Tuesday, September 3, 2013

Yes we can! (destroy a booming economy) - Straight from the Hip by J Mulraj

Manmohan Singh's version of Obama's 'Yes We Can' speech: 'The one who is on my mind today is Mother India, who is thousands of years old' 

"And tonight, I think about all that she's seen throughout her life - the heartache and the hope; the struggle and the progress; the times we were told that we couldn't destroy her currency's value, which was equal to the $ in 1947, and the economists who opined we cannot make her diminish in stature. I say to them: Yes we can diminish it. 

"At a time when rational voices were warning us of the dangers to her economy from uncontrolled fiscal and current account deficits, we silenced them with leaky welfare schemes that allowed us to reach for the ballot, whilst destroying the country's balance sheet. I say to them: Yes we can destroy it. 

"When there was optimism and entrepreneurship across the land, we saw a nation succumb to fear with policy paralysis, new subsidies, and new regulations that stifled growth. I say to them: Yes we can stifle it. 

"When the corruption scandals and scams fell on our TV channels and threatened our crony capitalism world, she was there to witness a generation brainwashed to yield to corruption and lose its moral values. I say to them: Yes we can degrade values. 

As Finance Minister, Manmohan Singh led India out of the 1991 economic crisis. As Prime Minister, he has led India back into a bigger one. 

Last week the Parliament passed two laws, the Food Security Bill, which seeks to provide subsidised grain to 67% of the population, even though 23% are below the poverty line and deserving of the subsidy, at an estimated annual cost of Rs 1.25 lac crores; and the Land Acquisition Bill, which seeks to provide farmers who sell their land to developers either for manufacture or for housing, a fair compensation for it, judged to be 4 times the (undefined) market rate for rural and 2 times for urban land. The non-definition will, of course, lead to uncertainty and further corruption. 

There are other complications. The acquisition is subject to clearance by 80% of the owners in the case of a private acquirer and 70% in the case of a PPP project (public private partnership). It is also subject to a social impact audit, which, in turn, is to be approved by various layers. 

This amount of uncertainty will make land acquisition for manufacture and for housing an impossibly arduous and uncertain process. It is doubtful whether foreign investors, with global choices, would wish to undergo it. 

India's growth story was largely predicated upon the encashment of its demographic dividend. The young population, after getting jobs, would have spending power, and the economy would be led by a consumption driven boom for decades. 

This story requires two ingredients. One is the provision of jobs. The second is the provision of housing for the young population, which will largely be a migratory one from rural to urban India. In India, agriculture has a 14% share of national income but over half the population depends on it. This is unjust and has to change. It will change when they get jobs and move to urban areas, where they will need housing. 

The service sector has provided the jobs so far, but the potential to provide millions of jobs in future will necessarily come from the manufacturing sector

So will the uncertainties, and the additional costs, emanating from the recently passed Land Acquisition Bill encourage the manufacturing sector to provide the jobs, and the real estate sector to build the homes, and if so, at what cost? 

It was Martin Luther King who said "True compassion is more than flinging a coin to a beggar; it is not haphazard and superficial. It comes to see that an edifice that produces beggars needs restructuring" 

Even prior to the Land Acquisition bill, some large foreign companies had expressed their intention to quit India.Nokia, chagrined at the reneging of the promise by Tamil Nadu State to refund it a 4% VAT, as agreed to, is one . Shell and Vodafone are fighting disputes relating to untenable tax demands. 

It is little wonder that GDP growth for the quarter ended June has fallen to 4.4%, a 4 year low. The falling rupee will push up import cost of oil (an estimated 27%) and push up prices of petrol, diesel and power. This would lead to less consumption, hence lower consumption led GDP growth. The investment led growth will also slow down, thanks to a variety of factors including high interest rates and the higher cost, longer time, and uncertainties relating to land acquisition. 

The root of all this is appallingly poor governance. As Martin Luther King said, quoted above, the polity should see that the edifice that produces beggars needs restructuring. The polity is, however, busy making Luddite laws and messing up the India story. In some States there is little law and order; politically connected people get away with bulldozing homes of doctors, without authorisation. 

Even as they accuse and transfer a Government official of illegally demolishing a wall, which was held by a District Magistrate to be a false accusation. So a Government functionary is falsely accused of an illegal demolition, even as politically connected persons are not arrested for doing the same thing! The District Magistrate who dared to opine that the accusation was false, was transferred! Who would invest under these conditions? 

The NSEL (National Spot Exchange Limited) imbroglio is getting murkier, and the Government is not doing what it ought to be doing. 

One can compare the Sahara episode with NSEL. In the case of the two Sahara companies, there was a regulatory vacuum as the collective investment schemes floated by them fell in the regulatory chasm between RBI and Company Law Board. Neither of them thought of a joint consultation and intervention, a criminal neglect of duty. 

Similarly, in the case of NSEL, the exchange was allowed to operate but without regulatory oversight. This makes the Government entirely culpable and responsible for the losses; it cannot evade its responsibility. 

Now in the case of Sahara, the Government delegated the task to SEBI which approached the Supreme Court, got orders passed against the two Sahara companies, and has sequestered the personal properties of the promoters of the group. 

Why can this not be followed in the case of NSEL? 

What is the reason for such a lackadaisical and ineffectual response? 

When it wants to, the Government has plenty of powers to use against a defaulting group. If it wants to. Ergo, its reluctance to act stems from the 'if' and not from the 'when'. 

It is only in times of crisis that the Government is forced to take decisions that are sensible but politically deemed to be tough. The word 'deemed' is advisedly used. It is a perception that the decisions are politically tough, more than a reality. 

One such is the discussion, now being held, to reduce Government stakes in public sector banks to below 51%. Among others, this column has been long suggesting that this is inevitable and necessary. But it is only when the Government is in a financial crisis that it thinks of such things. 

Several commentators have mooted the idea of tapping into India's huge gold reserves, by offering private holders (including temples) a scheme by which they would earn a modest income on gold surrendered to the Government plus the option to get it back in future. It has taken years, and a CAD crisis, for the Government to think of mooting it. 

Last week the sensex gained 100 points, mainly after the Prime Minister promised there would be no capital controls and the rupee bounced. For a Government that brings in retrospective changes in law, the confidence of investors is quite touching. The BSE-Sensex ended the week at 18,619. The NSE-Nifty was unchanged over the week, at 5,471. 

Will the Government now have an amnesty scheme for foreign bank account holders? If so, will it result in a substantial inflow of foreign funds lying abroad? That would cause a rally in stock markets and in the Indian currency

Otherwise, both would continue sinking, chasing the credibility of a Government that has driven a wedge in the India story.

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