India needs humane policy, open biz, rule-based RBI for fresh start
September 23, 2020
-23.9 percent crash
India needs humane policy, open biz, rule-based RBI for fresh start
Whatever, the country needs soft policy, low taxes, no barriers like tolls, open business and humane approach to solve difficult problems. India with a new beginning can beat all. — Shivaji Sarkar
It’s a fall or new beginning. The nation is pondering over the minus 23.9 percent GDP crash. The figures are stark but the life goes on. Does the GDP really matter? The lockdown (LD) has plunged India into a never before crisis. The GDP slump now is likely to worsen to full-year economic contraction of 7 percent – or simply negative seven percent, massive for a country of 130 crore that wants to take a super leap. It is the result of routinely jettisoning financial stability for myopic adjustments in government expenditures, says Viral V Acharya, former RBI deputy governor.
Now the growth is prescribed on government spending by RBI. Good. Nobody has answered from where the government after squandering opportunities since the demonetization, accentuated by GST and devastating economy with LD would bring the precious money. The gold pawning by the Chandrashekhar government in 1990 caused similar cocern. Then the growth clocked one percent.
Again the figures have meant not much for the nation. Post-1992 budget some companies did exceedingly well at the stock market. It led to exposure of billion-dollar Harshad Mehta scam. Banks and financial institutions were denuded. The corrective steps were taken, SEBI was formed but the banks continue to take the hit.
The RBI is eloquent. It says even in a year of crisis that began in August 2019, bank frauds jump 159 percent involving Rs 1.48 lakh crore for public sector banks and Rs 34211 crore for private ones.
During the last 30 years GDP swung up and down but the common man not only in India even in the US and Europe post-2008 sub-prime crisis lost several billions. The insurances and mutual funds emerged as more dishonest. Nations churn out big concerns; hopes and jingoism across the world keep people busy.
The US economy shrinks by -31.7 percent, the British by -20.4 percent and the fall guy China by -6.2 percent. Pakistan, with scant containment, is clocking at least 1.03 percent growth.
India many might say is in league with the big. May be it is in a better situation with free food grain doles to 80 crore people. That is indeed a silver lining. Many families are able to survive. Though now they are being harassed by demands of production of ‘income’ certificates. Many may cross the illusory poverty line and be forced to starve. They are people in need and not corrupt as some officials tend to paint them.
It is also true that since these 80 crore are not part of the market as they do not generate demand. The job losses, salary cuts or its non-payment, starvation, and rising number of suicides to four a minute has led to fall in industrial output to 38.1 percent, services 20.6 percent, and manufacturing to 39.3 may not theoretically have hit them.
India has notionally spent Rs 150,471 crore for free rice and wheat. The overflowing stocks in FCI silos were paid long back and do not entail financial burden. Actual hit to exchequer as of now is Rs 1930 crore for transportation and another Rs 5000 crore for pulses. The immediate cost is Rs 6930 crore. But as the stocks are depleting carrying out the operation beyond November or till West Bengal polls would burden critical finances.
The present figures are only first estimates. Informal sector numbers, which are likely to have suffered more, says India’s former chief statistician Pranab Sen, will be announced later. Entire non-farm economy has been hit.
Agriculture with 3.4 percent is the silver line but it is also having problem in recovering costs. The wholesale price indices’ contraction indicates producer prices are declining. Gross value added (GVA) that is actual production value minus taxes contracts by 22.8 percent. Even the public administration, defence and other services sub-sectors record 10.3 percent fall in government spending. Gross fixed capital formation, in short investment, contracts 47.1 percent. However, government consumption expenses have grown by 16 percent, much due to inflation.
Even nominal GDP has contracted by 22.6 percent. It means base of tax collection, as the GST controversy depicts, will shrink.
More than the government, the central bank, RBI, is responsible for having dithered form achieving its long-term objectives of price and financial ability, opines Acharya. It is leading to a situation of stagnant growth and high inflation – stagflation. It is hitting bank depositors and market investors creating uncertainties.
The economy is getting more centralized. The government balance sheet gets larger and that of private sector shrinks. It hits all but the smaller players more like the MSME crisis and private educational institutions. As the economy shrinks government funding programmes become mainstay in relation to crashing domestic savings and irrational interest rates. It hits the core of economy. It increases lobbying by the powerful.
The remedy is in less government and more free private sector open economy. It also does not mean selling the public sector jewels like railways, HAL and others. They set the quality standards. Simultaneously, private sector has to be allowed spaces without direct or indirect government support. For this the government has to have fiscal restraint and RBI has to put financial stability and resist fiscal dominance.
The GDP itself is not a big number but its ramifications are. It is a symptom. The disease is severe – not the covid19 but financial failures2019. As a first the RBI has to assert itself and instead of suppressing interest rates on savings, it has to increase it to a minimum of 9 percent for bank deposits, else the banks would collapse.
It is not for rewarding the saver but to boost the culture of savings that has been taking care of government expenses, deficit, all through including of the Hindu rate of growth era. It has to reset policies and functions like the central bank adhering to rule-based decisions to save and bolster nation’s finances. The life will go on but to become a global leader we need a minimum 8 percent continuous growth for $ 5 trillion economy. The central bank has to delineate the path.
Disease or not the nation has to take a vow that it would not jeopardise normal functioning ever again. Whatever, the country needs soft policy, low taxes, no barriers like tolls, open business and humane approach to solve difficult problems. India with a new beginning can beat all.