The Economic Crisis of India circa 2012

By : Amit Bhushan Date : 25 June 2012

A nations economic strength is mirrored by the xchange value of its currency and buying/purchasing capacity of its average citizens. However, the political managers in conjunction with the experts in financial domain often spin a twist and manipulate exchange value of currency to achieve varied political and financial objectives. Objective is to support one or two key industries, achieve some lofty goals on unemployment front or to manage balance of payment/inflation etc. Worse, the economists usually play along generally because financial manipulations occur with such nasty frequency on worldwide basis and form small whirlpools of hot air to lift the markets temporarily and have capability to blind average observers with its dazzle. The economists are perennially at risk of losing their credibility as such circumstances can be managed for short to medium terms of up to 3-4 years and the same may be sometime enough to make structural adjustments in economic structure (subject off course to a supporting market being available). This is coupled with a limitation regards availability of data and information on competitive situation including trade pacts and market access ability, complexity in assessment of impact of technological changes, changes in accountancy and taxation policies, issues with regards to security of assets and personnel and ability of identify and manage/outsource risks. With the end of era of our socialist command and control economy, our economic administration and planning departments stopped expending their time and effort to debate policies that would suit Indian publics as power of expenditure or investment control had shifted away from them and slipped into private hands. The economic administration therefore shifted its focus on bringing foreign investment as measurable criteria of success as this was and remains a need of the people/economy. An absence of political acumen as well as a host of political factors including coalition governments on the top led devolvement policy making for industry sectors to discrete ministries with a narrow focus limited to industry under their influence rather than on the whole economy. The job of smoothening the policy is expected to be performed by Cabinet/GoM/EGoM/CoS. On the surface, this looks fine however a limitation that the ministries generally collect data having a narrow focus on development of industries under their influence rather than overall impact on the economy of the country. For example, a minister can collate data to argue for raising import duty on power generation equipment citing dumping by foreign manufacturers and erosion of domestic manufacturers competitiveness; however the short and long term impact on jobs across various industries is never gathered or understood. For example cheaper and ready availability of solar/wind power generation equipment can sustain or reduce costs for consumers/consuming industry and improve their productivity and competitiveness; well may be, but needs to be explored. Similarly, our policy on education does not allow India to competitive education services to foreigners as it is formulated keeping domestic population in mind is it good ? Our price controls on drugs are ineffective is it good for the country to emerge as global health care destination; also focus on price controls gives rise to spurious drugs- so what to do? Ban on gambling

has been ineffective (so is ban on liquor in a state) so why keep public bereft of possible revenues and possible government services? We do not debate such issues any more as if they have ceased to exist. Each of these issues can now be put to a decision as these have increasingly lost the emotional espousal that they were once associated with and the potential revenues can be harnessed to build nation further, however for narrow political gains of financial clout by our politicians/political parties, these issues continue to languish on the back seat simmering to explode some day. The governments instead of looking like an Omnibus with different ministries and departments forming a consensus to move along a certain direction; now resemble public coaches sprinting in their own crisscross direction across the Indian economic highways. Frequently, in their race to outdo each other, different ministers spring out their quick fixes to solve the woes of the industry in the name of policy or reforms. Often this lack of coherence and understanding is labeled as dynamism and clout of the minister concerned and the Man Friday of industry hailed as new debonair by our media. The sleaze and spoils for such exuberance is added incentive to continue to roll policies and projects in the name of economic management for the country. The absence of a centralized policy making/debating think tank with reliable information collection on global basis and able to coherently formulate/argue the course that may be good/sustainable for the nation makes our governance apparatus to be easily manipulated by political satraps. The leadership seems to be focused on managing coalition partners and allowing good governance and effective economic policy making to take a back seat in the face of populism to the extent of accommodation of sleaze and corruption at policy making levels to the peril of society and common man. Now lets examine the role of economic administration in attracting foreign investments for India. The idea also is that if foreigners are comfortably operating in a segment, then policy governing the segment must be good for entire nation. This also serves as an important information collection point for formulation of policies and procedures and kick-off for new projects. However, as mentioned in para first of this thought paper, the industrys ability to thrive is also impacted by security situation, accounting and taxation policies, access to technology, raw materials and market access amongst others, besides entrepreneurship and sound management capabilities. Since such factors are a mix of local and global factors so governments have to tread cautiously. Also, the political elites are wary of losing controls, so even when they privatize they tend to ensure that controls are in hands of people who can be managed/manipulated; rather than in hands of foreigners who would at drop of the hat rush to create a diplomatic tussle between nations and their people for private profits. Thus you have situation where resources are allocated to domestic power brokers rather than to foreigners who can value such resources. The alternatives to selling resources to foreign entities are to either allot them to Public sector undertaking, however the sector is marred with such plunder and inaction that allocation of such resources would possibly be an exercise in futility. The other option is to engage private sector within the country. It may however be noted that for private sector to raise financial resources at competitive costs, they need to engage/partner globally renowned project developers with credible plans and technologies as well as to ensure that all anticipated risks are managed including exchange rate and interest rate fluctuation. The financers also look derive comfort if such projects can reflect a healthy

profitability stream. So private sector argues that the resources be allocated at nil or little value while the government would be benefitted through taxes from such project. In practice, however the entity managing such projects may not be as profitable as reflected in projections because of leakages/accounting practices/corporate governance issues. Often such allocations are done on a totally arbitrary basis to cronies of the politicians without any attention being paid to devising formula to minimize arbitrary selection at behest of debonair political leaders. Such selections, not only increases the risks for the financers of the allocated projects but also erodes the competitiveness/profitability of those entities competing with such projects. Thus the entire sector suffers making foreign banks as well as other domestic financial institutions lose confidence in the economic management of the country. In the case of Coal/Power, the government is currently pushing Coal behemoth for bailout by getting into supply agreements with power producers and persuading RBI/Banks for suitable financial restructuring of the sector, so that misdeeds can be covered up/made for. It may be noted that for emerging markets especially like India viz. those dependent primarily on domestic demand for their growth, the consumer demand has not ebbed or else they may be facing the level of inflation that is being witnessed presently. It is basically a reduction in investments which is primarily because of a decline in savings (due to inflation); a decline in lending by domestic FIs due to high interest & loss of confidence due to above mentioned factors ad pull back from foreign FIs (again due to above factors); that we are witnessing scenarios where some of our corporates are impacted by reduced demand for their wares. Also, because of reduced corporate demand, we do have pockets of affected consumers as well as dipped fortunes for SMEs. The decline in xchange rate of the currency has ensured that India continues to witness high impact of imported commodity inflation and due to integration of our markets with global markets and our focus on exports, so even domestically produced commodity (including food items) mirror the prices abroad. Again due to such arbitrariness in matters of governance now being exposed in media is susceptible to legal challenges and hurdles and the probability of reversal/discontinuation of government policies has gone up. This has led to further uncertainty in matters of governance and impaired decision making apparatus in the policy making circles. There is an erosion of self confidence amongst the decision makers and confusion in bureaucracy which is searching for a magic wand to rescue their head/minister as well as themselves. However, they are still loathe to surrender decision making to the age old political structures which according to them were a cause of misery to the country. Thus the need for structural reforms as well as to build capability for decision making is more than ever before. Are our think tanks, public educational institutions as well as media able to cope up to such challenge to bring about such reforms? When will focus go to building decision making capabilities/implementation related issues being discussed; at various levels be it central ministries, state governments and their ministries or local governments? The changing global scenario has brought India to a cusp where are decisions can have long term bearing on not only our own fate but also on the future of global economy. Our capabilities to transform the shape of production/consumption for various products and services is higher than ever before, however instead of trying to leverage the situation to benefit India in the long

run, our leadership is still pursuing its power battles and self interest in a dogmatic manner and clinging on to power structures for pursuing the megalomaniacal dreams.