05-11-2009, 08:19 AM
<b><span style='color:blue'>Clouds of unrest in the fiscal sky</span></b>
<b>Subramanian Swamy</b>
(10 May 2009, New Indian Express)
How will we address the five major ills that constitute the malaise today without aggravating the economic situation and taking the country closer to the brink of disaster? To be immunised from foreign funds- induced volatility, we have to rectify the present ailments of economic growth in our country
NOW we know that any fast-growing economycan collapse suddenly due to a financialblowout â as past global experience of thelast two decades shows. The 1997 experience of the East Asian âtigerâ economies and ofthe 2008 global meltdown show that the âin-ternal organsâ of an outwardly robust eco-nomic system needs to be monitored toavoid sudden economic collapse, especiallyif the internal economic growth is fuelledby the external finance and trade.In India what saved us in 1997 was the lackof capital account accountability in the bal-ance of payment, and what has sunk us in 2008-09 is the reckless resort to the participatory notes [PNs] which had been put beyond the scrutiny of the government regulator, the SEBI (despite the Tarapore Committeeâs strong opposition to it), by the most crooked finance minister in Indiaâs history. To be immunised from foreign funds induced volatility, we have to rectify the present ailments of economic growth in our country. The present ills of the economy principally are five in number: (1) Jobless low productivity growth: The growth rate of the economy even though presently high, at eight to nine percent annually, is not generating enough jobs. Employment is growing at only 2.25 per cent per year since 1999-2000. However, to progressively reduce the unemployment backlog, absorb excess farm labour into industry, and provide for the new entrants in the labour force, jobs must grow at about 3.5 percent per year rate. At the same time, the economy must raise productivity of labour and capital through induced innovations and new management practices so that higher and higher investment rate would not be necessary to sustain the growth rate Hence, in the budget there must be adequate provision for encouragement for labour using instead of labour substituting, technology and projects, and for promoting innovations through radical tax breaks. This means that the education sector, especially at the primary level, and to eliminate drop out before higher or technical education, has to be focussed in the Budget too.
(2) Lack of agricultural reforms: The growth rate in agriculture should be at least 4 per cent annually to ensure that an 8-10 per cent GDP growth is sustainable But since 1997, agriculture has grown at a trend rate of 2.5 per cent with wide fluctuations year to year, due to lack of reforms, declining public investment, and poor even pre-modern infrastructure. Rather than resorting to the very silly ad hoc measures for uplifting the rural people that we see in past Budgets, we must empower farmers to export by imaginative schemes, rather than provide more subsidies and higher purchasing prices.
(3) Huge fiscal deficit: The government is impounding public sector bank funds (nearly 48 per cent) to finance the budget deficit, thereby starving the private sector especially in manufacturing of resources. P Chidambaram has a propensity to play to the gallery of unions of organised labour by wrecking fiscal balances through appointment of Pay Commissions (eg, in 1997 and 2006) and then creating a capital account budget surplus to finance the huge revenue account budget deficit. This is antidevelopmental. No wonder, inflation is rampant today fueled by this rising money supply from revenue expenditure.
(4) Debt trap: The debt accumulated by Centre and States is so large (86 per cent of GDP) that the annual servicing outlay now exceeds the fresh loans taken. This is unsustainable and can explode into a crisis.
Moreover, if we correct Chidambaramâs budgets to date, for Enron-type classification of contingent liabilities in a parallel or partnership account, then as the IMF recently found, the fiscal deficit as a ratio of GDP has actually been rising, not falling as the Finance Minister claims.
(5) Budget allocations are straitjacketed: Due the folly of all finance ministers since 1996, nearly 98 per cent of the receipts in the revenue budget, are committed to heads that cannot be politically pruned. That is, items such as defence, subsidies, interest payments, counter-guarantees, pensions, police, and grants to states, are those committed allocations that weak governments cannot reduce. These commitments together leave only 2 per cent of the total revenue receipts for other sectors. Hence, the governments are dependent on loans for funding other heads of expenditures, which however due to the debt trap, is also an evaporating option for funds.
So the question will be: How we will address these five major ills that constitute the malaise today without aggravating the economic situation and taking the country closer to the brink of disaster? Outside financial virus cannot affect our economy if we are immunised as above.
Even if we survive the current global meltdown which I expect we will because of other reasons given above, India will, if the ailments are not cured by new reforms, face a major fiscal crisis of the kind we have not seen before. Let us not take comfort from the stock market periodic buoyance. Ours is a rigged market with a purring pussycat regulator called SEBI. Since 1997, the number of retail investors has declined from 23 million to 18 million, a negative trend unprecedented in world stock market history It is the portfolio money, Participatory Notes, and FIIs via Mauritius and now Cyprus too, who, whenever in mood, prop up or deflate the stock market. This is a dangerous addiction that the âtigersâ of East Asia learnt to their heavy cost in 1997, and are yet to recover from it.
Moreover, most of our cash-rich industrialists at the top are not visionaries but crony capitalists like in East Asia â dependent on political patronage. Only some like Rattan Tata, or in the cutting edge areas like IT, pharma and biotech, entrepreneurs like Infosys Ranbaxy and Biocon have shown independent innovative talent due to globalisation. The question that remains is: what should be done to rescue the Indian economy from the current tailspin and not end up in an even bigger fiscal crisis three years hence? First of all, the middle classes have to be motivated to save more, go in for financial products such as insurance and equity, and buy consumer durables on credit. For this we must abolish income tax which is largely at the root of Indiaâs black money. The resources lost for the government thereby can more than be recouped through increased quantum of excise revenue due to a higher growth rate arising from a higher investment.
Second, Indian industry must be encour aged to outcompete Chinese labour-intensive manufacturing especially in outsourcing and exports. For this, India must invite FDI and otherwise invest in food processing, textiles, retail trade, infrastructure, and R&D. For this, we need a nationally focused skill augmenting educational system.
Third, treat agriculture as industry and extend all the fiscal concessions of industry to it. Land should be leased and consolidated where the farmers cooperatives want to enter grain, vegetable, fruit, milk and flower exports. Local feeder airports should be constructed for speedy freight transport and e-commerce introduced.
Fourth, to discourage government from poaching on bank finances to finance itâs revenue expenditure, the public sector banks must be privatised. Government can compete with others for these funds through the market, or by equity floating of public sector enterprises.
These reforms require a new government with a new mandate. It will require gutsy and rational risk-taking leaders. They are there, but the people must demand it and vote for them. That is the bottom line in our agenda for stability.
â Subramanian Swamy is the president of the Janata Party and a former Union minister
<b>Subramanian Swamy</b>
(10 May 2009, New Indian Express)
How will we address the five major ills that constitute the malaise today without aggravating the economic situation and taking the country closer to the brink of disaster? To be immunised from foreign funds- induced volatility, we have to rectify the present ailments of economic growth in our country
NOW we know that any fast-growing economycan collapse suddenly due to a financialblowout â as past global experience of thelast two decades shows. The 1997 experience of the East Asian âtigerâ economies and ofthe 2008 global meltdown show that the âin-ternal organsâ of an outwardly robust eco-nomic system needs to be monitored toavoid sudden economic collapse, especiallyif the internal economic growth is fuelledby the external finance and trade.In India what saved us in 1997 was the lackof capital account accountability in the bal-ance of payment, and what has sunk us in 2008-09 is the reckless resort to the participatory notes [PNs] which had been put beyond the scrutiny of the government regulator, the SEBI (despite the Tarapore Committeeâs strong opposition to it), by the most crooked finance minister in Indiaâs history. To be immunised from foreign funds induced volatility, we have to rectify the present ailments of economic growth in our country. The present ills of the economy principally are five in number: (1) Jobless low productivity growth: The growth rate of the economy even though presently high, at eight to nine percent annually, is not generating enough jobs. Employment is growing at only 2.25 per cent per year since 1999-2000. However, to progressively reduce the unemployment backlog, absorb excess farm labour into industry, and provide for the new entrants in the labour force, jobs must grow at about 3.5 percent per year rate. At the same time, the economy must raise productivity of labour and capital through induced innovations and new management practices so that higher and higher investment rate would not be necessary to sustain the growth rate Hence, in the budget there must be adequate provision for encouragement for labour using instead of labour substituting, technology and projects, and for promoting innovations through radical tax breaks. This means that the education sector, especially at the primary level, and to eliminate drop out before higher or technical education, has to be focussed in the Budget too.
(2) Lack of agricultural reforms: The growth rate in agriculture should be at least 4 per cent annually to ensure that an 8-10 per cent GDP growth is sustainable But since 1997, agriculture has grown at a trend rate of 2.5 per cent with wide fluctuations year to year, due to lack of reforms, declining public investment, and poor even pre-modern infrastructure. Rather than resorting to the very silly ad hoc measures for uplifting the rural people that we see in past Budgets, we must empower farmers to export by imaginative schemes, rather than provide more subsidies and higher purchasing prices.
(3) Huge fiscal deficit: The government is impounding public sector bank funds (nearly 48 per cent) to finance the budget deficit, thereby starving the private sector especially in manufacturing of resources. P Chidambaram has a propensity to play to the gallery of unions of organised labour by wrecking fiscal balances through appointment of Pay Commissions (eg, in 1997 and 2006) and then creating a capital account budget surplus to finance the huge revenue account budget deficit. This is antidevelopmental. No wonder, inflation is rampant today fueled by this rising money supply from revenue expenditure.
(4) Debt trap: The debt accumulated by Centre and States is so large (86 per cent of GDP) that the annual servicing outlay now exceeds the fresh loans taken. This is unsustainable and can explode into a crisis.
Moreover, if we correct Chidambaramâs budgets to date, for Enron-type classification of contingent liabilities in a parallel or partnership account, then as the IMF recently found, the fiscal deficit as a ratio of GDP has actually been rising, not falling as the Finance Minister claims.
(5) Budget allocations are straitjacketed: Due the folly of all finance ministers since 1996, nearly 98 per cent of the receipts in the revenue budget, are committed to heads that cannot be politically pruned. That is, items such as defence, subsidies, interest payments, counter-guarantees, pensions, police, and grants to states, are those committed allocations that weak governments cannot reduce. These commitments together leave only 2 per cent of the total revenue receipts for other sectors. Hence, the governments are dependent on loans for funding other heads of expenditures, which however due to the debt trap, is also an evaporating option for funds.
So the question will be: How we will address these five major ills that constitute the malaise today without aggravating the economic situation and taking the country closer to the brink of disaster? Outside financial virus cannot affect our economy if we are immunised as above.
Even if we survive the current global meltdown which I expect we will because of other reasons given above, India will, if the ailments are not cured by new reforms, face a major fiscal crisis of the kind we have not seen before. Let us not take comfort from the stock market periodic buoyance. Ours is a rigged market with a purring pussycat regulator called SEBI. Since 1997, the number of retail investors has declined from 23 million to 18 million, a negative trend unprecedented in world stock market history It is the portfolio money, Participatory Notes, and FIIs via Mauritius and now Cyprus too, who, whenever in mood, prop up or deflate the stock market. This is a dangerous addiction that the âtigersâ of East Asia learnt to their heavy cost in 1997, and are yet to recover from it.
Moreover, most of our cash-rich industrialists at the top are not visionaries but crony capitalists like in East Asia â dependent on political patronage. Only some like Rattan Tata, or in the cutting edge areas like IT, pharma and biotech, entrepreneurs like Infosys Ranbaxy and Biocon have shown independent innovative talent due to globalisation. The question that remains is: what should be done to rescue the Indian economy from the current tailspin and not end up in an even bigger fiscal crisis three years hence? First of all, the middle classes have to be motivated to save more, go in for financial products such as insurance and equity, and buy consumer durables on credit. For this we must abolish income tax which is largely at the root of Indiaâs black money. The resources lost for the government thereby can more than be recouped through increased quantum of excise revenue due to a higher growth rate arising from a higher investment.
Second, Indian industry must be encour aged to outcompete Chinese labour-intensive manufacturing especially in outsourcing and exports. For this, India must invite FDI and otherwise invest in food processing, textiles, retail trade, infrastructure, and R&D. For this, we need a nationally focused skill augmenting educational system.
Third, treat agriculture as industry and extend all the fiscal concessions of industry to it. Land should be leased and consolidated where the farmers cooperatives want to enter grain, vegetable, fruit, milk and flower exports. Local feeder airports should be constructed for speedy freight transport and e-commerce introduced.
Fourth, to discourage government from poaching on bank finances to finance itâs revenue expenditure, the public sector banks must be privatised. Government can compete with others for these funds through the market, or by equity floating of public sector enterprises.
These reforms require a new government with a new mandate. It will require gutsy and rational risk-taking leaders. They are there, but the people must demand it and vote for them. That is the bottom line in our agenda for stability.
â Subramanian Swamy is the president of the Janata Party and a former Union minister