Friday 22 September 2017

Growth continues to decline in India (Pakistan Observer)

Geopolitical Notes From India | M D Nalapat
FORMER Prime Minister Manmohan Singh is globally credited with being the architect of the 1992-94 reforms that gave a growth impetus to the Indian economy. The actual responsibility for the spurt in growth vested in Prime Minister P V Narasimha Rao, with Manmohan Singh as Finance Minister refusing to lower taxes on domestic companies and taxpayers but slashing away at taxes on imports. Since the period when he was Finance Minister (1992-96), foreign companies have enjoyed preferential treatment in India, and several domestic companies have in effect become commission agents for foreign enterprises.
The last two years of the five years (1992-96) of the Rao administration saw the first Prime Minister from South India buffeted by political, attacks orchestrated by Sonia Gandhi, who was wary of a person outside the Nehru family acquiring too much power. Unlike Manmohan Singh, who was at her beck and call even while Prime Minister, the soft-spoken Rao refused to scurry to 10 Janpath (Sonia’s government-provided mansion) when ordered to do so. As a consequence of such lese majesty on the part of Prime Minister Rao, Sonia Gandhi encouraged a revolt against him within the Congress Party. This was led by four individuals very close to her: Arjun Singh, Natwar Sigh,N D Tiwari and Sheila Dixit, all of whom were given high positions later by a grateful Sonia.
The split in the Congress Party weakened it sufficiently to enable the BJP led by Atal Behari Vajpayee to become a powerful force in Parliament from 1996 onwards, finally culminating in the first BJP-led government getting installed in 1998. Vajpayee has remained grateful to Sonia Gandhi since then, and during his years in power, has shown her every consideration, something that was reciprocated when Sonia Gandhi took effective charge of the government through installing Manmohan Singh as PM in 2004. Both Sonia and Vajpayee remember their friends, and ensure that they are rewarded for their loyalty.
It was expected that a culture friendly to business would take root after Modi became PM in 2014, but thus far,the punitive powers of the taxman and other agencies linked to the Finance Ministry have only grown rather than been reduced. Instead of focussing attention on job creation through generation of higher output, the focus has been on getting a larger and larger share out of a diminishing cake of investment. As a consequence of such an approach, which is almost the same as what it was under Chidambaram, growth has fallen to less than 6% and the worry is that it will get further reduced in subsequent quarters. The overall business outlook remains gloomy. Several companies have had to stagger payments due to other enterprises, and there is therefore a funds crunch. At the same time, tax demands are raining like confetti on individuals and companies, and stories of harassment are gaining ground.
Modi’s most trusted minister is Arun Jailtley, who is both Finance as well as Corporate Affairs Minister since the new PM took office. Jaitley has incredible reserves of charm, and is loved by journalists in Delhi for his habit of ensuring that they be given information so as to write exclusive stories. He is easily the most popular minister where mediapersons are concerned. However, apart from his ministerial responsibilities, Jaitley also has to deal with a host of political problems together with his close friend, BJP President Amit Shah. Both Shah and Jaitley are known in Delhi as the right and left hands of Prime Minister Modi, and seldom does a situation arise when one or the other (or usually both) are not by his side. Modi trusts Jaitley and has in multiple instances chosen those recommended by the present Union Finance Minister for top posts.
This far, job growth has been below expectations. Banks in India are wary of lending money, because of the bad debts that they have accumulated as a consequence of giving loans to well-connected individuals who have no intention of paying pack the banks. There are individuals in India who fly around in chartered jets but who owed several billions f dollars each to banks in India that are vulnerable to political influence. Thus far,almost all of them have escaped any penal action, although the talk in Delhi is that Mdi s planning to make an example of some of the biggest defaulters. In India, crooked businesspersons get back the value of the equity they have invested very quickly.This is by over-invoicing imports and under-invoicing exports. Once they get back (illegally) the money they have invested, they run their companies in a corrupt fashion, looking only to swell their foreign bank accounts rather than ensure the healthy growth of the enterprises in their control. The Times of India is reporting that illegal cash by Indian nationals has jumped up in recent years, and are these days being parked in tax havens in East Asia that are outside the reach of US and UK authorities. European countries are known for confiscating funds at short notice.
An example is the cash they took from Libya. Few of the deposits made by Libya during the Kaddafy period have been returned to Libyan hands. They have in effect been confiscated. Hence, more and more, London and Geneva are being passed over in favour of Macau and Hong Kong for keeping undeclared wealth. Prime Minister Modi resorted to the drastic measure of demonetisation on November 8, 2016 in order to reduce illegal cash flows, but this seems not to have been as effective as government economists were expecting would be the case. On the other hand, it has done severe damage to the informal sector, which generates more than 70% of India’s jobs. Overall, the slowing trend in growth continues. Much of the global prestige of Modi comes from his image as the Deng Xiaoping of India, who can launch the country onto a fast growth trajectory. He has less than two years left in his present term to make that hope a reality.

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