Economic Highlights

New Delhi, 3 May 2013

ESCAP On India

GROWTH APPROACH UNTENABLE

By Shivaji Sarkar

The other day, President Pranab Mukherjee lamented that the multi-nationals are not investing in India to “dodge” tax. The very next day, Finance Minister P Chidambaram reduced tax rates, from a whopping 20 per cent to 5 per cent on Government and corporate bond income of foreigners. This only testifies why the multi-nationals are investing at places away from India.

Yes, India has one of the highest tax rates and also a tax system that does not suit the taxpayer. The recent report of Economic and Social Survey of Asia and Pacific (ESCAP) reflects precisely this. It belies the hopes expressed by Prime Minister Manmohan Singh of a higher growth. Instead it notes there is the concept of ‘new normal’ i.e. lower growth in developed economies and adds that Asia-Pacific overall appears to be experiencing it.  

Importantly, in the Indian context it blames the Government for allowing betting on commodity prices, increase in prices, critical infrastructure shortages and rising unemployment. In fact, the ESCAP says that one of the main reasons for rising prices has been betting – futures trading – of food grains and other commodities. Further, it notes that some economies like China are slightly ahead of India, due to the stimulus given to its domestic industries.

India, on the other hand, has not only been on a spree of raising taxes of all sorts but also fares, charges and prices officially to sustain the luxury of its bureaucracy – couched in the omnibus term of fiscal deficit. This has become an excuse for increasing taxes and charges on a continuous basis.

The ESCAP has reservations on this kind of approach as it indicates that such moves only further hinder growth and reduce the capacity of citizens to approach the market for purchases. In simple terms, people’s purchasing power shrinks. This apart, ESCAP is extremely critical when it states that prices are rising “due to upward adjustment of administered prices or removal of subsidies”.

While the UPA Government is elated as headline inflation comes down to 5.96 per cent, ESCAP notes it’s down in many economies, including India, due to a fall in demand (people are unable to buy good) as economic growth slows down. The rising food prices, which according to Food and Agriculture Organisation have reached a global record, are further adding to the people’s woes.

Another problem accosting these nations is high unemployment. India is no exception. Employment growth has decelerated even in Indonesia, China, Hong Kong, Taiwan, New Zealand, South Korea, Philippines and Vietnam.

Job vulnerability has accentuated with increase of informal jobs with no basic protection and access to basic rights. India tops the list with 80 per cent of all workers outside agriculture engaged in informal employment. Nepal and Pakistan follow the trend. Other nations such as Indonesia, Vietnam are no different.

Though ESCAP has given credits for monetary policy changes during the past one year, it castigates the Government’s inability to reduce charges and save the countrymen from supply shocks. The governments, not only in India but across the region, have not been able to contain supply-related shortages. In fact, it does not accept that the shortages are due to production lag, as there is adequate production of commodities, including food grains. The shortages have been aggravated by the increasing financialisation of commodity markets. This also means that ESCAP is blaming futures trading of food grains in India and the region.

Commodity assets managed by financial investors have increased from less than $10 billion in 2002 to $404 billion in June 2012. The presence of financial investors, betting on an increase in fundamental prices aggravates price increases. It means that governments have allowed betting on essential commodities to encourage vested groups causing immense misery on the people.

Both the producers and consumers are being hit as it is causing volatility in the food market. It hurts food producers as the accuracy of medium-term decisions regarding production based on prices is jeopardised.

ESCAP warns that present trend in headlines inflation coming down would be a short-term affair. There is no regulation. In fact, experience in different countries exhibit that regulators, if at all, suit more the violators of the rule than the consumers. It warns price rise will continue to aggravate owing to some of the steps not taken by the US to limit the holdings of financial investors in commodity markets. If the US does it, it would have global impact as other governments could follow suit. But multi-nationals are preventing the Obama administration.

The policy of the US and Europe for bio-fuels is another reason for shortage of food grains. Since the amount of food crops available to produce bio-fuels in the EU is limited, the mandate has an increased concern on food production in other regions. For Europe’s sins Asia and the Pacific are suffering.

Indian efforts to attract more foreign investment may not succeed as the developed world is once again setting expansionary monetary policies. It is causing problems for macro-economic management in Asia and pacific region. The impact of the Great Recession of 2008-09 would continue and may cause severe problems. Insofar as India is concerned it hasn’t been able to chalk out a policy to come out of it.

India’s financial sector is slowly getting into a crisis. The RBI is finding it difficult to counter the ill-effects of onslaught of western economies. Mere policy formulations may not be able to get India investment.

Undeniably, it needs a better climate, reduction of bureaucratisation of the tax-related systems and a congenial atmosphere to pave way not only for foreign but also unbound domestic investment. India has to stop looking at its citizens, business classes and investors with suspicion. Taxes have to be moderated and personal income tax should be abolished to free the economy of the tag of black money.

Indeed, the new policies have to be formulated in view of foreign investment declining by 10 per cent--$399 trillion—in the region. All countries are in competition for investments, and China, Hong Kong, Singapore, Russian Federation and Australia are cornering most of it.

On the other hand, intra-regional FDI inflows have gained importance. Some in the region like ASEAN are having investment by the members themselves. The ASEAN countries have doubled their intra-group FDI flow. It has increased to 40 from 15 per cent in 2000. The only positive is slight increase in remittances by non-residents. But this is just enough for the purpose of current account deficit. In reality, it has not touched the pre-2007 level.

So if India has to sustain its economy, it has to look beyond the cliché. The prescriptions need to have a lot more including reduction in the number of non-productive bureaucracy, their perks, radical changes in tax laws and ushering in real liberalization. The UPA being on its last leg may not do this. The next Government would need to formulate the policies to steer the country ahead. It’s worth a watch. ---INFA

(Copyright, India News and Feature Alliance)