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22 May, 2012

Economy at a crossroads

BRP Bhaskar
Gulf Today

Is the Indian dream fading? With the growth rate sliding, the rupee falling and the stock market going for a spin, this question is being raised within the country and abroad.

Last week a foreign news agency quoted a spokesman of India Inc as saying, “We have a full-blown crisis on our hands.” In a report which painted a picture of a paralysed political leadership and a drifting economy, the agency also quoted former US envoy Tim Roemer as saying the American business community was “increasingly frustrated and fatigued by flip-flops and roll-backs and reversals of decisions.”

Both were batting for acceleration of the globalisation process which has been on hold for some time in the face of strong opposition from some of the Congress party’s allies in the ruling United Progressive Alliance. Foreign and domestic business interests argue that more reform is the answer to India’s current problems but the experience of the fully globalised economies does not bear this out.

India emerged without major injury from the global economic meltdown of 2007 primarily because reform measures had not gone so far as to draw it deep into the financial convulsions of the time.  Foreign investors found it an attractive market and the economy continued to grow at a fast pace.

The scenario has changed somewhat since then. Last month the global agency Standard & Poor’s lowered India’s sovereign credit rating outlook from “stable” to “negative”, citing concerns over rising fiscal deficit and debt burden and lower growth rate.

Officials point out that there has been no general downgrading of credit rating and that the outlook on long-term ratings has in fact been revised from “negative” to “stable”. However, fears that foreign investors may shy away persist.

Finance Minister Pranab Mukherjee, who attributes the current difficulties to the Eurozone downturn, says the government has noted the concerns and is taking steps to strengthen and sustain robust economic growth.     

Advocates of accelerated reform attribute the government’s reluctance to move forward to differences between Prime Minister Manmohan Singh and the Finance Minister. They believe Manmohan Singh, who, as Finance Minister, began the process of dismantling the controlled economic system, is willing to go forward but Pranab Mukherjee, who is a pragmatic politician, is holding the government back.

The country no doubt is facing a serious situation. At the end of the last financial year the fiscal deficit stood at Rs522 billion. While the government’s income rose by only 36 per cent in the previous five years the deficit shot up by 312 per cent. The trade deficit mounted to $185 billion. The rupee fell to 54.91 against the dollar, the lowest level so far.

Many believe a slight fall in the value of the rupee was necessary as a corrective measure but with importers buying up dollars to hedge against the global uncertainty the decline has gone way beyond the desirable level. Everybody is looking up to the government and the central bank to intervene and arrest the slide but they have to move cautiously lest they should add to inflation, which is already running high.

Foreign and domestic corporate interests consider the situation ripe to press home the International Monetary Fund’s proposal to cut subsidies. When they talk of subsidies, they have in mind the subsidies on food, fertilisers and petroleum products like diesel, kerosene and cooking gas, which by and large benefit the poor and the middle class. They overlook the subsidies that benefit the affluent, which are a bigger drain on the economy than those that benefit the poor.

In the most recent budget, food, fertiliser and petroleum subsidies add up to a mere Rs2,163 billion. The subsidies to the rich, which figure in the document under the head “revenue foregone”, total Rs4,373 billion. The figure includes customs duty waiver of Rs1,953 billion, excise duty waiver of Rs1,691 billion and corporate income tax waiver of Rs729 billion.

In 2008, corporate tax in India was only 17.3 per cent while it ranged between 20.7 per cent and 37.0 per cent in the other BRICS states and between 30 per cent and 50 per cent in the developed economies. Since then it has come down to 14.7 per cent. Is it any wonder that India is producing billionaires faster than any other country?

Emergent India is at a crossroads. It has to decide whether to follow the route that landed the developed economies in the throes of crisis or furrow a new path taking into account its special circumstances. It will be disastrous to let less than one per cent walk away with undue gains and heap new burdens and make life more difficult for more than 99 per cent.--Gulf Today, Sharjah, May 22, 2012.

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