The Indian economy seems to be caught in an unending downward spiral. If agriculture was hampered by drought and summer in the first three months of financial year 2013-14, the second quarter seems to be literally getting "washed out" because of floods.
Thanks to the myopic polices of the UPA, manufacturing in India has virtually collapsed. Forget exports, we have reached a stage where Indian manufacturing is no longer competitive even within India. That in effect means we are import dependent on every ordinary goods. Frankly one is appalled with the confession of the Commerce Minister in the Parliament on the first day of the current session that India runs trade deficit with eighty countries! This is turn is adding to the pressure on the Rupee.
Now the downturn seems to be extending to the service sector too. According to a survey conducted by a leading multinational bank, the services sector — that accounts for approximately 60 per cent of the national GDP — suffered a fall-off in activity for the first time in nearly two years in July 2013. Accordingly, the HSBC Markit Services Purchasing Managers’ Index [PMI] fell to 47.9 in July from 51.7 in the previous month.
The latest PMI is the first time since October 2011 the headline index has fallen below the 50 mark, which divides growth from contraction, and the lowest since April 2009 which in turn was recorded in the immediate aftermath of the global economic crisis.
In short, all three sectors — Agriculture, industry and services — of the economy are facing significant headwinds.
Given this paradigm let us explore ten steps in retrieving the Indian economy:
1. UPA should go: Being the cause of the mess, the UPA Government led by Manmohan Singh must resign forthwith.That alone will restore the confidence of the people of this country. What is worse is that the UPA Government seems clueless to tackle the extant crisis. The reason is not far to seek. Where is the question of an appropriate prescription when the managers of the economy are unable to even complete the diagnosis? Indeed a frightening scenario!
Nothing illustrates the confusion in the mind of the PM when for the past 12 to 18 months the PM has been repeatedly announcing a spate of ‘reforms’ while in effect opening more and more sectors to FDI.
Any student of economics, more so the PM, would know that opening the economy to FDI is not equivalent to reforms. What makes matters worse is that less than 3 — yes 3 — per cent of the aggregate Indian investment is funded by foreign capital. That implies 97 per cent of our investment is funded by domestic savings. Needless to emphasise this misplaced priority in favour of foreign capital distorts the collective national psyche. If foreign capital, technology and initiative is the route to our development, where is the role for Indians?
There is another dimension to this debate. Assuming that the PM is successful in attracting foreign capital, he can at best double the share of foreign share in domestic investment from 3 per cent to say 5-6 per cent. Even in this best case scenario, our investment would be dependent predominantly [95 per cent] on domestic savings! Put pithily, India can be built only by Indian capital and Indian initiative — a fact lost on our PM. And this should be the economic rationale for the next Government.
2. Raise interest rates: Consequent to a falling Rupee, domestic savers are finding it extremely rewarding to invest in gold. Moreover, thanks to the fixation with the stock market interest rates in India are negative — i.e. lower than the inflation rates. This mispricing of interest rates has caused huge distortions within the economy and needs to be remedied forthwith.
As deposit rates rise, domestic savers will find it lucrative to save and save in simple financial sector products. This will in turn ease the pressure of gold imports, trade and current account deficits. As a net consequence, the pressure on the Rupee will ease significantly. Crucially, if interest rate regime is reset, we will be able to finance domestic investment requirement through domestic savings.
3. Raise import duties on select products and countries: Ideally the pathetic economic situation within the country calls for a steep devaluation of the Rupee by 15-20 per cent from the current levels. That implies Rs 75 to a dollar. Remember that we run trade deficits with 80 countries. While some experts have been suggesting a sharp devaluation to revive our manufacturing sector, let us not forget that this idea cuts both ways.
While devaluation could make our exports competitive and imports costlier and to that extent offer succour to our manufacturing sector, the fact remains that India being overwhelmingly dependent on crude imports [we import 80 per cent of our total requirements], this idea could backfire. And that could fuel inflation beyond the control of our Government.
One way out is to increase customs duties on select products from specific countries to the levels that are permitted by the extant WTO rules. Further if need be, we need to invoke the provisions of the anti-dumping laws and safeguard measures contained in the WTO agreements to combat this surge in our current deficits.
In the alternative the Government must explore the possibility of devaluing the Rupee to Rs 70 or even 75 to the Dollar.
4. Need to cut Government expenditure: We have a Ministry for surface transport. And on top of it we have separate Ministries for shipping, railways and civil aviation — each one working at cross purposes on the issue of transportation. Likewise we have Ministries for commerce & industry as well as Ministries for textiles, steel, chemicals and fertilisers. Over and above all this is the Ministry for micro, small and medium enterprises — each one torpedoing the efforts of the other.
Whatever be the reason for creating the same, ideally it is time we cut our Government expenditure significantly. To do this we need to have a single nodal Ministry — Transport or Industry; not one for each mode of transport or type of industry.
The new Government has to roll back government — and believe me this is not merely an economic imperative but the ideal governance model. We need to ring fence our own people from the evil machinations of our Government. And for this we need to shut department after department. This will alone will ensure revenue surplus and dramatically bring down fiscal deficit. A lower fiscal deficit will in turn ensure more money for private investments.
5. Privatise MGNREGA: The national rural employment guarantee program has run its course. It is time it is privatised.
One of the fallouts of this program is that farm labourers have vanished from the farms. This has pushed labour costs up and made farming unviable across India. While it is not my case to have a subsidised labour for the farm sector, the fact remains that MNREGA has implicitly made farming uneconomical. Crucially, letting loose a sum of Rs 40,000 crores annually without concomitant production we run the risk of inflation.
To undo this damage, MNREGA should be extended ONLY to the farm sector. Accordingly, labour used by the farm sector must be subsidised by the Government through the MNREGA program. This will possibly revive the ailing farm sector.
6. Tackle food inflation: The Government of India currently has a buffer stock of food grains in excess of 80 MT. This implies that the Government, and not private grain traders, is the biggest hoarder of food grains. By purchasing such huge quantities of food grains and refusing to distribute them [a significant portion of this stock would be unfair for even cattle consumption], the procurement policies of the Government is a significant cause for domestic food inflation. To remedy the extant situation, the Government must forthwith release 25-40 MT of food grains in the open market for distribution. This would at once bring down food inflation.
Over and above this, studies conducted by eminent economists suggest that the futures market in commodity is a cause for food inflation. We need to close these gambling dens forthwith to tackle the menace of inflation.
7. Tax Laws: If not all, most of our revenue officers enforcing our tax laws are simply in the business of extortion. Transfer pricing provisions within the Income-Tax Act is a case in point. The situation is fast deteriorating into a farce where every addition to the income sought by the I-T Department seems to be a flight of fancy. If this is how we treat foreign investors who have invested into India? This in turn dampens the overall international business confidence on India.
Nevertheless, all these make the Government the greatest litigant when it comes to administering its own tax laws. In the interest of retrieving the situation, the government must set up a committee of retired officers from the respective revenue departments who can advice whether to pursue litigation in certain high profile cases and where the department is alleged to have carried out high pitches assessments. In such cases, the suggestion of the committee to drop the cases must be binding on the Government.
8. Remove Labour laws: The Small and Medium sector is the backbone of India’s economy. Not only does it provides jobs to the millions it also contributes signficantly to India’s domestic production and even exports. It is this sector that has been bearing the brunt in recent tmes. As a fillip to this sector, the government must declare that NO labour laws are applicable to any manufacturing unit employing 200 or less than 200 employees.
Once we ring fence this sector from the corrosive intervention of the state, this sector is eminently capable to dealing with foreign competition. It may not be out of place to mention that annecdotal reference suggests that interference by labour law authorities increases cost of production in these units by 10-15%. Obviously, such a step would restore competitiveness to these units, allow them to employ more people and add to the national growth.
9. Restore confidence of the administration on the system: Strange as it may sound, Indian bureaucracy seems to have been battered and lost its confidence in the system. Given the overarching fear of an investigation by the CBI, our administration has come to a complete standstill. Used, as it were, to a cash and carry model of functioning, thanks to a vigilant media, enlightened citizenry and active judiciary, in recent times bureaucracy seems to be chary of taking any decision at all. The pendulum seems to have swung to the other extreme.
This too is unacceptable. We need to restore the faith of our bureaucracy in the system. We need to find the correct balance by distinguishing between a malafide decision and a decision taken in good faith that has gone bad. And unless we do this forthwith, bureaucracy will continue to be a drag on our growth potential.
10. Relax NPA Norms: The international norms of identifying Non-performing Asset by Banks is currently unworkable in India. This has in effect converted every entrepreneur in India into a financial engineer without getting at buccaneers who continue to proliferate. Ideally, wherever a borrower is not a willful defaulter [and has given collateral] the Government must come out with a clear cut plan to restructure such loans. Ideally part of the collateral could be liquidated.
Such a bold step will allow entrepreneurs to concentrate on their business without any fear of undue interference from banks. Needless to emphasise such restructures loans must be out of the purview of any vigilance probe. Let us not forget that part of such borrowings has been routed as pay-offs. And to that extent it is a systemic problem such and needs to be tackled pragmatically if not sympathetically.