Centre clueless on slowdown
Dr Ashwani Mahajan
THOUGH monsoon session of Parliament has been washed out on the issue of Coal Scam, the Government has suddenly accelerated its speed of so-called economic reforms by increasing diesel prices, limiting subsidy on LPG and opening up multi brand retailing for 51 per cent Foreign Direct Investment (FDI). Hectic political activities have started after the same. For the last more than one year, government has been making efforts to make some policy changes (in the name of economic reforms) for which there is total lack of consensus in the country.
For decade and a half, there has been an era of coalition governments and no single party could implement its own agenda. Dr Manmohan Singh, Finance Minister at the time of beginning of new economic policy and present Prime Minister, who has been the proponent of economic reforms and his team, has been pushing some policy changes, namely opening up of retail trade for foreign investment, Insurance Bill, Pension Bill etc. Beginning with 2005, Planning Commission under the stewardship of Montek Singh Ahluwalia has been advocating for FDI in retail and sponsored studies by ICRIER in 2005 and 2008 for preparing the ground for this policy change. This endeavour of the government got a big blow when an alliance partner of UPA (Trinmool Congress) threatened to sever their relations with the Government on this issue. Now the Trinmool Congress has actually withdrawn its support from the UPA government.
Insurance Bill is also indicator of a big policy change. It is worth remembering that NDA government allowed FDI to the extent of 26 per cent in insurance sector. To bar the Government, to increase this cap, a Bill was passed in the Parliament to this effect. Now to increase the cap of FDI in insurance, legislation is required. Pension Bill is yet another big policy change, which will allow the Government to invest pension funds in the stock market. Various political parties, both in the Government and outside, are opposing both these Bills.
Supporters of economic reforms have been criticising the Government terming this situation as ‘policy paralysis’, and try to blame the Government for not doing enough to implement these policy changes. However, the fact is that the economy is turning from bad to worse due to total mismanagement of the economy. Rate of economic growth grounded at 6 per cent annually, rate of inflation is nearing two digits, rupee is at its historic low, and interest rates are skyrocketing. All these factors are killing the industrial growth, with no chance of revival in near future. Under these circumstances, government and its advisers have been advocating for making policy changes in the guise of economic reforms. International bandwagons have also joined this advocacy. First USA’s magazine The Economist then Times, again a USA’s weekly, and then USA President Barak Obama, in a row joined this chorus, while showing concern about slowdown in Indian economy. Addressing his home constituency in the election year, Barak Obama complained that India is forbidding foreign investment and investment climate is vitiating. However, while saying so he was also pressurising the Indian government to open the economy for USA companies.
No doubt, economic conditions in the country are fast deteriorating; and to cure the problems of the Indian economy, we need urgently an efficient management and not the foreign capital. We find our trade deficit rising at a much faster speed than ever. In 2010-11, our trade deficit was $ 130 billion, which increased to nearly $ 190 billion in 2011-12. Balance of Payment (BoP) deficit has also increased from $ 44 billion to $ 78.4 billion during this period. To fill this gap in BoP, policymakers argue for foreign investment. Thus foreign capital is not for any development; rather it is the compulsion arising out of the mismanagement of the economy. For such a big deficit even huge foreign investment was not sufficient to fill the gap between demand and supply of dollars. And the obvious fallout was, depreciation of rupee by more than 20 per cent in just 4-5 months and rupee declined from 48.7 per $ to 57-58 per US$ between February 2012 and June 2012.
Depression of rupee led to fast increase in prices of imported fuel and raw materials. Industry, which was already reeling under high rates of interest, now came under pressure from rising prices of inputs as well. This naturally led to deceleration in industrial growth, which is nearing zero now, down from 8-9 per cent a year before. On the one hand rising costs in industrial sector were impacting industrial production; increasing rates of interest were responsible for depressing demand for durable consumer goods like cars, electronic products. Demand for housing sector also decelerated. Knowing very well that reduction in rate of interest is a necessary condition for inspiring industrial production and demand, RBI could not gather courage to bring any reduction in rate of interest due to high rate of inflation. Economic world is worried, as they foresee end of an era of growth under these circumstances.
Government is not ready to concede its inefficiency, and puts all the blame on the political conditions, which it says is responsible for stalling FDI in retail and new legislations, which they call economic reform. Sooner we understand better it is that crisis in the economy is not due to stalling of new legislation, but actually due to inefficiency of the Government.
Lack of political support cannot be held responsible, if trade deficit has reached $ 190 billion, industrial growth has flattened to zero or rupee is depreciating. Rise in trade deficit for instance from 130 $billion to 190 $billion between 2010-11 and 2011-12, cannot be due to lack of political cooperation, but is actually because of the fact that in 2011-12, government did not make any effort whatsoever, to restrict rising imports of gold, which increased from $25 billion in 2010-11 to $50 billion in 2011-12. Imports from China are rising exponentially in the past few years and government has failed miserably to control them. Today not only consumer goods, even project goods like power plants, telecom and many other types of equipments, are being imported on large scale from China.
Efficient Management Needed
Coming out of its conventional arguments, like global economic crisis, inevitability of increasing foreign investments and so called economic reforms, government needs to set its house in order. Controlling inflation, reducing rates of interest and restricting imports are the policy alternatives, which government should adopt to put the economy back on the track.