Coordinated fiscal and monetary measures can pull a country back from the brink
By Mohan Sule
In the second half of 2013, it did appear that the developed world and the emerging markets were decoupled. The focus of central banks in the US, Europe and Japan was to wake up inflation. In contrast, emerging markets were grappling with burgeoning current account deficit, depreciating currencies despite interest rates higher than in the West, and surging consumer prices, pushing the aam aadmi to take to streets in Brazil and India. Even within the fast-growing bloc of countries, there were differences. Imports of gold were straining reserves in India, while cooling prices of commodities were hurting Russia and Brazil and unproductive expenditure in property development was haunting China. At last, it was conceded, that different hotspots have unique problems calling for customized solutions rather than coordinated action by monetary authorities around the world, as was proposed after the post September 2008 financial markets meltdown. The common thread tying up the rich world and developing nations appears to be the frothy equity markets due to the cheap money in circulation. The second is corruption. Crony capitalism is agitating not only India but also Communist China and one-man-ruled Russia.
Yet there are silver linings: home prices are spurting in the US, software services exports from India are looking up, and China’s domestic market’s consumption potential remains untapped due to the high savings rate. The crucial issue is whether they are able to capitalize on their inherent strengths to trigger another round or prosperity, the last being in 2003-07. There are two scenarios. One of the economies rebounds forcefully so as to pull up other laggards. The other is the bottoming out effect as no one is in a healthy shape at the moment. Parallels can be drawn to the four years of universal economic boom at the beginning of this century: India dreamt of double-digit growth in the years ahead without doing anything. However, both conjectures look remote at this juncture. An important component of the last season of buoyancy was cheap money in search of yields. With its likely absence, the debatable question is if the emerging markets will be able to ride on the American recovery. Central banks in these countries will have to keep their interest rates high to remain competitive against US investment options. This will slow their growth. Another possibility is of simultaneous recovery in the world economy because of coming to an end of the seven-year seasonal cycle. By this theory, global economies should start looking up by the end of 2014. Yet his does look a bit difficult because two of the largest economies, Brazil and India, are holding elections this year. Pre-poll sops are in the danger of skewering their finances, stretching the period of recovery and causing a lot of pain.
The continuing slump in commodity prices means the greenshoots are fragile. On the positive side, countries dependent on oil imports will be able to cap domestic inflation. If increasing reliance of the US on shale gas production implies that the era of high crude prices is coming to an end, the rising number of people coming out of poverty is putting pressure on foodgrain supplies in emerging economies. The inability of politicians to reach a common ground is stalling growth in rich countries as well as developing ones like India. On one hand, there is outcry over unemployment. On the other, there are shrill protests over profit-making corporations. At the forefront of this contradiction is financial services, painted either as a greedy dinosaur or a barrier to financial inclusion. Despite consensus that a booming manufacturing vertical is essential to provide jobs, companies in this sector are allowed to turn sick and ask to turn themselves upside down to return to health. But too-big-to-fall financial institutions are prepared for another round of capital infusion to clean up their balance sheets. The onus of reviving the economy has now fallen on central banks, which can only make money costly or cheap as governments with powers to formulate sensible policies have abdicated their responsibility in favour of racking up fiscal deficits. G2, G5,G7, ASEAN, APEC, BRIC are groups formed to calibrate policies but end up being just comfy retreats without any scolding to member-country for mismanagement of the economy. Monetary authorities do meet to swap ideas but are powerless to discipline their governments. How coordinated action by the government and the central bank can help the economy was best demonstrated by the action of India’s finance minister, who imposed import curbs on gold to stave off foreign exchange bleeding, and the Reserve Bank of India, which opened a swap window for banks at a predetermined hedging rate for their dollar deposits to increase inflow.
Wednesday, February 19, 2014
A piecemeal vision
India needs a Marshall Plan to pull it out of the present slump and put it back on the fast-growth track
By Mohan Sule
Perhaps in a first, a prime ministerial candidate has unveiled his personal vision for the country. This is a marked departure from the practice of political parties releasing manifestos on the eve of elections. This is because the prime minister is not directly elected. He is supposed to toe the party line. For instance, waiver of farm loans, guaranteed employment to rural folks and food security, the three major policies for which the UPA I and II governments will be remembered, were sourced from the National Advisory Council headed by Sonia Gandhi. Not surprisingly, these five-year plans are please-all documents. Banishing poverty and controlling prices continue to remain the central objectives. The roadmap to achieve these goals, however, is rarely spelt out. Unfortunately, there is no tradition for the ruling party to present an audit of the promises fulfilled. Nor do the voters demand a report card. With the increasing trend of fractured mandates, expecting the dominant partner to implement its promises is unrealistic. A common minimum program is no guarantee of harmonious relationship between the various components forming the government. The UPA I government had to dismantle the ministry of divestment to appease Left party supporters, who nonetheless left the coalition over the civilian nuclear deal with the US. Trinamool Congress leader Mamata Banerjee walked out of the UPA II composition late 2012 over fuel price hike.
That a leading contender to head the next government spells out his projection for the country could be a pointer that India is at a turning point. Just like the US presidential election, where the candidate has the freedom to walk the road that is not in conformity with the party that selects him, the Indian electorate has to make a choice not based on the charter of the political parties but on the personalities leading their parties. The Congress has shied from naming its candidate for the top post and is yet to reveal its agenda for future. It is unlikely that the bosses of regional parties will make ‘I have a dream’ sort of speeches despite harboring secret ambition of becoming prime minister of a rag-tag government in case neither the Congress or the BJP is in a position to enlist support because no one is sure who will be lucky enough to answer the call. The country will have to wait to see what more freebies they can think of. This leaves with just Narendra Modi’s idea of India. The most remarkable takeout is the absence of any mention of subsidies, particularly in the present toxic environment of political parties vying for the popularity sweepstakes by promising cut in power tariffs. Instead, enabling farm output data in real time to balance between demand and supply seems to be his answer to keep foodgrain prices in check. The problem is not of adequate production but last-mile connectivity with the consumers. This calls for warehousing, good roads and decongested ports and competitive pan-India telecom services.
Another contradiction is the twin thrust on agriculture and urbanization. Boosting produce is indeed necessary due to the increasing purchasing power of the population, particularly in rural areas covered by the minimum wages scheme of the UPA II government. At the same time, the share of agriculture diminishes in the gross domestic product as the country makes the transition to a developed economy. How Modi is going to balance the needs of modern cities with those of an agrarian economy is not clear. Whizzing away in bullet trains is an exciting prospect and underscores the importance of transportation as a fuel of growth. The chief minister must be surely aware that one of the factors affecting India’s economy is availability of land. Environmental clearances have stalled ambitious projects to build new cities such as Lavasa in Maharashtra. Return on investment in infrastructure projects remains a thorny issue. On his next visit to Mumbai, he can find the reasons for the delay in implementing the Worli-Bandra sea link and the monorail and metro network and the scrapping of the second Churchgate-Virar railway corridor. Instead of piecemeal focus on components of infrastructure, what is needed is a Marshall Plan, which helped to rebuild Europe post World War II. The comprehensive package for a new India should include planned development, universal healthcare and quality education. All this boils down to attracting capital. The challenge, therefore, is to make India an important port of call by allowing inflow and outflow of financial and human capital without fiscal barriers. For this stable and transparent policies and maintaining the sanctity of the market with swift punishment to those who circumvent the system would be important steps to instill confidence in invest
By Mohan Sule
Perhaps in a first, a prime ministerial candidate has unveiled his personal vision for the country. This is a marked departure from the practice of political parties releasing manifestos on the eve of elections. This is because the prime minister is not directly elected. He is supposed to toe the party line. For instance, waiver of farm loans, guaranteed employment to rural folks and food security, the three major policies for which the UPA I and II governments will be remembered, were sourced from the National Advisory Council headed by Sonia Gandhi. Not surprisingly, these five-year plans are please-all documents. Banishing poverty and controlling prices continue to remain the central objectives. The roadmap to achieve these goals, however, is rarely spelt out. Unfortunately, there is no tradition for the ruling party to present an audit of the promises fulfilled. Nor do the voters demand a report card. With the increasing trend of fractured mandates, expecting the dominant partner to implement its promises is unrealistic. A common minimum program is no guarantee of harmonious relationship between the various components forming the government. The UPA I government had to dismantle the ministry of divestment to appease Left party supporters, who nonetheless left the coalition over the civilian nuclear deal with the US. Trinamool Congress leader Mamata Banerjee walked out of the UPA II composition late 2012 over fuel price hike.
That a leading contender to head the next government spells out his projection for the country could be a pointer that India is at a turning point. Just like the US presidential election, where the candidate has the freedom to walk the road that is not in conformity with the party that selects him, the Indian electorate has to make a choice not based on the charter of the political parties but on the personalities leading their parties. The Congress has shied from naming its candidate for the top post and is yet to reveal its agenda for future. It is unlikely that the bosses of regional parties will make ‘I have a dream’ sort of speeches despite harboring secret ambition of becoming prime minister of a rag-tag government in case neither the Congress or the BJP is in a position to enlist support because no one is sure who will be lucky enough to answer the call. The country will have to wait to see what more freebies they can think of. This leaves with just Narendra Modi’s idea of India. The most remarkable takeout is the absence of any mention of subsidies, particularly in the present toxic environment of political parties vying for the popularity sweepstakes by promising cut in power tariffs. Instead, enabling farm output data in real time to balance between demand and supply seems to be his answer to keep foodgrain prices in check. The problem is not of adequate production but last-mile connectivity with the consumers. This calls for warehousing, good roads and decongested ports and competitive pan-India telecom services.
Another contradiction is the twin thrust on agriculture and urbanization. Boosting produce is indeed necessary due to the increasing purchasing power of the population, particularly in rural areas covered by the minimum wages scheme of the UPA II government. At the same time, the share of agriculture diminishes in the gross domestic product as the country makes the transition to a developed economy. How Modi is going to balance the needs of modern cities with those of an agrarian economy is not clear. Whizzing away in bullet trains is an exciting prospect and underscores the importance of transportation as a fuel of growth. The chief minister must be surely aware that one of the factors affecting India’s economy is availability of land. Environmental clearances have stalled ambitious projects to build new cities such as Lavasa in Maharashtra. Return on investment in infrastructure projects remains a thorny issue. On his next visit to Mumbai, he can find the reasons for the delay in implementing the Worli-Bandra sea link and the monorail and metro network and the scrapping of the second Churchgate-Virar railway corridor. Instead of piecemeal focus on components of infrastructure, what is needed is a Marshall Plan, which helped to rebuild Europe post World War II. The comprehensive package for a new India should include planned development, universal healthcare and quality education. All this boils down to attracting capital. The challenge, therefore, is to make India an important port of call by allowing inflow and outflow of financial and human capital without fiscal barriers. For this stable and transparent policies and maintaining the sanctity of the market with swift punishment to those who circumvent the system would be important steps to instill confidence in invest
The force disrupter
The young in India need stamping out of crony capitalism and creation of jobs and not subsidized power and free water
By Mohan Sule
How quickly has the sense of optimism at the turn of the New Year been dashed. Hopes of a stable one-party government after the general election due in a few months have given rise to concern that India may be going back to the days of unstable, left-leaning and short-lived governments of V P Singh, Chandrasekhar, H D Deve Gowda, and I K Gujral, who created havoc with public finances in the name of populism. The turning point, of course, was the mortgage of the country’s gold reserves early 1990s. India once again is poised at a critical juncture, with the US Federal Reserve beginning tapering of liquidity injection. High inflation and low growth pose a challenge of attracting liquidity to take care of supply-side issues and at the same time of controlling credit outflows. The combo of Reserve Bank of India governor Raghuram Rajan and Union finance minister P Chidambaram has managed to stem the slide of the rupee by slowing down unnecessary imports. In the process, they have built up forex reserves to tackle any dollar shortfall on Fed’s gradual reduction of its bond-buying program, instilling confidence in the market. The anticipated crowning of Narendra Modi, with a track record of good governance in Gujarat, had propelled foreign institutional investors’ return to India. The guerrilla win of Aam Aadmi Party in the Delhi assembly elections, however, has the potency to damage the economy the way Sonia Gandhi-headed National Advisory Council did during the two terms of the UPA govenment.
There are some indications that the power of subsidies and freebies has been overestimated. Delhi was the first state where food security was implemented. Chhattisgarh had become the laboratory to examine the efficacy of the direct cash transfer in lieu of subsidized products. The Rajasthan government distributed free medicines. Nothing worked as the ire against corruption overwhelmed cheap essentials. What did was good governance in Madhya Pradesh. Phasing out of subsidies is inevitable as India transforms into a developed country and the share of services in the gross domestic product increases. Making the transition smoothly is the crucial differentiator between progress and chaos. The UPA II government could not make the grade, mistaking the short-term pain for terminal despair. Waiver of farm loans and the guaranteed rural employment scheme were short-term prescriptions to the upheaval caused during this phase. Their contribution in getting the UPA government a second term led to the belief that the electorate needs to be wooed by welfare schemes. In retrospect, this calculation has proved off the mark as the population has graduated to the next level of the progress curve. The AAP, too, is repeating the error, forgetting that an important pillar of its support is youth. Agitating this section is the lack of opportunities for growth due to cronyism. Telecom spectrum and coal blocks were sold to those close to the policy makers rather than to those competent to run them. The most visible benefit of liberalisation is the creation of jobs. A landscape bereft of market-hungry companies cannot produce this growth. The young voter, therefore, has to understand that a government that empowers them to pay for essentials such as power and water at competitive pricing is the best bet for the long-term sustainability of a comfortable future.
The goal should be growth with transparency. India’s economy is evolving and there are bound to be missteps. The journey of the telecom sector best symbolises the process of opening up the economy on a trial-and-error basis due to the uncertainty of the potential and which degenerated into a get-rich scheme after realization of the market size. A valuable lesson learnt is that there is no fixed method to implement reforms. The changes, however, should be part of the objective of a policy focused on fiscal health rather than on appeasements of different constituencies. This is because stickiness of investment is important. This was underlined during the flight of foreign portfolio capital on indications of Fed’s reversal of easy money policy. The importance of foreign investors will be easily understood if AAP scrutinizes two of its poll promises: accessible and cheap water and electricity. Infrastructure projects in a country of the size of India require huge capital. There are only two ways to tap funds: Allow foreign investors to invest directly in these projects or ask Indian promoters to implement them by raising funds in the foreign markets. Hence, a healthy capital market where well-managed and profitable companies are sought after is essential to meet the basic needs of the aam aadmi.
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