I have not studied in Harvard or MIT. I never worked with the World Bank or the IMF. I have studied Managerial Economics during my PG program. This is my background in economics – which is little academically. Consider this as the views of a layman who works hard to earn a living unlike our “living in the lap of luxury” politicians.
What is the need for reviewing the current macro economic situation? Our PM Mr. Manmohan Singh took a decision to appoint Mr. Raghuram Rajan as the the Reserve Bank Governor. The term is for three years. Previously, he was working as the Chief Economic Advisor to the Prime Minister. He is educated in world premier institutes like the IIT, the IIM and the MIT and has worked with the IMF. Is it possible for a well educated person like him to rescue Indian Economy using his magic wand? His credit boasts of the prediction of the 2008 US recession in 2005. If he can do the same wonders here, it will be good for the country. Otherwise his appointment will be the third major tragedy of the decade. The other two being the re-electing of UPA and Mr. Manmohan Singh as PM and the induction of Montek Singh Ahluwalia as the Deputy Chairman of Planning Commission.
As a person working within the private sector, I know what is happening in our industry and am also closely watching what is happening to other industries. I strongly believe that the current financial crisis and so called recession is a Government Sponsored one. Why?
Mr. Manmohan Singh started a rescue operation in 1991 wherein our gold reserve had been pledged by Chandrasekhar government for getting a loan from the Bank of England, the IMF and the Union Bank of Switzerland for increasing our Foreign Exchange Reserves. Now one full revolution has completed (as the cliche goes). After 22 years, are we are again in the same bleak macro economic situation as there are rumours that our FM is planning for such an action again? How has it happened? What can be the reasons?
Paul Krugman (Nobel Prize winner) in his book END THIS DEPRESSION NOW clearly advocated for the intervention of government when there is a recession. According to him, the government should spend more during recession times instead of what recommended by the World Bank and the IMF, and practised incorrectly during the recession time in Greece, Italy and Spain. In contrast the United States overcame the depression by increasing the government expenditure. They bailed out companies like AIG, Lehmann Brothers, etc. and allowed those financial institutions, which received help from the Government in the form of bonds, to invest the money in other countries for profit.
Few years back when USA and some European countries were deep in recession, our government said that it was because of their foreseeing capacity and expertise that the Indian economy remained unaffected. We have also seen that our GDP grown fairly around 7% in those years. The troubles continued in the US and a sign of consecutive recession was perceivable. During the recession period, The United States had mainly used one weapon – creating unrest in other countries having natural resources like oil. This time they targeted Iran naming nuclear experiments planned or conducted by them as the biggest problem in the world. Iran was one of our major oil suppliers and due to the US economic sanctions they were even ready to receive payment in Indian currency or ready for a barter system. But due to the constant pressure from US and its allies, India took a foolish decision to reduce the imports from them and paid the price. Our dependency on dollar increased which finally affected us in many ways. Our Dollar reserves reduced, rupee was devaluated and hit an all time low below 60, our Current Account Deficit increased, oil prices increased (the depreciating rupee), share markets tumbled, etc were some of the after-effects. It is politically OK to take a decision against a country based on the pressure from powerful countries like the US. When we took such a decision which caused us huge losses, the country which proposed (USA) the same should have reciprocated by investing more on our infrastructure development – this did not happen at all. Even after allowing MNCs in multi brand retailing to operate in our country, no one has invested so far. Many global finance companies invested in the Indian share market – Our share market showed positive signs due to this and as a result our PM and FM said that India is not affected by the recession in the West. This was more of a reflection of the poor investment environment in the West than a India story.
If we are going through the press releases of the Reserve Bank of India, we can find that their main objective is to control inflation and not enhancing investment. In one side government is increasing price of all commodities like oil, LPG, electricity, water and food items. Service Tax hiked for the existing sectors and the tax net broadened by adding new sectors. Using the money gained from these, they have given some aid to the corporates by exempting taxes (Rs. 575000 Crores from 2007 to 2012) and spent in crowd pulling programmes like MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme), RTE (Right to Education) and now Food Security. Huge investments are required in all these sectors but we have to ensure that every rupee spent on the same gos to the right person. But in our corrupt political and executive system, it is very difficult. Many times we have found that the food grains to be distributed among public at one rupee has instead gone to flour mill owners. The disposable income of common man is reduced heavily. Lots of small and medium enterprises including the real estate companies who needed real help from the government and banks found it difficult to survive as they were ignored by our government. Car and motor cycle sales reduced. Construction of houses and flats reduced due to the high price of steel and cement. These are the two segments which are giving employment to many. For assessing the growth of economy we need to watch growth in these two segments only. Reserve Bank many times increased Repo and Reverse Repo rates to control the flow of money just to keep inflation minimum. Banks stopped giving easy loans even against collateral securities. Over Draft facility also controlled and higher rates charged for that. But inflation was never under control as government gave away the price control of oil. The companies increased price of oil and other essential goods and services several times. Middle class Delhiites are now paying a monthly bill of about 15000/- for electricity alone. At the same time the government expenditure has been crossing all limits. Foreign trips of ministers, secretaries and higher officials are never controlled. Remember the visits made by our former president (sic !) . We have seen the amount spent by Mr. Montek Singh Ahluwalia for the modification of his house. And so on.
In Summary, Below Are Seven Areas We Can Improve (Policies and/or Governance) to Overcome The Situation?
- Tax evasion and black money
Our minister for Communication and IT Mr. Kapil Sibal is trying to settle tax issues with Vodafone (purchase of Hutchison share by Vodafone) at a mere Rs. 2000 crores instead of Rs. 20000 crores aimed by the tax department. This should be avoided. If government has that much pressure from MNCs and corporate houses to reduce the same, they can do it but they should agree to invest the same amount to develop our infrastructure. Black money invested by Indians in all foreign countries should be recovered (Rs. 40000/- crores officially and Rs. 670350/- crores unofficially). Such measures will help to increase our Foreign Exchange Reserve
2. Foreign Direct Investment
Short term investment by foreign financial institutions in share market should be controlled. Allow foreign investments only in sectors like infrastructure and transportation where we lack modern facilities.
3. Government Intervention
Government should spend more on infrastructure development in areas like public transportation, housing, agriculture, farming, etc.
Incentives given to corporate houses in the form of reduction in corporate tax should be stopped as our taxes are lowest among the world (India is the country where corporate tax is 30% or less. In western countries it is 40% or more)
4. Banking Sector
Banks should recover dues from all big companies including Kingfisher to reduce NPA (Non Performing Assets) and it should be spenT for helping SMEs (Small and Medium Enterprises).
Reduce Repo and Reverse Repo to avail more funds for development and also to reduce interest rates of loans.
5. Pricing and Taxes
Reduce taxes on oil – reduce its MRP which will control inflation to a certain extent.
Reduce the import of gold. Fix a limit on the maximum grams of gold a family can keep.
Pricing policies of oil and natural gas should be in a transparent way and there is no need for international parity as our salaries and other expenses are not at par with international companies. Maximum profits allowable to such companies should be limited to 10% at any circumstances. To my knowledge, selling the share held by the government in public sector oil companies is the policy of our government. For that only the new pricing formulae have been prepared and practised. The pricing decision on natural gas was done to help Reliance.
Reduce expenses of oil companies. I have heard some stories about the expenses of oil companies. For a story writing competition conducted by one oil company for the children of their staffs, the finalists from each state has been given to and fro air ticket for Mumbai and the price money was Rs. 1 lakh. Even our leading writers are not awarded that handsomely. The companies are spending crores of rupees for advertisements in various medias which can be avoided as all of them are public sector undertakings and hence there is no scope for competition.
6. Political Decision
Reduce the expenses of ministers and other government officials. The savings can be used in crowd pulling programmes.
Auditing should be widened and made strict in all sectors where government funds are utilized. Government should seize the assets of all corrupted persons including politicians.
7. Corporate Sector
Ensure that every corporate firm is spending the desired amount in the CSR (Corporate Social Responsibility) account. It should not be like giving an award for Rs. 10000/- and spending Rs. 1 lakh for the award function.
Funding to research programs in S&T should be increased to reduce the brain drain. Role of corporate houses like Tata is commendable in this sector. Other corporate can copy them as a part of their CSR programmes.
These are just a few points that readily come to mind – I will surely follow up with more.