Economy unravelling

Finance Minister P Chidambaram’s all-iswell chant when the economy is unravelling recalls an apocryphal tale. A man sat cutting the branch of a tree on which he was perched, ignoring warnings by passersby that he might fall and hurt himself. But he waved them away with a shrug. And when he fell, as he had to, his arrogance would not permit him to admit his folly in ignoring well-intentioned warnings. Well, the way Chidambaram has sought to talk up the economy, it would seem he is oblivious to the deep funk the economy has sunk into. His glibness, and reliance on friendly newspaper editors to amplify his cheery stance, does not mask the most serious crisis the economy has faced since the early ‘90s. That some of the measures undertaken by the central bank in the last couple of days mimic those taken during the foreign exchange crunch in the ‘90s further underlines the seriousness of the situation. Capital controls, tighter monetary policy, restrictions on imports and on the outgo of foreign exchange by companies and individuals, etc. is an admission of a grim situation, despite the FM’s brave posture. Equity markets do not operate in a vacuum. They have a very sharp antenna, which gathers all relevant signals. On Friday, the bloodbath on the bourses was not triggered by unscrupulous traders out to make a fast buck. It was caused by foreign investors seeking to salvage whatever they can, before the Indian economy slips further into a bigger crisis. The rupee is in a free fall, having lost more than fifteen per cent against the dollar in a few short months. Bond markets are in a panic, the net sales of bonds being four times than the sale of equities. Therefore, it is not rocket science for gold prices to zoom to record highs. On Friday, while the Sensex plummeted by 770 points, gold surged to Rs. 31,010 for 10 gram, its highest price in two years. Clearly, a further increase in the import duty made speculators to buy gold ahead of the coming festival season. Higher import duty will come as a boon for gold smugglers, besides defeating the objective of conserving foreign exchange. Some analysts might blame the US Fed chief Ben Bernanke for the current panic in the equity and forex markets, but this only evades the real cause. Which is the fundamental weaknesses in the economy. Having slept through the last four years, policymakers are now reaping the wages of the wilful neglect and damage they have inflicted on the economy. Till very recently, the emerging economies were on an upswing, while the developed economies were in the grip of a slowdown. But the trend is reversed now. All BRICS economies are slowing down while, led by the US, most western economies are perking up. However, in the case of India, the crisis is man-made, though UPA ministers have a convenient scapegoat in global factors to evade their own criminal negligence and willful neglect of the economy. Even the depreciation of the rupee, frankly, is a reflection of the double-digit inflation in the last couple of years. The flight of foreign investors too is largely on account of retrograde taxation policies, lacking transparency. It is remarkable that in spite of periodically tweaking the rules in their favour, no major multinational retail chain has shown enthusiasm to set up shop here. Even if foreign investment caps are raised further in other sectors, such as insurance, it is unlikely to bring in dollars. Frankly, the government no longer inspires confidence. Neither GST nor the Direct Tax Code has been rolled out. Ad hocism passes for economic policy. It is proof of the profligacy of the UPA government that despite sitting on the world’s richest reserves of coal, it has allowed its imports due to its failure to manage the affairs of the public sector behemoth, Coal India. It was neither asked to expand its mining operations nor was it denationalised so that the private sector could meet the growing needs of thermal plants for the black gold. Likewise, manufacturing has been given stepmotherly treatment, thus causing cheap imports from China, while local labour and factories have been rendered redundant. The litany of official follies is endless. But it needs to be noted that the run on the currency will not be curbed by exchange controls. The more reliable solution is to go to the IMF and boost the confidence in the rupee. Political factors can only delay the IMF loan, but they cannot stop it. If that is the case, have an early Lok Sabha poll, so that a new government can start undoing the mess created by the UPA. And the first thing required to clear the mess is to acknowledge its existence and not to boast that all-is-well like Chidambaram does all the time.