Economic Highlights

New Delhi, 2 June 2012

Fall In Growth

INDIA’S OWN MAKING

By Shivaji Sarkar

Neither tiny Greece nor fledgling Europe nor gasping US is leading the Indian economy downhill. The latest fall in the GDP growth to 5.3 per cent, lowest in nine years, is India’s own making or may be the wrong World Bank-IMF prescriptions accepted without a cross check.

Globalisation can be blamed, but the big question is how much of India is really exposed to the outside world? As per the export figures, it has a miniscule $ 24 billion trade with the rest of the world. The remaining of its GDP is contributed by the domestic economy, which is on the verge of a collapse.

Clearly, the message it gives is that our vision 2020 is an impractical dream. Instead, the country, today and in reality is having the nightmare of 1991, when the country had to sell its gold. Worse, while every parameter indicates we are moving towards the 1991-type crisis, it could perhaps be staring us in a more aggravated way.

Sadly, political wisdom eludes this Government and it depends a lot on the bureaucracy. Every decision, mostly not in the right direction, is suggested by the bureaucrat, who has the least contact with the common man. The pattern of governance needs to change. The country needs political leaders’ and not mere politicians. The UPA government with a stop-gap Prime Minister does not have one person who can lead the country. The few who are in the party are sidelined. The drift is a natural corollary.

The Government has been taking impractical, verging to wrong, decisions continuously. For 13 consequent times it allowed the Reserve Bank to raise interest rates, when these should have been cut. Banks are functioning like financial rogues. They have arbitrarily raised rates of all services as their non-performing assets (NPA) touched an all-time high. Investments have become expensive. It has made transactions costly and led to severe liquidity crunch.

Coupled with it food inflation is zooming in. It has a direct consequence on wages as food items decide the floor wages. It again increases the cost of production for the industry. The government has not taken a single step to contain almost 30 per cent increase in food prices over the last two years. It tries to take solace from the fact that food prices have risen even in the US. But is forgets that the American food prices have increased by 0.5 to 0.75 per cent and over the last three years the raise is not more than one per cent.

The bureaucrats suggest the ministers that food prices are neutralised by revision in dearness allowances. True. But the number of employees in the organised sectors has been dwindling since 2004. More workers are in the unorganised sector and still larger numbers are having casual piecemeal employment. Many others don’t even have employment.

In such a scenario, the purchasing power of an average citizen has reached its nadir. Expenditure estimates showed private consumption has dropped to 6.1 per cent from 6.4 per cent in the last quarter of 2011-12. It shows that people have the least capacity to purchase.  This is testified by the continuous fall in industrial and manufacturing production. Core sector data released on May 31 showed the new fiscal year began on a weak note with output of key infrastructure industries, which have a 38 per cent weight in the industrial production index (IIP), rising only 2.2 per cent.

Manufacturing contracted by 0.3 per cent. Services sector also had a slower expansion at 7.9 per cent down from 8.9 per cent in the previous quarter. A lethal concoction of high interest rates and inflation, plunging currency, high current account and fiscal deficits, loss of investments and business confidence has derailed the economy.

The Government’s announcements of expenditure cuts, largely plan, would affect the nation’s growth further. It had no reason to inaugurate another structure for its income tax department, which has over 20 expensive properties in posh Delhi areas and the NCR townships. The department spends more than it earns. It only shows that the government can do with far less staff in I-T department and save billions of rupees. The government should understand that I-T department should not be given the powers to be extravagant.

Rating agencies Goldman Sachs, Morgan Stanley and Citi have for these reasons downgraded their forecast for the Indian economy to 6 per cent from 8 per cent for the year-end March 2013.

It is not on the policy front alone that the UPA government is tottering. Its taxation policies are the most retrograde. Tax rates are extremely high and exploitative. It has not listened to the advice of bringing down the tax rates to a maximum of 20 per cent and simplifying the procedures. The bureaucrats feel it would make them redundant. It is not only Vodafone that complained of retrograde retrospective taxation policy even the successful software industry has complained of harassment by the tax authorities.

The Government needs to learn that people or corporate earn for themselves and it should expect taxes what they can easily afford. One big rate cannot fit all shoes. If the Government wants to earn more it has to bring down the rates and must not harass people for not paying small part of the taxes.

The tax concept should lubricate the economy and not put obstacles as it has recently done by seizing bank accounts of Kingfisher and some other industries, which are in crisis. The British had introduced an atrocious taxation system to pauperise Indians. The UPA seems to continue the legacy. Its direct tax code (DTC) for this reason remains a retrograde document. The GST is yet another ill-conceived system.

Importantly, the Government has yet to evolve a policy to jack up the rupee. The Reserve Bank has limited options of intervention. It cannot solve the issue as basic fundamentals are weak. India’s trade deficit at $ 13.5 billion has created a dollar crunch. Unless and until it decides to follow an independent path, free from the dollar, for rupee, the free fall would be difficult to stem.

India can grow with a people-friendly Government led by political wizards. Its core remains strong but lack of vision is taking the country on a wavering path. Instead of looking outside and seeking solutions from the World Bank, it must tame its bureaucracy and give its own people the freedom to function if it wants to ensure growth on a long-term continuous basis. ---INFA

(Copyright, India News and Feature Alliance)