure and scam-tainted corporates would be difficult.

The central budget for 2011-12 has to be an unique balancing between international and domestic scenario, taming the corporate, moderating the taxes and looking for a growth process. A feat indeed! ---- INFA

(Copyright, India News and Feature Alliance)

< Previous   Next >
 
   
     
 
 
  Mambo powered by Best-IT