Smattering of short-and long-term measures, & hope, can turn sentiment and economy--ET 7th Setember 2013
Sep 6, 2013, 04.00AM IST
By: V Balakrishnan
The Indian economy is at crossroads today. The Indian rupee had depreciated by more than 20% since January and is one of the worst performing currencies in the emerging markets. The talks of a country downgrade are already looming over our heads.
While part of the reason for the current situation can be attributed to global events, most of it is self-inflicted. What we are witnessing in the world today is a "balance sheet recession". World GDP is around $71 trillion, while the world's debt, including private debt, is around $222 trillion. Such excessive leverage will take a long time to unwind and will be a major destabilisation factor for the world economy in the years to come
ndia's problems are different. For a country that was christened a miracle economy, which was growing at 8-9% less than two years ago, this is a big climb down. With slower growth in the economy and absolutely zero job creation, the once-touted "demographic dividend" will soon become "demographic liability".
What Can't go Wrong, Will!
India's problems are different. For a country that was christened a miracle economy, which was growing at 8-9% less than two years ago, this is a big climb down. With slower growth in the economy and absolutely zero job creation, the once-touted "demographic dividend" will soon become "demographic liability".
What Can't go Wrong, Will!
A cocktail of judicial and regulator activism consequent to crony capitalism in allocation of natural resources, a paralysed government with no capacity to push any reasonable reforms, high inflation coupled with high interest rates, uncertain and unfriendly tax regime coupled with complete loss of confidence from the business community have resulted in the current situation.
The reality is that a country that has a sustainable trade deficit will never have a strong currency. India is a consistent trade-deficit country. Such countries need to fortify their position when times are good so that they are well prepared when things turn adverse. The government does not have sufficient tools to address these structural problems. The markets understand that clearly and to some extent are challenging the government to respond.
Turn the Tide of Fund Flows
What can the government do? There are some short-term measures and certain long-term measures the government should consider. For the short term:
The government should seriously consider raising a sovereign bond of $75-100 billion and send a clear message to the market that it will defend the rupee at 55 levels, come what may. The benefit of raising a bond outweighs the cost of not doing it.
Instead of focusing on curtailing outflows, the government should seriously consider increasing inflows. To some extent, the government had taken foreign investors for granted in the last few years.
Bring clarity and stability to the tax regime. The retrospective amendments to the Income-Tax Act and the recent transfer-pricing demands have dented the country's image. The government should understand that the foreign investors want certainty and they have alternate choices for investment.
Put some of the reforms, such as the insurance Bill, GST and so on, on fast track and implement them.
Resist populist measures at this point of time. There is no need to be populist when there are so many concerns on the fiscal front.And some long-term measures:
We have to identify every sector in the economy and come up with a fiveyear plan to make them a dominant player in the export market. This is not about tinkering with export subsidies here and there; it requires systemic intervention and planning.
Reform the labour regulations in the country. This is long overdue and requires a lot of political will. Unless we create scale and improve productivity, India can never become big in the manufacturing sector.
Amend the Judicial Accountability Bill to necessarily include an "economic brief" before the judges in all cases that have an economic impact on the economy.
Remove crony capitalism and bring about a transparent mechanism to part with any natural resources in the country. The judicial and regulatory activism is a consequence of the crony capitalism we witnessed in the recent past.
Liberalise the FDI regime and make the tax and other laws conducive to attract long-term capital into the country.
Every crisis creates an opportunity: an opportunity to innovate and an opportunity to change things that are unchangeable in normal times. After all, the currency crisis in 1991 made the country take the major step towards liberalising the economy.
Call of Good Hope
US President Barack Obama said in aspeech, "I'm talking about something substantial. It's the...hope in the face of difficulty, hope in the face of uncertainty, the audacity of hope: in the end, that is God's greatest gift to us, the bedrock of this nation, a belief in things not seen, a belief that there are better days ahead."
This holds good for India too. Today, "hope" is something that is missing across the sectors of the economy. The government should use this crisis to bring about the change and recreate the hope for a better future of its citizens. The problem is that most of us think it is too much to expect from the present government.