Economic Highlights

New Delhi, 11 August 2012

Industrial Gloom

TAP AVAILABLE SOLUTIONS

By Shivaji Sarkar

The gloom continues. Industrial production slumps again to minus 1.8 per cent. Jobs are not growing. People are not purchasing. Government finances are coming under pressure. Inflation is showing its fangs in a wider area. The June 2012 consumer – largely food-price inflation is measured at 10.8 per cent. This is over almost 29 per cent inflation on an average during the last three years.

It is contracting private purchases, according to official NSSO figures. People are putting off purchases due to high prices and interest rates. Many people have also seen their wages shrinking and many others losing jobs.

In such a situation it is only natural that the nation sees contraction in manufacturing, capital goods and possibly it would affect the services sector as well in the near future. The industrial growth has turned out to be negative in three of the last four months. The economic growth rate expectation as per the Reserve Bank has shrunk to 6.5 per cent.

The fact that capital goods output shrunk by 28.7 per cent shows that corporates are not investing in assets and machines to expand existing capacity. This is a critical statement. The coporates are lacking confidence in the future growth prospects. They are not making fresh investments which create more jobs and incomes. It in turn generates more demand.

A contraction in capital goods has the reverse effect of dragging down the economy. Poor demand has pulled down the growth of manufacturing sector to 3.2 per cent. The mining sector is in the pits with output growing by only 0.6 per cent – a decline of 1.1 per cent in the first quarter. It has only been contracting during the past few months.

The RBI is often blamed for hawkish monetary policies and high interest rates. It certainly has choked the consumer demand and the corporate are avoiding taking credit. The flip side is that this keeps the banks’ capital safe. Afflicted by large defaults by power sector and real estate companies, the RBI policy has insulated the banks from further defaults by small lenders. The policy by default is acting as a safety device.

It is a moot question whether the RBI should allow banks in the country to face more difficulties in the face of almost Rs 450 lakh crore non-productive assets – NPA. The system is finding mopping up capital difficult. As private insurance companies like Aegon Religare are gobbling up insurers’ investment, now fewer people are investing in insurance and mutual funds. It has shaken the confidence of small investors. They are estimated to have lost a few lakh crore to these fly-by-night operators through supposed legal instruments.

The method of insurance regulator – IRDA – itself is being questioned. It is not just an issue of expense ratio and agent commission. The Government needs to direct all Religare-type companies to refund the principal investments made by both the poor middle and lower middle class investors. These are being “adjusted” on the pleas that their policies have lapsed.

If the investor is shaken, as it is now, the market of insurance cannot be expected to thrive. It may be recalled that insurance business was nationalised in 1950s for such reasons only.

Another shocking issue are the taxes. There is General Anti Avoidance Rule, GAAR, which is to afflict companies such as Vodafone and others. Corporates are demanding stimulus. Clearly, the Government has to streamline GAAR or give it up. It only complicates tax computation. However, no direct stimulus in tax terms is needed to be given to the corporate. Instead, the Government should lower the individual income-tax (I-T) rates so that more money is available to individuals. This would in fact be an indirect stimulus to corporate.

Obviously, as more money would be available to the people they would be able to flock the market to boost demands. Even otherwise tax rates need to be lowered and tailored to inflation rates. Indians pay high taxes – an average salaried employee loses two to three months wages as taxes. Is this not high?

As a stimulus the Government needs to raise the exemption limit to Rs 10 lakh and put a maximum rate of not more than 20 per cent. This would release a large sum for the market to thrive. As purchases increase, it is likely that inflation would also take a downward turn and Government revenues would increase. Let us think out of the box of bureaucratic wisdom, which the new Finance Minister Chidambaram is capable of.

This would blunt the criticism of Moody’s Analytics, which cut the growth forecast to 5.5 per cent – one per cent lower than the RBI. Some of its advice in its “India Outlook: Below Potential” needs to be pondered over. The agency, a division of Moody’s corporation, said the economic slowdown was broad based and sharper than anticipated and deeply entrenched across all sectors.

Recall, in June, Standard & Poors like Moody’s blamed the leadership in the Government for the shaky economy. In short, the economy cannot and should not be left to be managed by the bureaucrats alone. It has to be managed with political wisdom which the new Finance Minister has to show.

The country also needs to have a look at 1991 Forex crisis. Despite such a crisis the domestic sector was hit the least then. Its small scale industries had cushioned the impact successfully. It is over now as small industries all over the country are vanishing. India is increasingly dependent on foreign capital. The real fear is what will happen to our balance of payments should the money exit at this rate (fall of rupee against dollar despite a weak US economy).

It is time we revert to strengthen our own industries, give a protection to it and save it from predatory moves of large foreign conglomerates. The economy needs a new diagnosis. It needs some mix of indigenous input to instil confidence in its people and corporate.

The Government may hold meetings with leaders of political leaders to understand various dimensions of different regional aspirations. Solutions may be worked out accordingly. It should veer round how Indian corporate sitting over Rs 1 lakh crore of capital at the least is encouraged to invest. There are ways to rescue the economy. As a nation we all need to act. ---INFA

(Copyright, India News and Feature Alliance)