Economic Highlights

New Delhi, 12 October 2012

Parekh, Tendulkar Reports

LET’S JUNK THESE PLEASE  

By Shivaji Sarkar

Does the latest round of reforms merely amount to getting foreign direct investment (FDI) without even caring for its impact? Sadly, Finance Minister P Chidambaram appears to be saying just this. And, perhaps even considers the “reforms” as a panacea for ushering in an economic boom!

In the same breath, he is concerned about inflation. But his endeavour at repeatedly raising taxes – service and others, besides user charges as suggested by the Vijai Tendulkar committee or the Deepak Parekh committee is doing just the opposite as there is increase in price of every service and commodity.  

Indeed, the country’s tryst with sliding on the Global Hunger Index to 65th position among 80 countries speaks volumes. Had the reforms of the past 20 years led to an impact almost half the population of India would not have been starving or malnourished.

Additionally, the fall in exports by 11 per cent, increase in imports by almost the same level and trade deficit rising to $ 39 billion should be the Finance Minister’s other concerns. These all once again raise the big question whether bringing in FDI can resolve as well. Coupled with this is the constant downgrading of India by most rating agencies. The Standards & Poor’s is the latest to join it. While Chidamabaram may wish it away it remains a major concern for investors, who obviously seek a good return.

The nation’s worry on all these scores is fine. Globally too, the growth projections are being lowered by the International Monetary Fund (IMF) to 3.3 per cent. This lowers India growth to 4.9 per cent against the 12^th Plan target of 8.2 per cent – a modest projection after a near double digit growth till mid 11^th Plan.

Therefore, the Finance Minister’s optimism on FDI pushing up growth appears a bit out of sync. It is difficult to understand how FDI in areas such as insurance or pension funds or even retail could really change the tack of the economy. Clearly, FDI is not supposed to perform a miracle. Investments are fine but how these would translate into money-spinning business is not easy to comprehend.

Falling exports are a natural corollary of the global slowdown. Europeans and Americans do not have money to buy our products. It is also now established that economic growth cannot be pegged to exports. Our competitor China too is suffering. Japan is going into an abyss as large volume of exports to the West has fallen throwing it into turmoil.

Undoubtedly, “Reforms” of 1991 have become a cliché. These have not worked in India except for the initial few years of liberalisation. And that era is virtually over now with creation of new maze of rules that empowers the bureaucracy.

The reforms cannot mean as Parekh who is also HDFC chairman, suggests for raising charges of almost every services he could imagine - rail travel, power tariff, road toll and what not. As he represents the corporate, his concern for profit is natural. But, his committee has unfortunately not spoken of the users’ capacity to pay. Neither does the committee take into account the economic fall out of the recommendations nor does it mull over whether it would really boost growth.

Parekh needs to answer the basic question of how he could even suggest increasing the charges when Chidambaram is worried about controlling inflation. His steps indeed add to prices going up and make it more difficult for the economy to move up!

Likewise, Kelkar committee recommendations for higher gas and diesel prices and cut subsidies (where are these?) would also have a similar impact on inflation. Increasing fertiliser by Rs 50 per tonne would make farming activities more expensive. And this in turn means that food, vegetables and other commodities would become dearer. Odd as it may sound, the Finance Minister and his committees are seemingly working at cross purposes.

There is no denying that fiscal deficit is a major concern. But it cannot be controlled if the Government has an army of non-productive administrative officials, who guzzle up the entire tax revenue. Apparently, the Government’s expenses go on increasing on activities that have little to do with masses or their welfare. Sadly, no committee suggests that the Government should have a leaner bureaucracy, police force and rationalisation of rules and procedures for reduction of operational costs.

The immediate reform i.e. if the Finance Minister is really serious should be on the price front. However, there is no plan whatsoever to reduce or even control it. Worse, this country is also not learning from its adviser, the IMF. President Christine Lagarde in her recommendation to the US warned that raising taxes would only hurt its growth and even opposed spending cuts on welfare activities. India refuses to budge. It is going along with the Parekh and Tendulkar committees suggestion of raising taxes on all services, which to quote Lagarde is a retrograde step.

The argument that FDI would usher in better times and happiness all-round is also flawed. This is so because it has a high cost of investment and higher in terms of repatriation. The way international corporate forges documents--as evidenced by manipulation of investments by Walmart -- it may have even higher social costs. The dream of reducing prices may turn into a nightmare.

If India is pining for growth, taking a hackneyed path would certainly not work. It has to take measures to strengthen the rupee. It will gain only if the economy does well, domestic consumer flocks to the market and the rupee gathers a higher purchasing power. There is thus, need to change the base from industry to agriculture, take hard decisions, simplify procedures and reduce cost of running the Government. But none of this is happening.

Let us not forget that India’s domestic consumer and the economy have a basic strength. It should not be sacrificed at the altar of foreign investment or efforts to boost exports alone. Jobs need to be generated, as inflation has made it tough for employers to engage people with wages steadily rising. The polity should have a wider perspective and diverse approach. It needs to target inflation as its foremost enemy.

The FM should realise that the people are looking for well-meaning reforms and not which corporate or their supporters want. Reforms which are holistic and which would reduce prices, all user charges, create a benevolent atmosphere and add to the purchasing power of the common man. This in turn would give sheen to the rupee. And, all this would be the mantra for a resurgent economy. It’s not difficult if only the basic theory is changed. The country awaits the crucial moment. ---INFA

(Copyright, India News and Feature Alliance)