Push Comes to Shove Liberalisation

Push Comes to Shove Liberalisation



Watching Mr. Pranab Mukherjee present the UPA Government’s final Interim Budget was witnessing an exercise in brazen, experienced politics, rather than economics. Mr. Mukherjee manfully catalogued the achievements of five high-growth years of UPA rule and dwelt on enumerating the benefits given to the farming sector and rural development as a whole, but said as little as possible on the present state of the economy overall.

The fact is, the bulk of the economy, some 82 per cent of it, is currently in dire straits. But of course, Mr. Mukherjee, his colleagues, supporters and apologists, in and around the UPA Government, are not about to admit this on the eve of the general elections. However, deny reality as they may, with talk of restoration to 9 per cent growth at the earliest, the people at large are unlikely to be convinced. Not even Mr. Mukherjee can pull off this sleight-of-hand.

Mr. Mukherjee made much of the 4 per cent growth in Agriculture and while it is true that Agriculture supports at least 50 per cent of our population and we have all had quite enough of farmer distress and suicides; it is also an electoral demographic that has surely not escaped the government’s notice. And a 4 per cent growth in Agriculture impacts the overall economy by just 0.7 per cent. Agriculture today accounts for a modest 18 per cent of GDP and is therefore not in a position to rescue the economy as a whole.

In contrast, we have negative growth in industrial production (IIP) to the extent of 3.5 per cent for the third quarter, or a crippling minus 14 per cent annualised! There are also sharp declines in the employment intensive “services” sector that account for over 50 per cent of the economy, and demand shrinkage in every one of the other sectors, atrophied, in fact, by horrifying percentages.

For example, demand for commercial vehicles has fallen by 75 per cent! The situation is so bad in corporate India that it calls for the culling of lakhs of jobs by big, medium and small companies just in order to stay afloat; as well as a near moratorium on fresh hiring.

On-budget, the one noteworthy, if much belated point, was the increase in the Defence allocation. Off-budget, the recent fuel price cut was indeed most welcome. With inflation moderated to about 4 per cent (WPI) at present, and indications that it may go even lower, and crude oil prices at well under 40 dollars a barrel, there is room for further interest rate and fuel price cuts before the mandatory lay-off period prescribed by the Election Commission.

The regrettable part is that as an economy dependent on domestic consumption, again to the extent of about 80 per cent, this state of affairs cannot be blamed wholly on the global economic crisis.

Much of our current predicament can be attributed to the fact that for almost two years now, the government has been doing all in its power to slow growth and curb inflation that had risen to nearly 13 per cent in a ham-fisted bid to calm prices. Growth was indeed curtailed by relentlessly raising interest rates and sucking liquidity out of the financial system, but inflation has only fallen by default because of a drastic fall in crude oil prices from about 147 dollars a barrel to under 40 dollars today.

But had this not happened, the ridiculous monetary tightening indulged in by the UPA Government would not have lowered either the inflation rate or prices. In fact, even today, food prices are still tending upwards, and it is oil prices that our government had no control over, that accounts for the overall reduction in the wholesale price index (WPI) inflation number.

Truth be told, the UPA Government, despite its high profile and eminent economists at the helm, has a long list of sins to answer for. It has given away money to farmers and government employees by increasing the fiscal deficit and burdening future administrations with a recurring bill. It has enhanced non-budget expenditure with cavalier abandon to further add to the fiscal deficit even while choking off the very growth that may have contributed sorely needed government finances. It has wilfully reduced the viability of public sector banks by politically interfering in their functioning and causing sharp increases in their quantum of non-performing assets. It has failed to curb the ingress of a flood of counterfeit currency from entering our financial mainstream. It has deliberately turned the credit tap off on hundreds of financially starved blue chip companies. It has dragged its feet on infrastructure development that is essential for future growth and hampered our defence preparedness. It has failed dismally at stock market regulation to prevent fraud and has been taken totally unawares in the face of corporate brigandage with the aid, abetment and collusion of ruling party and alliance politicians.

And this minimum listing of the Government’s sins of omission and commission does not even refer to the non-economic failures on security, law and order, diplomacy, and the like.

But now, even with favourable inflation and oil price numbers, we have no liquidity to take advantage of the favourable circumstances. We have run our economy into the ground and no domestic source can provide the billions of dollars we need to re-inflate the economy. So, perforce, we must wait for a groundswell of liquidity from abroad. And considering the state of affairs internationally this may not be forthcoming for quite some time to come.

There is, however, a silver lining. Recently the government, perhaps in desperation, or more likely, taking advantage of a time when they could get away with it politically, has vastly liberalised the foreign direct investment (FDI) norms. In convoluted effect, it has done away with caps on FDI in practically any sector of the economy. This includes controversial sectors such as retail, insurance and the airlines that had met with local resistance from vested interests when they were sought to be opened up to foreign investment in the past.

This virtual “open sesame” coming as it has amongst the prevailing doom and gloom from multiple quarters has attracted very little comment. But when the money comes back to the global system, India may yet benefit substantially.

(1,050 words)

Monday, 16th February 2009
Gautam Mukherjee


Published on the OP-Ed Page of The Pioneer as "Crisis? What crisis?" on Tuesday, 17th February 2009 and online at www.dailypioneer.com. Also archived at www.dailypioneer.com under Columnists.