Wednesday, November 30, 2011

Economy in trouble…..get back to work guys….

The quarter 2 GDP growth numbers are shocking. It’s after two years that we have again dipped below the 7% mark. We need to drop everything and pay attention to this unnecessary crisis. A combination of factors – policy paralysis, RBI’s missteps, global factors – have led to this slowdown. Even the smallest drop in the growth of the GDP should be thought of as being similar to an attack on the country – and when the country is under attack, its time for us to dissolve our political differences and work unitedly. For starters, it would help if Parliament were allowed to work.

If Parliament had worked for the last 7-8 days of this session, we could have seen important bills go through. That’s the dying need of the hour. For months before the winter session started, we kept discussing ad nauseum all the bills that were being lined up by the government. And yet when the session has started, there is no action happening. The logjam in Parliament has two consequences – one of course is that important bills don’t get passed. The second is that the message that goes out is that the logjam is going to continue. That exerts its own downward pressure on the economy and makes investors flee. Investors like a welcoming climate – a climate of stable economic policies and progressive thinking. If that is missing, investors will exit in no time. Not only foreign investors, even domestic business houses will start taking their investments outside India – as a few head honchos have already hinted.

Apart from the Parliamentary logjam, the other thing that has badly affected economic growth is the bull headed approach of the RBI in controlling inflation. It wants inflation to come down, but it fails to appreciate and understand where it is emerging from. The RBI is behaving like a one-trick pony; increasing interest rates for any and all problems. The problem of inflations is on account of a production constraint in the agricultural sector; the fact that there is more money in the hands of the poor. The problem is not in manufactured items or in infrastructure or power. And yet, the RBI does the only thing it knows to do. Increase interest rates. Interest rate increases will clamp down on manufacturing, but it will do nothing to control inflation in agricultural products. The RBI’s approach is like searching for a lost item under a lamp post even though it has been lost somewhere else; only because the lamp post makes it easy to search there!

RBI may be an autonomous body, but its Board of Governors is made up of people chosen by the finance ministry. The government has to question Subba Rao; pull him up for wrong strategies. It has to lean on RBI to cut interest rates; so as to spur industrial growth back. If needed, a differential interest rate regime needs to be thought of; so that subsidized funds can be provided to certain core sectors of the economy. Instead, what we find is an incessantly spiral of rising interest rates. First the RBI increases its lending rates to banks; that leads them to a hike their deposit rates; that in turn leads to further higher lending rates…..making it difficult to lend cheaply even to the priority sectors. The entire thing needs to be reversed. Interest rates need to be brought down. And deposit rates need to go down too.

To solve the inflation problem, we need to augment agricultural capacity. I noted in an earlier post titled “Politics killing economic growth” (July 27th, 2011): When it comes to food inflation, this is where successive governments have repeatedly failed. There has been nothing substantial achieved in agricultural productivity since the Green Revolution in the mid-sixties. We need to embrace more bio technology. We need more irrigation facilities. We need better food storage facilities so that so much food doesn’t get wasted. We need a better cold chain system. We need more mechanisation in farms and for that we need to develop a system of credit flow to the farmers. We need more power supply at affordable rates. We need a better fertilizers policy......Clearly, a lot needs to be done on this side. Growth of insecticides has almost gone down to zero in the last ten years or so. There is also no growth in irrigation coverage in the country. All of these need to be addressed for inflation to come down. The solution to every type of inflation is not increasing rates; but the RBI seems to believe it is.

We need the policy paralysis to end. We need new laws to be enacted. We need the FDI proposal in multi-brand retail to be notified. We need to welcome all forms of investments – the color of money being irrelevant for a fast growing country. We must overcome the paranoia of being overrun by foreigners. These companies are not the East India Company. And in any case, the East India Company is now owned by Indians! In today’s world, Indians are buying up large companies internationally. How can we disallow others from entering the Indian market then? We need to allow more FDI in the insurance sector, so that more capital can flow in there. There is need for the PFRDA bill to go thru too. We need a new mining policy so that the negative growth that has been recorded in mining this quarter can be reversed over a period of time. There are so many other economic bills pending in Parliament. Then there are acts on which there is no consensus – again not for ideological but political reasons. We need to think of the nation first and politics later.

And very importantly, the witchhunting of corporates to stop. The 2G scam is a classic example of politics bringing gloom and doom to a buzzing segment of the economy like telecom. If the allotment of spectrum at zero cost is taken as part of a continuing government policy, then the telecom scam is a small one and it shouldn’t take away so much of our time. It shouldn’t lead to the blockade of economic reforms.

For long, the similarity of economic policies of both, the BJP and the Congress, led to a stable economic environment in the country. Investors felt that India was a safe bet because both major political parties were largely pro-reform. Today, that appears to have changed. Today, the BJP is playing the politics of opportunism – opposing the government’s initiatives not because of some ideology, but only so as to debilitate the government of the day. Tomorrow, when the BJP rules, the Congress will do the same. This is unacceptable and we must raise our voice against it.

The real truth is that the warning signals are loud and clear. Instead of battling the crisis, we are busy politicking. The media needs to take a lead in raising the people’s voice against all political parties that are blocking Parliament. After all, if there is one thing that politicians fear, it is the media…..

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