Economic Highlights

New Delhi, 6 September 2013

Rapid Fire Bills & RBI Chief

LITTLE IMPACT ON ECONOMY, RUPEE

By Shivaji Sarkar

It has been a week of rapid fire legislation – Food Security Bill, Land Acquisition Bill and Pension Bill. This apart, simultaneously there is a change of guard at the Reserve Bank of India. An unyielding D Subba Rao is replaced by the Prime Minister’s blue-eyed boy Raghuram G Rajan as the new RBI governor.

Would it make any difference to the economy? The Government would let the people believe that the rapid fire “reforms” would usher in a new economic regime – FDI would flow in, the rupee would make an upward movement, people would be satisfied and the US would listen to Prime Minister Manmohan Singh’s pleas at the G-20 Summit for an orderly exit of its easy loan policy to soften the blow to the Indian economy.

It seems India is in a state of utopia where all its wishes would be fulfilled. At home, it may have a not so wise an Opposition party to stall it but internationally the G-20 has not helped the emerging economies much. Their moves have led to continuous slowdown for no fault of the emerging economies. Each of their previous moves had led to adverse impact, spiraling inflation, currency devaluation and rise in unemployment.

The US had not listened to the poorer economies earlier and is unlikely to do so. It has unleashed a war on currencies because devaluation against the dollar helps it scout for goods at cheaper prices the world over. Manmohan Singh may use it as a good campaign plot at home but the nation doesn’t gain by mere rhetoric. And, the G-20 Summit is unlikely to bail out India.

How is the Pension Bill going to help? It has put a 26 per cent cap on foreign investments. Rightly so. In reality, pension funds are a liability. They invest very small sums, if at all. These generate funds in the area of their operation and repatriate more than invest. Besides, it allows large playground for short-term investments by foreign institutional investors (FII). None of it contributes to the betterment of the economy. If the Government was keen on welfare of the workers, the mandate of Employees Provident Fund Organisation could have been widened to include those in the unorganized sector.

Therefore, it is difficult to understand how a pension fund would help rejuvenate the economy. Risk factors are greater. In the 2008 Lehman crash, the worst to suffer was the US giant AIG – both in the business of insurance and pension. There were hundreds of other US pension funds that crashed and precious deposits of poor Americans were lost forever. In fact, pension funds are no better than the ponzy scheme Sharadha type chit funds. These simply don’t help the economy.

On another front, high hope is generated as Raghuram Rajan takes over the reins of RBI. He is known for his famous quote: “Physicians do not need to know the behaviour of every molecule to predict how a gas will behave under pressure. Economists cannot be so sanguine”. Very apt. The day he takes over, the RBI allows companies to invest up to 400 per cent of its net worth raised through external commercial borrowings (ECB) abroad.

Last month, the RBI had reduced overseas direct investment (ODI) to 100 per cent amid a tight economic and difficult state of the rupee. Economy has only worsened. The reversal would cause additional outgo of foreign exchange and is likely to further impact the health of the rupee. The net India’s International Investment Position (IIP) as on March-end 2013 stood at (-) US $307.3 billion, implying that our external liabilities are more than the external assets.

Rajan’s announcement to allow banks to open branches at will, subsidizing NRI deposits would only add to the woes of the banks and its customers. Banks have Rs 450 lakh crore NPA – losses. They are increasing every service charge and have made Indian banks one of the most expensive.

The NRI deposits are in dollars and have to be repaid in foreign currency. The forex swaps cost around 7 per cent. It increases cost of the dollar deposits to about 12.73 per cent. The RBI now has offered to provide swaps of 3.5 per cent to banks to make it attractive. The cost would be transferred to the Government exchequer. It is difficult to understand the wisdom of such a policy or how it can strengthen the rupee, which Rajan says is his priority.

Even otherwise it is too much to expect of the RBI. It has a limited role of deciding monetary policies. Events of the past two years have shown that tightening interest rates, repo rates or some other measures that it is empowered to take, have limited impact on spiraling inflation or overall slowdown of manufacturing and industrial sectors. It has little control over the speculative commodity dealings and betting of food grains. Rajan would be hamstrung.

The nation should not expect too much of the cosmetic changes in the RBI but it needs to guard the conservative policies it has been pursuing. That had saved the financial system from collapsing-- something the US couldn’t do. 

The Food Security Bill has not helped in terms of international investment. It has busted the myth India had created about a burgeoning market and middle class. Instead, the Bill has exposed the reality that there is nothing so bright. It is likely to create a further disinterest among foreign investors. Additionally, it exposes another factor-- that India is still not prepared to give infrastructure the needed boost. High food subsidies have sent grim signals of India being in a cash crunch and that it may not take adequate steps amid increasing non-productive Government expenditure.

Likewise, the Land Acquisition Bill is pleasing none. The investor feels he would have to shell out too much to acquire land and the farmer feels he is getting too less and is being deprived of his livelihood. There are many controversial clauses – a legacy of the 1894 Act – and should have been sent back for further review. It doesn’t even provide for a land bank, a necessity for the industry.

Overall, the rapid fire legislations are good political gimmick, unlikely to bring in much of investments or help the rupee gain. Who is the Government trying to fool? --- INFA

(Copyright, India News and Feature Alliance)