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)
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