Sunday 4 August 2013

A last chance for economic survival (Sunday Guardian)


RBI Governor D. Subbarao with deputy governors H.R. Khan, K.C. Chakrabarty, Urjit Patel and Anand Sinha during the unveiling of the quarterly review of RBI’s monetary policy in Mumbai on Tuesday. PTI
uring the last quarter, for which information was released, "core growth" in the once-booming Indian economy was 0.1%. The combination of Jean Dreze and Duvvuri Subbarao has ensured that the Indian growth story has reached the gravesite and is within a few hard blows of extinction. Although comparisons are being made between the 2013 economic crisis and the situation in 1991, the fact is that 22 years ago, institutions in India were much stronger than they today are.
As a consequence, remedial action has become much more difficult, and could soon become impossible, should the present crisis be allowed to escalate through the avoidance of policy decisions that are sufficient to reverse the slide into chaos. The gloomy faces of the captains of industry at their meeting with Manmohan Singh were indicative of a rising tide of panic within their ranks. The bigger ones have for the past six years been shifting their operations abroad, so that this country accounts for a falling share of revenue. It is the others — those that betted 100% on India — that are in serious trouble. Even as incomes are falling, the Income Tax Department has become more insistent that this has not happened, that enterprises are actually in a boom period, except that these higher figures are not getting recorded in the books of account shown to the tax authorities. Because income-tax officers have been given higher and higher collection targets by the Finance Minister, they have no option but to squeeze out whatever extra money they can from corporate and other assesses, no matter that such an approach is killing these entities.
The Finance Minister has no option but to set higher targets, presumably praying that he will be out of a job by the middle of next year, leaving the debris left behind by a collapsed economy to be tackled by a new incumbent. Jean Dreze does not have much idea about how to promote growth — although his NGO friends clearly believe that economic expansion is possible without consuming natural resources or electricity — but he has very definite views on how money should get spent.
Hence, the succession of freebies and doles, all getting funded out of a shrinking cake of economic growth. The huge increase in government outlay leads to higher inflation, at which point our other hero, RBI governor Subbarao, tightens money supply still more, apparently not aware that government profligacy cannot be held by a mere rise in interest rates. Higher interest charges (already around 14%, an unsustainable rate for much of industry and trade) lead to slower growth and consequently smaller revenue, which is sought to be compensated by exactions such as what was attempted in the case of Vodafone, where the seller of shares (Hutchison Whampoa) escaped being taxed but the investor was told to cough up.
In their desperate bid to garner more taxes, authorities in India have launched more MNC transfer pricing cases in the recent past than have been seen in previous decades, thereby dooming initiatives such as a relaxation in FDI in selected circles to fail.
The lower growth resulting from Dreze-Subbarao policies pushes up the fiscal deficit and consequently boosts inflation, thereby resulting in the RBI tightening the spigot even more harshly. In the process, the Central bank dooms hundreds of companies into defaulting on their loans. As a result of Dreze and Subbarao, the Indian banking sector is rapidly becoming as sick as the sector became during 2005-8 in the US and in parts of the EU, with the difference that this country does not have the financial cushion needed to stabilise the banks. Aware of this, speculators are making a killing out of making a safe bet, that the rupee is headed downwards towards 75 to a US dollar and even 90, thereby boosting prices (and monetary tightening) even more.
The only way out of this deadly spiral is for the Manmohan Singh team to throw "politics as usual" to the winds and act to preserve the future of India. The only way this can happen is if incoherent policies get replaced with rational measures.
Kapil Sibal can blame the courts, and P. Chidambaram the Comptroller and Auditor General, but ultimately it is they who need to act. Will they, and their boss, do so? If not, by March 2014 the Congress party will anyway be the loser because of unbearable economic turmoil. And so will the country.

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