Economic Highlights
New
Delhi, 21 April 2012
Rate Cut & Reforms
WELCOME, NOT ENOUGH
By Shivaji Sarkar
Two good developments took place last week. Finally,
the Reserve Bank of India
decided to reduce interest rates and the Government’s chief economic adviser
Kaushik Basu announced an end to retrograde “reforms.” While one may say
hurrah, the two have not put an end to the gloom. The decisions have come amidst
continuous rise in consumer – retail - price index and a slowdown in the economy.
RBI governor D Subba Rao feels that 0.5 per cent cut
in the interest rate is a small measure to correct many wrongs done in the
recent past. The central bank is not happy with some of the populist schemes such
as MNREGA for valid reasons: it leads to a drain on Government finance, makes
wages dearer and adds further to inflation.
What Basu says is in fact, in tune with Trinamool
Congress leader Mamata Banerjee and the Left parties. The “reforms” in Government
parlance only means further opening up the retail sector to large Indian and
foreign investors, insurance to foreign companies, and a change in labour laws
to suit the needs of the corporate at the cost of the workers. It is good that
it is being put off as such measures would result in further unemployment and
displace many small businessmen.
Importantly, the RBI has virtually admitted that it
has not succeeded in controlling inflation through the lone monetary policy
measure. Had good sense prevailed earlier, at least the contribution made by the
RBI towards the inflationary situation by making investments and business
expenses dearer could have been avoided.
The silver lining, however, is that the RBI itself
eventually realises its mistake. It even takes a part of the responsibility for
the slowdown in industrial and manufacturing growth. Besides, it also admits
that fall in credit off take was also the result of its 13-time rise in
interest rates. The RBI analysis states that fall in Indian banks’ liquidity
resulted because of its tight monetary policy. The statement accepts that this
critical gap was filled up by foreign direct investment.
The RBI statement is a cause for concern as well. If
the liquidity position does not improve, the next eleven months might not see
the expected growth of around seven per cent. The country cannot depend for
long on Foreign Direct Investment (FDI).
The FDI has started shrinking, President of the Confederation
of Indian Industry Adi Godrej cautions.
Worse, the positive environment is not there and brand India image has
got soiled, he states adding that “It has hampered long-term foreign investment.”
Godrej wants reforms on fast track along with governance. However, this is contrary
to what Kaushik Basu has stated.
The big question that emerges is: whether the
scenario is confusing? Not really. Godrej is right to the extent that policy
paralysis on the part of the Government has put a spanner. Those who want to
invest in India
are not confident of either the political environment or business atmosphere.
Policy indecisions and bureaucratic flip-flop on
taxing businesses almost 50 years in retrospect has shaken the confidence of
the business class. The impact of Vodafone decision has deeply affected
business sentiments not only within the country but all investors abroad. Nobody
wants to invest and then fight with tax authorities, who undeniably have
enormous powers to harass.
The Government, under the influence of tax
bureaucrats, is trying to introduce more stringent and retrograde rules. This
sadly encourages bureaucratic discretion and vitiates the business atmosphere,
which the RBI obliquely points out to. In fact, it is a clear hint for the Government
that it needs to correct its policies on taxation. The indirect suggestion is
that it requires simplification of procedures if it wants growth. The growth
and tying of business and financial activities in knots cannot go hand-in-hand.
Another positive aspect of the RBI analysis is that
it has also realised that banking services are becoming expensive and
cumbersome. Therefore, it seeks to take steps to allow the marginalised section
to join the banking system, but these are not enough. Instead, it has made
money transfer, pay order and other transactions expensive. Each of these
affects the growth of the economy and it appears that while the RBI wants to
advise others it is not keen on implementing it for itself.
Expensive banking and other operations have not only
increased the cost of business operations but have also resulted in large funds
being diverted from the banking system. Contrary to popular belief, this is not
black money, but has the potential to siphon those funds from fiscal channels. Undoubtedly,
there is need for some policy correction but nobody seems to be interested.
This, one can say safely, is one of the main reasons
for the poor liquidity of banks. It requires almost Rs 450 lakh crore of
recapitalisation. If the policy framework is not simplified, banking services
not made affordable, repayments not streamlined, then the Indian economy may
once again be heading for the historical Hindu rate of two to three per cent
growth in not so distant a future.
This apart, the monetary policy analysis has also
come down heavily on the populist policies such as MNREGA. It has found that
though it is providing cash to the workforce, it is creating a class of people
who are not contributing to society and is increasing the Government’s fiscal
deficit. On the one hand it is increasing the cost of wages and on the other creating
shortage of workforce in vast areas, particularly rural India.
Such schemes, the monetary policy notes, are creating
higher wages all over. This is turn is triggering a cyclical problem as higher
wages are raising production cost and further inflation. The apprehension
expressed is that if inflation continues in double digit, then all the
projections for growth would remain on paper, unachievable. Further, it
suggests that this is not the time to put in money into failing public sector
undertakings and the Government must keep a check on it.
In all, the problems posed are many, the solutions
simple but the Government unfortunately lacks the political will it should
have. The monetary policy statement in toto calls for an easing of the
environment. Will it, or else growth would remain a hollow word and Finance
Minister Pranab Mukherjee’s effort to add to his coffers would end up in a
dream.
The future looks dreadful. Further loss of Government
revenue would mean higher borrowings. It would create more problems for
governance and liquidity. If the country has to progress it must take decisions
as the monetary policy suggests, simplifying procedures and creating, enabling
and enticing an atmosphere for both industry and business. ---INFA
(Copyright,
India News and Feature Alliance)
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