Indian Economy :Long-term prosperity vs short-term populism

Discussion in 'Economy & Infrastructure' started by Ray, Sep 15, 2013.

  1. Ray

    Ray The Chairman Defence Professionals Moderator

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    Long-term prosperity vs short-term populism

    Gurcharan Das

    “Life can only be understood backwards but it must be lived forwards,” says an epitaph from the philosopher, Soren Kierkegaard. It rightly belongs on the grave of this dying UPA government that has destroyed our economy, with the traumatic collapse of the rupee its latest achievement. The epitaph reminds us that we must not ignore history if we want to lead a reasonably predictable life in the future.

    One of the greatest lessons of history is that only an industrial revolution can make a poor nation prosperous. Every country has done it this way. Only thus can a nation hope to provide jobs for the millions of young people on the farms. But after two decades of reform, India’s economy is driven not by manufacturing but services.

    Tragically, 90% of Indians work in the informal economy and even Ganesh idols are sourced from China. Our prime minister knew about this structural weakness when UPA came to power, and his government should have focused on making India a great manufacturing nation — by reforming rigid labour laws, investing in power, roads and ports, cutting red tape, and removing “inspector raj”— so that India does not rank 134th in the ease of doing business.

    Instead, this government turned against industry. It brought retrospective changes in taxes, stopped hundreds of projects through red and green tape, imposed arbitrary penalties on companies and placed silly conditions when inviting foreign investment. Given this very unwelcoming and unpredictable climate, honest business people lost all faith in the system. Only crony capitalists remained faithful. And now, in the midst of one of the worst crises faced by our country, this government has championed two disastrous pieces of legislation.

    It has proposed a new law based on the dreadful premise that acquiring agricultural land for industry is inherently coercive and bad. Under the new law, it will now take years to acquire land, as the land acquisition proposal even for small projects will have to pass through a hundred hands. This will ensure that India remains disadvantaged against its competitor nations and does not experience an industrial revolution.

    Secondly, it has enacted a law on the ridiculous assumption that two thirds of Indians go hungry to bed. Hence, the state will now have to provide 80 crore Indians with grain at 10% of the market price when less than 2% of Indians claim to be hungry according to official surveys. Where will the colossal money come from when the nation is teetering on bankruptcy with its rating about to be downgraded to junk status? Two weeks ago Sonia Gandhi told Parliament that if there is no money for the food security bill, it would just have to be found. And if the public distribution system is broken, she said, it would have to be fixed. But how, she did not say.

    We used to believe that even if India reformed slowly, it was reforming surely and there was no going back. Under this premise businessmen made huge investments after 1991 and this unleashed the gift of high growth, gradually making India the world’s second fastest growing economy. But this government sneered at this gift and has even undone some reforms. Despite some excellent moves by the finance minister in the past year, there is uncertainty and confidence remains low.

    The coming of Raghuram Rajan at RBI has stemmed the rot somewhat. But it will take time to rebuild confidence that has been recently shaken by the fall of the rupee which brought huge collateral damage to the bond and equity markets. India can still create an industrial revolution if it remembers Kierkegaard’s epitaph. The rupee’s devaluation has once again presented an opportunity for export driven manufacturing growth. But it will require a deep commitment from the next government to create reliable infrastructure and transparent rules.

    Meanwhile, the best that this government can do is to call early elections and put an end to some of our misery. Let people decide if they want to take the path of long-term prosperity or the path of short-term populist giveaways. One can never be sure in a democracy about the next government but it is in the nature of the human heart to hope for a better tomorrow.

    Long-term prosperity vs short-term populism by Men & Ideas : Gurcharan Das's blog-The Times Of India

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    A telling commentary of Indian economy and the economic policies.

    Bareboned, the manner in which the Indian economy seems to have collapsed like a House of Cards, is surprising because when the World faced recession, the Indian economy still held its ground because of sound foundations.

    And now, the claim that India is facing its woes because of the downslide of the World economy really does not wash, if it had survived the earlier recession, which was more disastrous. In fact, everywhere else, the economy is rebounding positively.

    What all are the causes and faulty policies that have brought India to his near ruination of the economy?
     
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  3. Ray

    Ray The Chairman Defence Professionals Moderator

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    Reforms: clear the clutter

    SA Aiyar

    Economic reforms should be clear and simple, not cluttered with endless terms and conditions. This has long been forgotten by the UPA government, which tries desperately to ensure that any change satisfies several vote banks simultaneously, supposedly to ensure inclusion. This approach clutters even the most desirable changes (like the land acquisition bill) with loads of conditions, delays and red tape. A refreshing contrast comes from the new banking reforms of Raghuram Rajan, the new RBI Governor. He has decreed that any bank can now open a new branch without RBI clearance. Earlier, the RBI viewed every new bank branch as a special dispensation, to be approved only after long scrutiny. Indeed, the RBI once wanted to approve even individual ATMs, viewing these as bank branches of a sort! Rajan has jettisoned the approach of everything being forbidden till approved. By freeing banks to expand as required, subject only to the usual rules, he has produced clean, uncluttered liberalisation.

    Contrast this with the cluttered approach of Anand Sharma, supposedly one of the most market-friendly ministers in the Cabinet. He championed, and won Parliament’s approval, for 51% foreign direct investment in multibrand retail. He also got Cabinet approval for 100% FDI in single brand retail. He thought this should impress all foreign investors. In fact, one year after the supposedly revolutionary new multibrand policy, not a single dollar of FDI has yet come in (though Ikea and some others will hopefully come in soon).

    The distinction the government makes between singlebrand retail and multi-brand retail does not exist in other countries. It has no business logic, and simply tries to buy off the vote bank of small shopkeepers. If FDI in retail is a good thing, it should be allowed without clutter. If it is a bad thing, it should be banned. Sharma justified the cluttering of FDI as an India-specific model. That’s precisely the problem: India specialises in clutter that more sensible countries avoid.

    Sharma obliged foreign investors in multi-brand retail to source at least 30% of their products from small companies with less than $2million of fixed investment, and to invest at least half their initial investment in back-end infrastructure. This raised so many possible complications that it took a full year to clarify all issues. Ikea said it aimed to grow rapidly in India, so the industries it bought goods from would expand rapidly too, not remain small any more. After long agonized discussion, the government agreed to the expansion of supplier companies. It also agreed to limit the mandatory 50% spending on back-end infrastructure to the initial investment tranche of $100 million.

    The question remains, why are we returning to the bad old policy of small scale industry reservations? The old reservations were initially created in the 1970s, and proved terrible. They created a perverse incentive to remain small instead of growing. Some entrepreneurs split factories into several bits, each of which stayed below the prescribed investment limit. Others leased machinery instead of owning it, to escape the investment limit. The policy was conceptually stupid because it made lack of growth and productivity virtues, not vices.

    When reforms began in 1991, the small-scale lobby opposed de-reservation strongly. So, de-reservation was phased in very slowly, and was finally completed by 2005. Alas, the government has now brought it back — without any explanation for the reversal. The only logic seems to be vote bank politics.

    The same vote bank approach has been carried further for procurement of goods and services by government departments and public sector undertakings. Since 2012, 20% of all procurement has been reserved for small and medium enterprises. Within that 20%, a sub-quota of 4% has been fixed for businesses owned by dalits and tribals. The next step will presumably be a quota for Muslims. Salman Khurshid will doubtless demand a sub-quota for Pasmandas (dalit converts to Islam). Jaganmohan Reddy will demand a quota for dalit Christians. Nitish Kumar will demand a quota for maha-dalits (the lowest of the scheduled castes). A quota for women will follow. The possibilities are endless.

    There is a lobby for everything except productivity or competition, which are the mainsprings of higher incomes and lower prices. High productivity requires the abilty of businesses to compete and grow without endless hassles and conditions. The UPA government shows no interest in raising productivity or competition, and focuses instead on a clutter of conditions, quotas and permits to woo sundry vote banks. This is a major reason for the economy’s downhill slide. Solution: more clear, uncluttered reforms of the kind Raghuram Rajan has just introduced.

    Reforms: clear the clutter by Swaminomics : SA Aiyar's blog-The Times Of India

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    Swaminathan Aiyer is a votary of the UPA.

    This is his take.
     
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