EDITORIAL

Misallocation of Capital

Sonia-Manmohan regime sets a new record

The Manmohan government has set a record in misallocation of capital, making one wonder if it is deliberately torpedoing the India growth story. With every new announcement it makes, it is sounding the death knell of capital.
Take the latest three announcements in the last seven days. The food act is the first, which will substantially spiral food inflation and prove an unbearable burden for the government. Another is the economically morose idea of the government to stand guarantee for the urban poor for ` 5 lakh home loans. It was such loan guarantees that killed the two big American mortgage institutions, Fannie Mae and Freddie Mac and to a large extent the Lehman Bros. To compound the problem—close on the heels of yet another EMI hike by the banks last week, following the rate readjustment to fight the double digit inflation by the RBI — the government announced a one per cent subsidy on home loans up to ` 15 lakhs. It is not clear as to how it will work or benefit the existing EMI burden. What however is clear is that the government mismanagement of the country’s finances has reached its nadir.
Banking experts say that the mindless largesse of the government has created a solvency crisis for most nationalised banks. For instance the SBI is now demanding ` 60,000 crores from the government to replenish its finances. The heady subsidy regime coupled with the loan waiver schemes to create vote multiplier for the ruling Congress party have brought these nationalised banks on the verge of collapse. For instance, the SBI, three years ago was one of the healthiest banks in the country, with its shares booming in the stock market.
Even Food Minister Sharad Pawar, who is normally reticent about talking on government policies, has come out openly against the right to food scheme being proposed by Sonia Gandhi. In an interview to The Indian Express, he reportedly said, “the food subsidy will be around ` 1.15 to ` 1.20 lakh crore and this will affect the overall economy… the common man has to pay the price… the government is taking on a massive burden.” Pawar also noted that the fuel subsidy will be another ` 1.20 lakh crore, the fertilizer subsidy ` 80,000 crore, the NREGS another ` 40,000 crore and if so much is spent on subsidy what is left for development.
That exactly is the issue. The government is not spending or investing on the future of India. It is callously borrowing from the future and spending as if there is no tomorrow. Examine the costly defence deals it has struck with France, Russia and the US, the deals to buy aircraft for the ailing, cash-starved Air India, the controversial nuclear power plants being imported to help recession hit western economies and the large payoffs to EU and Afghan rehabilitation, we can see that the Manmohan government is splurging and squandering away national wealth. Perhaps because he is not enjoying a national mandate, also because he doesn’t have to answer to anybody, but Sonia Gandhi, who doesn’t anyway care two hoots for the future of India.
Finance Minister Pranab Mukherjee the other day admitted that he is overshooting his budget and to reduce deficit he is likely to venture on a distress sale of PSU shares when the market has hit rock bottom.
Reminding the country of the ridiculous loan melas during Indira Gandhi’s hay days, Manmohan government according to a report is preparing a blueprint for a scheme to stand guarantee for home loans of up to ` 5 lakh for the urban poor. Since the banks are reluctant to comply, the government is promising to pay up to 90 per cent of the loan amount in case of default. The scheme is similar to the one that brought the 2008 mortgage banking collapse in the US. There also mortgage institutions, Fannie Mae and Freddie Mac had their debts guaranteed by the US government, which meant that the banks need not bother or police the borrowers default tendency, or their repaying capacity. In a very narrow sense this guarantee is a good idea, a political gamble, but this has proved to be at the root of the US financial disaster.
Why is all this relevant? Because governments are expected to drive growth, and to drive growth it needs capital and capital is being diverted and misallocated. With a ballooning revenue deficit, the kind of populism—the result of which we have before us in the instances of the US and Europe – can only bring India to the brink.
The politicians will not bring back their black money stashed away in foreign destinations. They will not as we have seen in the case of 2G earn revenue by legitimate means where it can raise capital to spur economic growth. But in the face of inevitable disaster, the government will turn around and tax us, helpless taxpayers, just so that it can stay afloat. We are already paying a heavy price for high and persistent inflation. This has hugely dented our real income and purchasing power. At the macro level this has also affected savings, investment and growth. Under Sonia-Manmohan misrule, household savings have hit a 13-year low to 9.7 per cent of GDP last fiscal (2010- 11). With eyes wide open this government is leading the country to a financial armageddon.?