Author: Shivaji Sarkar
Publication: The Pioneer
Date: June 7, 2012
URL: http://www.dailypioneer.com/columnists/item/51750-india’s-economic-woes-are-self-made.html

A large chunk of the country’s GDP depends on the domestic economy. The euro crisis and the rise of the dollar as a result cannot become the compelling reasons for the downslide in India. Fiscal mismanagement by the UPA is the primary cause

Neither tiny Greece nor fledgling Europe nor gasping US is leading India’s economy downhill. The latest fall in GDP growth to 5.3 per cent, lowest in nine years, is India’s own making — or may be it’s because of the wrong World Bank-IMF prescriptions accepted without a cross-check.

Globalisation can be blamed. But how much of India is really exposed to the outside world? It has only a $ 24 billion trade with the rest of the world as the export figures indicate. The rest of its GDP is contributed by the domestic economy. That is on the verge of collapse.

It suggests that our Vision 2020 is an impractical dream. The country in reality is going through the nightmare of 1991. Every parameter indicates that we are moving towards the 1991-type crisis, perhaps in a more aggravated way.

Political wisdom eludes this Government. The UPA regime over-depends on the bureaucracy. Every decision, mostly not in the right direction, is suggested by the bureaucrats, who have the least contact with the common man. The pattern of governance needs a change. The country needs political leaders, not mere politicians. The UPA Government with a stop-gap Prime Minister does not have one person who can lead the country. The few good ones that are there in the party have been sidelined. The drift is a natural corollary.

The Government has been taking impractical, verging to the wrong, decisions continuously. For 13 consequent times it allowed the Reserve Bank of India to raise interest rates, when rates should have been cut. Banks are functioning like financial rogues. They have arbitrarily raised rates of all services as their non-performing assets  touched an all-time high. Investments have become expensive. It has made transactions expensive and led to a severe liquidity crunch.

Coupled with this, food inflation continues to zoom. It has a direct consequence on wages as food items decide the floor wages. This in turn increases the cost of production for the industry.

The Government has not taken a single step to contain the almost 30 per cent increase in food prices over the last two years. It tries to take solace in the fact that food prices have risen in the US as well. It forgets that in the US, food prices have increased by 0.5 per cent to 0.75 per cent, and over the last three years the hike has not been more than one per cent.

The bureaucrats tell the Ministers that food prices are neutralised by revision in dearness allowances. True. But the number of employees in the organised sectors has been dwindling since 2004. More workers are in the unorganised sector and still larger numbers are having casual piecemeal employment. Many others even do not have employment.

In a scenario like this, the purchasing power of the average citizen has reached its nadir. Expenditure estimates show that private consumption has dropped to 6.1 per cent from 6.4 per cent in the last quarter of 2011-12. It also shows that people have now the least capacity to purchase

This is testified by the continuous fall in industrial and manufacturing production. Core sector data released on May 31 showed that the new fiscal year began on a weak note with the output of key infrastructure industries, — which have a 38 per cent weight in the industrial production index — rising only 2.2 per cent. Manufacturing contracted by 0.3 per cent. The services sector also had a slower expansion at 7.9 per cent, down from 8.9 per cent in the previous quarter. A lethal concoction of high interest rates and inflation, plunging currency, high current account and fiscal deficits, loss of investments and business confidence has derailed the country’s economy.

Rating agencies Goldman Sachs, Morgan Stanley and Citi have for these reasons downgraded their forecast for the Indian economy to six per cent from eight per cent for the year-end march 2013.

It is just not on the policy front that the UPA Government is tottering. Its taxation policies are the most retrograde. Tax rates are extremely high and exploitative. It has not listened to the advice of bringing down the tax rates to a maximum of 20 per cent and simplifying the procedures. The bureaucrats feel it would make them redundant.

The tax concept should lubricate the economy and not put obstacles as it has recently done by seizing bank accounts of a major private sector airline and some other industries which are in crisis. The British had introduced an atrocious taxation system to pauperise Indians. The UPA seems to continue that legacy. Its direct tax code for this reason remains a retrograde document. The Goods and service tax scheme is yet another ill-conceived system.

The Government has yet to evolve a policy to jack up the rupee. The Reserve Bank has limited options of intervention. It cannot solve the issue as basic fundamentals are weak.