What they didn't teach them at Harvard !
When the UPA Government first came in, great hopes were placed on a well educated, sensible, triumvirate of Finance Minister, P Chidambaram, educated at Harvard, Prime Minister Manmohan Singh, (Cambridge and Oxford) and Planning Commission Chairman, Montek Singh, (Oxford). Their erudition and their education, would, it was felt, help them steer a coalition Government hobbled by Left parties with antediluvian ideas of economic growth, on a sensible path. For four years, it seemed things were going well, with the Indian economy growing at 8% and pouring enormous amounts of tax revenues to the Government. The triumvirate, alas, forgot what they had learnt in economics classes and succumbed to the politics of survival. We will now pay the price of neglect to plan for the future.
Poor governance matters. Look at Vietnam, till now one of the tiger economies, whose fast economic growth attracted a lot of foreign capital and created a stockmarket boom. The growth was not managed. The stockmarket has fallen 70% from its peak and every single day in April was a downtick! Look at Zimbabwe, where Robert Mugabe’s neglect has turned a country once the rice bowl of Africa, feeding other nations, into one that has to beg for food as it is bankrupt. Look at North Korea where upward of 1 m. people will die of famine as the great leader chases his nuclear nightmare.
Luckily India has democracy, and democratic institutions. But economic realities must be faced, such as rising crude oil prices unable to sustain untargeted subsidies, without fully prostrating to political compulsions. The triumverate ought to have been protected from political interference, much as Narasimha Rao did when Manmohan was the Prime Minister!
GDP growth is expected to slow down this year, though we should still be over 8%. If services, which account for 55% of the economy, continue growing at above 10%, that provides 5.5% GDP growth; industry, which accounts for 28%, growing at 7% (as in April), would provide another 2% and agriculture, accounting for 18% would, with a 3% growth, chip in with 0.5%, adding up to 8%. Or more, with higher growth in any sector.
The irony is that the resources generated during the past four years in terms of tax revenues, have not been spent in ensuring the future. Most of it has been wasted in political gestures, such as the subsidy on petroleum products. Only a small fraction, perhaps not even a tenth, goes to the truly deserving, who would need subsidised kerosene and LPG as fuel for cooking. This population could provided the subsidy in a more effective way, using technology, without needing a blanket low price for all. The kerosene mafia, which adulterates diesel with subsidised kerosene, is a beneficiary of this largesse, as are car owners who are not discouraged from buying fuel guzzling cars. (Belatedly, the Government has woken up to its responsibility and levied a special excise of upto Rs 20,000 on fuel guzzlers; too little, too late). Contrast this with Indonesia, where the Government had the cajones to hike petrol prices by 30% last year. Demand for oil has fallen 10% since.
The BJP Government had, when in power, hiked petrol and diesel prices by an equal amount, even though the underlying crude oil price growth was much less. However, it did it in 34 small increases, without attracting public fury, instead of one large one, leading to protests. (Ironically the protestors were the very people who prevented the small hikes). So even when politics comes into economics, management of it becomes important.
Kerosene coupons, much like food coupons in America, would be one way of better targeting subsidies to reach only the intended beneficiaries. Modern day technologies like smart cards embedded with chips to distribute products can also be used. The Government could, and should, have used buoyant tax revenues to develop resources using floating turbines to generate wind power (www.economist.com/science/tq/displaystory.cfm?story_id=11482484) and wave power (www.economist.com/science/tq/displaystory.cfm?story_id=11482565) Technology to generate power from waves is now advanced enough to make it equivalent to nuclear power, which would give the Government an alternative. India, with its huge coastline, would be able to develop this, had the priorities of nation building been determine by strategic thinking and economics instead of populism and accommodative politics!
Because prices of petrol and diesel have been subsidised, there is no price effect on its consumption, resulting in a ballooning import bill for crude oil. This leads to a current account deficit, taken care of by capital inflows. To attract which, and to control inflation (which in the last week of May touched a 7 year high of 8.75%), interest rates would need to be raised. RBI did just that, raising the repo rate (the one at which it lends to banks) by a quarter percentage, to 8%. The interest rate cycle is turning up, globally, which would negatively affect equity markets.
With all these untargeted, hence largely wasteful, subsidies on oil, on fertilisers, with the increase in salary after the pay commission hike and with the farm loan waiver, the Government’s fiscal position is atrocious, which is why foreign investors have been selling in spades. Which is also why the Government approved a procurement price of Rs 850/quintal for wheat, lower than the Rs 1000 recommended by CAC.
Source: Equitymaster
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