Reforms? The Government must be joking

The so called 'reforms' supposedly unleashed by the UPA Government is the biggest joke of the year.

How come increasing the Diesel prices that lead to inflation (argument against is that not increasing diesel price will lead to fiscal deficit increasing, which leads to inflation - so it is a case of heads I win and tails you lose to the Government- it is inflation either way - one now, other defered) be categorized as a reform? In the first place why are we not asking the question "What led to the spiralling of the fiscal deficit in the first place?". Why are we not even talking about reducing non-plan expenditure, curbing the cost of the bureaucracy, discarding with the unwanted ministries? Why are we not doing a cost benefit analysis of the porous NREGS, where only less than 15% reaches the beneficiary? NREGS is the single largest culprit for the spiralling fiscal deficit. Why should only the common man pay for the profligacies of a wasteful government? Why are we not hearing about Ministers, including PM and the NAC Chairman doing a cost cutting on their security detail? We may not save much, but at least it gives a feeling that everyone is tightening their belt.

In the first place we need to be transparent about the claims of under recovery that leads to notional losses in the oil industry. I am an ex-oil industry guy myself. With oil prices remaining stable during the past one year, how come the subsidy bill is spiralling day by day?

What is required are sacrifices made by everyone, starting from the top, including industrialists. There are so many ways to raise revenue. Increasing tax collection ( tax evasion is very high in the country, especially sales and corporate tax), reducing expenditure, spending more money on infrastructure that generates employment, restructuring the government and the bureaucracy, abolishing at least 40 ministries at the centre and many more in the States, reducing interest rates that allows entrepreneurs and small businessmen to invest more instead of banks pampering the big industrial houses......... ............the list is endless............

We talk about FDI retail in another post.....................

The Great Indian Tragedy

Two decades of Economic Reforms has helped discount at least one theory. It was always claimed by the proponents of Economic Reforms (they do even now!!) that liberalization and globalization would result in higher GDP Growth and the benefits would 'trickle down' to the common man. While the first part has come true, the second part has proved to be a mirage chased by the common man. His life has become more miserable as the higher GDP growth has brought with it higher inflation, while his plight has remained the same. Added to this, our country's fate has become so interwined with those of the decaying western economies, that a default by Greece leads to stock market crash and rupee devaluation in India. We hardly have any trade with Greece, and there is no reason why our economy should react to Greece defaulting, for being financially indisciplined.

The problem is that we have failed spectacularly to develop any core competency during the two decades of reforms, unlike China, which has focussed on low cost manufacturing ability, and has forced the high wage western companies to shift the manufacturing base to China. We can point fingers at the intolerent communist regime, but one needs to admit that China has indeed leveraged its strength.

India had the opportunity to be the IT focal point of the world and also a great financial hub. But we were content to be mediocre. Despite the earnings of the IT sector, one has to admit that our IT sector hardly created anything worthwhile, and they were none better than Chinese, using Blue Collar Engineers to produce programs based on low grade specs. No great IT discoveries were made in India. And the less said about developing ourselves as a Financial/Services hub the better.

The saddest part is that, despite evidence to the contrary, and with the economy in doldrums, we are still talking only about opening up the insurance, retail etc rather than on creating long term assets. In short, we are replaying the tape of the 1990s, that is a proven failure.

There is no informed debate about how to build the nation, either by the UPA or by the NDA, or by any of the Regional parties. The politics of corruption, mud slinging and one upmanship has ensured that we have missed the bus to take global leadership once again.

What a tragedy!!!

Sober Thought

Rupee's prospects do not look bright. With deepening fault lines in the economy, mainly due to mounting fiscal deficit, backed by an insipid budget, Rupee continues to slide and is expected to touch Rs 53 to US Dollar soon. While this is good news for NRIs like me, and for exporters, it is bound to increase the inflationary pressure.

Another major cause for concern is the mounting Non Performing Assets with Indian Banks. With interest rates rising, most of the Banks are seeing an alarming rise in their NPA. This is bound to have serious implications. The credit rating agencies have already started downgrading Indian Banks, making it dearer for them to get credit in the open market. With hardly any takers for loans, due to high interest rates, the play-cautious attitude of the Banks towards new loans, which is likely under the current scenario, will further slowdown investment in the economy. What is alarming is the total ineffectiveness of the Banks to initiate recovery proceedings against the defaulting Industrial Houses.

In the near term the interest rates will continue to rule high, banks will lend less and money supply will be curtailed. We are almost nearing the economic crisis point of the late 1980s. And that is a sober thought.

Brace for a harsh Budget

Of late we are getting news from the Government that the inflation is down to 7%, from the high double digit figures ruling roost for the past couple of years. Even 7% inflation when the GDP growth rate is < 7% is unacceptable. It should be around 3-4%.

Having said that I get a bad feeling that the Government is manipulating the figures keeping in mind the current elections to the 5 States, mainly UP and Punjab, and this low inflation figures is more to do with preventing a backlash against Rahul Gandhi, than anything else. With Railway fares likely to go up (unless Mamta refuses to do so, which is a possibility, in which case Central Government shall be forced to pump in money to support the ailing Railways, which anyway will put a burden on the common man by way of increased taxes elsewhere), and Government having the last window before the General Election to really take hard measures (with UP, Punjab elections out of the way, and with General Elections likely late 2013 or early 2014, this is the only chance to increase taxes), we are in for a harsh budget this time around, which would mean higher taxes, cut on subsidies etc.  It is my reading that the inflation will touch double digits by April 2012.

While everyone is cribbing about the inability of the Government to reduce subsidies on Fertilizer, Kerosene, Diesel and Food grains, no one talks about the Tax Exemption and special benefits (which tatamounts to subsidy) to the Industry, which is many times more than those given to the poorer sections of the society. The argument that giving subsidy to industries spur employment is yet to be proven. Most of the subsidies given to industries have gone to fatten the pocket of the rich industrialists (or found its way back to the political parties as 'contribution' or bribes) rather than being passed on to the customers or in creating employement. No studies have been conducted or is likely to be conducted in doing a cost-benefit analysis of the the subsidies and special benefits given to the industrialists. And most of them enjoy the profits in private while passing on the losses to the poor public (All you have to do is to observe how Vijay Mallya is trying his best to force Government or the Public Sector Banks to bail Kingfisher Airlines out, rather than pumping in money from his liquor business. The Kingfisher mess is purely due to bad business modelling and still poorer management. Since Mallya is not willing to risk his wealth on reviving his Airline, why should SBI or Government, whose money is the common man's, do so?).

The RBI has given indications that the CRR is on a downward trend. This is to counter industrial recession.  But reducing the CRR without slashing the Interest Rates is of no use. The former is likely to put in the market more money that could be lended out, but where are the takers? Who wants to take loans at such high rates?

The Stock Market is doing fairly well, but that is more due to FII inflow than due to the turning around of our economy.

The Government has been lurching from one crisis to another, and has hardly time to tackle the economic woes. With a lame duck Prime Minister, a tired Finance Minister,  a beleagured Home Minister, a sick Party Chief and a dud PM in waiting there is a leadership vaccum.

We, the people of India, deserve this and more for re-electing Congress and UPA in 2009.

The adage, 'We get the Government we deserve' has never been truer.

Lack of prioratisation

Two decades of Economic Reforms has resulted in Profit going to the Private Entrepreneur while the Loss to be borne by the poor Public (All you have to do is look at how Kingfisher owner made money, and then when it ended up in a loss, begged the public sector banks and government to bail it out)

The Indian Economic Reforms were introduced in haste, without forethought and under duress from vested Western Interests. That it was thrust upon the Indians due to the poor economic situation the Country found itself in due to decades of wrong policies is another matter. But the cure is becoming worse than the disease with every passing year.

No. I am not against Reforms. What I am against is not ensuring checks and balances are in place prior to embarking on a major reform process, and not have set objectives and goals.

No Corporate worth its salt would have a Strategic initiative approved without KPI's and periodic review of attainment of KPI's. But, do we have a nation, our KPI's?

It looks like our Government has only one KPI - GDP growth rate. Everything is aimed at attaining 7-8% GDP Growth Rate. GDP is only an indicator.

We don't have KPI's for Unemployment, Employment Generation, Poverty Reduction, Inflation, Fiscal Deficit, Agricultural Growth, Industrial Growth, Services Growth, Illetaracy, Population, revival of sick units (or closing them), Subsidy Reduction, Transmission loss, Improvement of Roads, Infrastructure development............... the list is endless. The Government do have targets for all these, but they are given scant importance. If they are not achieved, and they are not achieved in any case, then nothing happens. No heads roll. And Government blunders on.

If we had a specific KPI for poverty reduction, we still will not be in a situation where more people are slipping below the poverty line, and the level of lack of sanitation in rural areas is appalling. Why can't we ensure clean drinking water and proper sanitation in every household is beyond my imagination. A portion of the money that is looted would suffice for the above purpose. Likewise primary education. The amount required to ensure proper schools and teachers is ridiculously low, compared to the subsidy given to industrialists. By doing so we are creating intellectual assets, that will be carried down from generation to generation. But for the Government, this is not a priority at all.

We pumped in billions into Airport upgradation. Did we ever do a cost-benefit analysis? Did we do an opportunity cost analysis? Would that money have been better spent on providing connectivity to the rural areas?

We pumped in billions to set up huge malls in the metros and other cities? But we hardly spent any money on developing rural markets that would have fetched better returns for the rural agriculturalists, that would have reduced poverty significantly.

We are committed to increase power generation capacity manifold by investing heavily in nuclear power plants. The amount involved is mind boggling. A hundreds and thousands of crores. But we are silent on cutting down our transmission loss, which is outrageous at 40%, half of which is theft. Why don't we spend on efficiency improvement than on creating more power that will again lead to more stealing?

I can go on and on...................

What we need is a national debate on the issues that need to be prioratised and taken up on a war footing, resources required to be identified and allotted.

But the very government that needs to do this is more worried about banning Salman Rushdie, burying corruption cases, throwing mud at people opposed to them, and in short not taking any decision.

Iruttu kondu otta adakkuka

There is a saying in Malayalam "Iruttu kondu otta adakkuka", which means "blocking a hole with darkness", which serves no purpose other than to camouflage the defect, while the core issue of closing a hole remains unsolved.

The Indian stock market has been facing a major crisis of confidence. This is reflected in the falling stock indices. The root cause is the policy paralysis at the Government level, the Global economic prospects, the downgrade of projected growth of Indian economy, the runaway inflation, rising fiscal deficit which means Government investments in economy in the near future will be severely curtailed, and a general feeling of despondency amongst the investors.

India took the FII route in early days of reform to attract overseas capital, while China opted for the FDI route. The FDI is more permanent as an investment, while the ills of focusing on FII is there for all to see. Firstly, it encouraged Black Money to be routed back to India through the Mauritius route, but more importantly we witnessed a flight of capital at the first signs of Global economic crisis, as witnessed in 2008.

The Global economy is in a much worse state than it was in 2008. Then it was only a few financial institutions that were affected, but now dozens of countries are in serious trouble, and some of them major consumers, and 'developed'. The recovery is going to be painfully slow.

The Government is going one step ahead in its idiocy and allowing Foreign investors and individuals to invest in Indian Stock Market. If the FIIs are not keen to invest in India, what makes the Government think individual investor will? Even if some were to do so, they are likely to take the money out more quickly than the FIIs in case of any negative indicators flashing.

Like many decisions of this lame duck UPA II government, this one also tries to pull wool over the eyes of the citizens without any intention to create long term benefit for them.

This is what I meant by saying at the beginning, 'Iruttu kondu otta adakkuka'

Some Economy related thoughts

The year just gone by hasn't been great for India, economically. The Government obviously gets blamed when things go wrong, and it did go horribly wrong last year. That is par for the course, because the Government is quick to accept credit when the economy does well.

Though, it is easy to blame the Government for the mess the economy is in, the fact is that our economy runs on auto pilot and is not very dependent on Government initiatives. Services constitute 55-60% of the GDP and this sector is by and large independant of Government interventions. Inflation was in double digit throughout the year, but this normally should be good news for the Corporate Sector, as in the short term, inflation means addtional revenue.

So why did the economy become sluggish. Global economic situation is very bad. USA is in trouble, as the sins of 2007 are fast catching up. Eurozone is in a melt down. Japan is still recovering from the Tsunami and Earthquake, and even Chinese economy is splitting at seams. There is hardly any demand for our products and services, and with internal consumption sluggish, due to higher interest rates and inflation, and with Government not willing to make any bold (or even routine) initiatives, the Corporates lost confidence. The current crisis is more of crisis of confidence than a crisis of economics.

The Government can think of stimulus to increase the demand. Allowing the Rupee to devalue by not intervening is one option. This would make Indian goods and services cheaper, boosting demand. Agreed imports will become dearer, but that can be compensated by supporting CAPEX importers with soft loans. Investment in the Agricultural sector will have a direct impact on stimulating the local demand. Sector specific easing of loans can be made available to select manufacturing sectors, that are critical to the growth. While it is tempting to suggest reduction of interest rates, one has to keep in mind its impact on inflation. But since an increase in interest rates did not contain inflation, one really wonders whether a decrease in interest rates will have a negative impact on inflation. One has to wait and see.

In short, have confidence in our Corporates and people, show that you are taking meaningful actions in a calibrated way, and you will have the economy up and running again.

This is assuming that the economy was performing purely due to internal competencies in the past. I had always suspected that the black money pouring in through the Mauritius route as FII was more responsible for Indian economy doing well in the past, than because of strong fundamentals.

Hike before it is too late

Why did the government raise the petroleum prices?

(if you believe that oil companies took an unilateral decision in hiking the prices, as UPA spokespersons tell you,then you are as cuckoo as them!)

Congress party knows that,with assembly elections to 6 states coming up in 6 months time,this is the last chance for them to raise the prices and mop up additionalvrevenue. Remember, government stands to gain 50% of the hiked price as revenue throughtaxes whenever there is a price hike. With revenue collections not likely to meet the targets for the fiscal, and with spiralling expenditure, and government unable to print more money in view of inflation,any additional income is welcome.

With opposition unable to organize popular protests, and limiting their activities to mouthing meaningless criticisms in the TV studios,the Congress party and UPA is getting away with murder. They think that the common man has a memory span of 3 days in this era of visual media, and would forget this price hike by april, when the assembly elections are due. They have not learned from history. The aam aadmi has a long long memory, and has shown that their retribution is severe.

Never have we had such an uncaring, unpopular government. Not even during the Emergeny period.

Need to recalibrate peoples expectations

With the demise of both capitalism and communism, world is desperately searching for a viable economic model.

But the question that remains is whether it is a case of these two models being flawed or like in most instances, it is the failure of the people who man the system. There is a saying that any system is only as good as the people who man it. While the power hunger of a chosen few land the repressive measures they adopted in their countries led to the demise of communism, sheer greed for money and the urge to grow rapidly led to capitalism being discredited. Both the models are great in principle, but both had utopian visions - a totally welfare state with no private enterprise where the resources belong to people and the wealth is equitably distributed is wonderful to dream about, but hardly practical to implement. The system needs someone to man it, and they took advantage. At the other end of the spectrum, no governmnent intervention and survival of the fittest is what any human being wants, but such a system lacks control mechanisms, that could and did lead to anarchy.

So, is mixeed economy the answer? I doubt, as it is at best a compromise and I dont believe in compromises.they dont ever produce the desired results.

Maybe, just maybe, the solution lies with reshaping the economy that currently depends on large business houses doing large scale production, to smaller business clusters that better use resources and ensures equitable distribution of benefits. But for that to happen, we need to manage the peoples expectations and retune their mind set away from thinking only in terms of economic growth as the only path to happiness, but rather to learn to live within means but be happy, as our grandparents were.

National consensus need of the hour

There must be something drastically wrong with our system of governance and planning if we cannot find solutions for a problem, that has become chronic over a period of 3 years - I mean the inflation.

The warning signs were there in late 2007 and early 2008. I was going through my blog posts during the period, when we were echoing the same sentiments about inflation, as we are doing now. You may read those posts just by typing 'Inflation' in the search window of this blog.

If there is one thing that affects people across the country, it has to be inflation. High inflation also has a direct bearing on the election results. And Congress is aware of it. Then why are they on such a suicidal mission of not doing anything about it.

Well they can't do much, even if they want to!

A good amount of money, that should have otherwise gone for plan expenditure, is being spent on unproductive, wasteful social sector spending like NREGA. I am not against social sector spending, but the delivery mechanism is so corrupt, that the cost benefit analysis of such schemes reveals a dismal picture. One can safely expect a waste of 40% in any average inefficient organization. But in this case, the waste is close to 85%!!. An organization cannot expect to not land in a financial crisis with such an amount of waste!!!

Then there is the case of Government unwilling to adopt cost cutting measures to bring down the fiscal deficit. There is absolutely no will to do a Governmental re engineering, that will downsize various departments and ministries, and help to abolish redundant posts. The Ministry itself is bloated with 80 odd ministers, out of which nearly 55 dont have anything to do at all.

Finally, the tax cuts and rebates given to the industries. Much is made of the subsidies given for petrol, diesel, kerosene and LPG, along with those given to the farmers and the poor. But this pales in comparison to the tax benefits given to the industrialists, who have become billionaires at countries expense. It is one thing to support the poor, but quite another to pamper the rich. The argument that rebates given to industrialists motivate them to create more jobs just does not hold water, as the figures on unemployment do not reflect the additional job creation.

There needs to be a national consensus if we are to really grow as an economy, on the way forward.

Or else we will end up like Greece.

1+1 just don't add up

Something about the budgetary figures dont add up.

Though the FM claims that the fiscal deficit this year will be 5% + as against 6%+ of last year, the truth is that this reduction is mainly because of the money received from the sale of 3G spectrum.  This is a one time sale of family silver, and do not reflect a serious effort on the part of the Government to reduce deficit through financial prudence. If you take this amount away, the Fiscal deficit for the current year will be back to 6.2%. Since there is no 3 G spectrum sale money available next year, the projected 4.6% deficit target for the next fiscal appears to be a bit too optimistic. This is bad news for those who want inflation to be controlled.

Another notable point is the projected rise in Government expenditure at just 3%, as against 19% last year. This too tests the common wisdom. With Government spending considerably reduced, one should witness a slowing down of the economy. But the FM claims the GDP growth will be 9% next fiscal. Reduced spending and higher growth rate?? Tough to believe. And reduced spending is bad news for the unemployed.

We need to take some harsh steps to reduce the fiscal deficit as it is adversely affecting our Real GDP growth in a big way. We were hearing about reducing the Fiscal Deficit to 2% not long ago, but no one even dare mention it these days. The rot started about 5 years ago, when we should have curbed non-plan expenditure, but we missed the bus and are paying the price for it.

Reduced Government spending and increased GDP growth? It means only one thing - The growth is to be funded by Black Money. And that is bad news for inflation.

Fidget Day

'Fidget' Day is here

Do not expect any miracle in today's Fidget, oops sorry .........budget.

The Government is presenting its 3rd budget and with no major elections in which Congress has a big stake in the horizon, the Government need not dole out sops to get votes. That will come next year when UP goes to polls. TN, Kerala, Assam, Bengal etc do not matter.

Pranab Mukherjee is a conventional politician with a slightly left of the centre ideology (that is, if he has one). He do not see eye to eye with the troika of MMS, Montek Singh, PC with respect to the economic philosophy. With Congress hell bent on splurging money on non productive social sector reforms, and with the PM considerably weakened (counting his days till the next Presidential election), Pranab Mukherjee is expected to give a status quo budget.

Anyway the budget do not matter when the real centre of money is elsewhere - the parallel economy and Foreign Institutional Investment.

This Government will continue to blunder along. Even the PM has started accepting that 7% inflation is acceptable, and we are grateful it might only be 7% as against 15% - a case of Stockholm Syndrome, though in a different context.

As long as the FM is not expected to give a performance appraisal of his previous years budget projection vs performance, we will continue to see irresponsible expenditure with no long term vision. Forget about long term vision, this Government is so short sighted that it cannot see clearly the tip of its nose.

So, on this fateful day dont Fidget. Just sit back, try to comprehend (if that is humanely possible) Pranab Mukherjees Benglish ( we just Mamata speak the other day, God help me), listen to all the idiots anchor know alls on TV and the self proclaimed 'experts' talk endlessly trying to make sense of something which they dont understand a word of.

Need of the hour

Why is it that there is still widespread poverty in India, despite the 7-8% per annum GDP growth rate over the past decade? Nearly 60% of our population lives around the poverty line, whether slightly above or below doesnt matter.

A country's economy goes through the phases of Agrarian -> Industrial -> Services Economies.  The skill sets/education required of the population for each phase varies from Basic School Education in the Agrarian phase, to Technical/semi technical skills during the Industrial Era to the higher level service oriented MBA/CA/Legal etc in the Services Sector.

Normally, this transition happens over at least 2-3 generations, whereby giving time for the respective governments to plan, upgrade the skill sets of successive generations in advance, so that they are employable when the transition from one phase to another happens.

In India's case, the rural India has been stuck on the Agrarian phase since independence. The transition to Industry and Services has been too fast and too quick, for it happened within a decade or at best a decade and a half. And the beneficiaries were the urban , semi urban population who were better equipped and possessed the right skills to exploit this transition. The poor rural population saw their opportunities shrinking, the sector is growing at 2-3%, the sector has the least priority amongst the policy makers, and unfortunately for them, the Government, instead of tackling the root cause of retraining and upgrading their skill sets, is trying to have a quick fix by giving doles, subsidies and ensuring they remain where they are.

Need of the hour is massive retraining of the rural population. But is someone listening?

Swiss Money the root cause of the inflation?

There must be something wrong with the macro economic conventions. The conventional wisdom is that when the interest rates go up, money will be sucked out of the system, leading to a release of inflationary pressures.

The RBI has increased the rates in six phases during the past year to the tune of nearly 200 base points (that is 2%). By all logic, inflation should have come down to less than 8% by now, especially in view of the more than fair monsoon.

This has not happened. This could mean two things. Since we can rule out major supply side constraints, and unnatural demand spike, as there are no visible signs of both, the only logical conclusion is money flow in the market is higher.

More money is being pumped in from sources, that is greater than the money that is sucked out of the system by the interest rate hikes. There are many suspects.

Pakistan has been very active in printing Indian currency and introducing them into our system. But the amount is too negligible.

With interest rates at an all time high, Foreign Institutional Investors have ensured that there is considerable dollar inflow to the Indian Stock Market (undesirable though), that has seen the stock market touch a record high. This means, the producers are not wanting in capital, which would have been the case when interest rates go up, leading to reduction in production, and wages paid leading to less money in ciculation. But if this were the case, then industrial production should have seen an unprecedented growth, which it hasnt.

The story about National Rural Employment Guarantee Scheme, increasing the purchasing power of the rural population, leading to inflation is pure humbug. If at all, it has to do more with the money siphoned off by the middle men finding its way back.

But my finger of suspicion points to the money stashed in Swiss Banks finding their way back. Swiss Banks are not safe as before and the black money hoarders, ranging from politicians to businessmen to middle men are jittery. With a pliant government that turns a blind eye to corruption, I guess huge sums of money is being drawn out of Swiss Banks and pumped into our system. There is no other plausible reason.

Print and Spend

The Congress Government's policy had always been to Tax and Spend, leading to Financial indiscipline and stunted growth.

But UPA 2 has chosen a more dangerous strategy, that will have long term consequence for the Country. During P.Chidambaram's tenure as Finance Minister, during UPA 1, the UPA Government has taxed anything and everything. As a wag once remarked "The only thing that PC has not taxed is f**king".

With hardly any new avenue open for additional taxation, the Government has shifted its policy to one of "PRINT AND SPEND". It has been printing money indiscriminately, leading to the hyper inflation that is prevalent in the Country today. Even the 'Economist' Prime Minister is pleading helplessness by saying that he is not a magician to tell when the inflation will come down, meaning it won't. Not when the irresponsible Sonia Gandhi and Rahul Gandhi, who enjoy considerable authority without a shred of responsibility, indulge in welfare economics of the worst kind that benefits none (with the exception of the corrupt), and especially the poor whom it is supposed to benefit.

Maybe Manmohan Singh is taking a leaf out of his Master's strategy to counter recession. The USA has been printing dollars indiscriminately (see pic above) to shore up a sagging economy. And disaster looms for dollar.

Heading for a catastrophe on the economic front

The RBI has hiked the interest rates once again. This seems to be the only mantra government has for combating inflation, and it is not working. The UPA 1 government had promised a low interest rate regime once and it seems eons ago now. The Government is clueless.

The root causes for the sustained inflation are many. The UPA Chairperson, Sonia Gandhi, has a left of the centre leaning in her policies and is on a social sector spending spree, without any accountability. And the Government, cant or wont, do anything about it. Thus largesse is bestowed on the aam aadmi, with hardly a portion of the intended money reaching the beneficiary.

The pro business Government, headed by Manmohan Singh, has been giving massive tax concessions to the Business Sector over the past 5 years. This has ensured that the Government do not get the benefit accruing from the 8% GDP growth,  by way of substantial increase in revenues.

And Government has not taken any step to control its non plan expenditure. Waste is the name of the game with anything to do with Government, the Common Wealth Games scandal is only the tip of the iceberg. The money that should have spent on income generating projects, is lining the coats of the middlemen, who are using it for conspicuous consumption.

Thus, while revenue collection has not shown substantial growth, the expenditure has increased manyfold, resulting in inflation.

Add to this, the role of the black money. It is an open secret that Pakistan has been pumping in fake currencies into the country for a long time now. We have hardly taken any steps to counter this.

Thus there is far too much money chasing too few goods. Is there any wonder inflation is doubte digit?

We are in for a catastrophe if this situation persists.

A new world order in the making

Unfortunately, there is a hype that what is good for the West (read US and Europe) is good for the World. And anything that affects the Western economy catastrophic. This is quite untrue.

When the Argentinian currency crisis happened in 1990s, followed by the Far East Asian currency crisis (both incidently happened only because those countries followed the Western country led World Bank policies of opening up the economy when they were not quite ready), the West gave gratituous advice as to how to manage the deficit, how to tighten the financial system and how to open up the economy further. Now that the shoe is on the other foot, with Western economies proving to be financially indisciplined, running trillions of dollars of debt (in some cases more than 100% of their GDP) no one is speaking to drastric solutions and need for fiscal discipline. The US managed to temporarily stave off a currency collapse by printing more dollars, which I suspect Europe will also do in the medium term. The crux of the matter is that Western Economies are unsustainable if they follow their current model, which is heavily consumption and services based. The estern economies are sustained  by the Eastern Savings. Eastern countries are looking at improving their own consumption levels to avoid what happened to Japan during the past two decades. India is already showing signs of increase in consumption, which is one of the reason for the current inflationary pressure. With economy in a downward spiral, Western customers will spend less and less, leading to lesser consumption and ultimately the East/ other emerging economies like China, India, Latin America, Africa, will lose interest in the West altogether. A new world order is likely to emerge during the next quarter of a century.

Importance of Micro Finance

My obsession- microfinance - discussed by S A Aiyer in his weekly article. Worth a read.

The nationalized banks have served their purpose of creating a banking culture amongst the middle class. However, they have paid scant attention to the needs of the poor and small traders, that include vendors who make a living out of what they sell on a daily basis. The banks cry wolf over rural credit, claiming the default rate being high. But when have you heard a hue and cry over loan default by mulit billionaire industrialists, that run into  thousands of crores? - and this list includes the who's who of Indian business.

The Government led by the neo capitalists like Manmohan Singh, Montek Singh Ahulwalia are only concerned about the massive industrialization, forgetting that Indian economy is dependent on rural demand, that is sustained by agriculture and small traders. This is where micro finance can pay a huge role. There are pockets in our country where self help groups have their own micro finance schemes, that run amazingly smoothly. But the rural traders and vendors are at the mercy of loan sharks. I had written about this almost three years ago, which can be read here.

And nothing much has changed in this front during this past 3 years.

At last the GST is here

The much awaited restructuring in the indirect tax structure in India finally gets the go-ahead.

Goods and Services Tax (GST), which is to replace the existing VAT, service tax, excise duties and central sales tax among others, will be in place from April 1, 2011. This shall dismantle the existing multiple level, regressive indirect tax structure, to be replaced by a single tax making it easy for corporates, small business and traders.

I have long been against artificial barriers being set up by each State and Union Territory that hampered the free movement of goods and services across the country. The check posts at state borders are a source of corruption, national waste due to loss of precious fuel and delays transhipment from one part of India to another by at least 2-3 days, a criminal waste.

This will be advantageous to the consumer too. The current Central and State Taxes are different for different products and in some cases it is as high as 30%. Under the new GST, there shall be a uniform tax of 16%, out of which the Central and the State shall have 8% each. This of course will be implemented over  a 3 year period in phases, and as such we shall get the full benefit of this scheme only by 2014. Government has been smart in one way. Our economy has been turning to a service centric one for the past decade. Under the new GST, even the services will be taxed at 16% as against the 12% today, allowing Government to benefit from the phenomenal growth in services.

The only worry will be when the Government decides to increase this 16% at some stage. Then it will be regressive. But that is for another day.

A bad feeling about the inflation scenario

The Government, headed by two 'economists' ,Dr. Manmohan Singh and the Dy. Chairman of the Planning Commission Dr.Montek Singh Ahulwalia, has only one prescription to tackle inflation - To increase the interest rates. And this is plainly not working.

We are currently back to the bad old days of 1980's when the interest rates were very high, stiffling productivity and consumption. Immediately following the Petroleum product price hike last week, RBI has quietly increased the repo and revere repo rates by 0.25 basis points. And a probable further raise can be expected on 27th July, when it announces its credit policy.

There has been both supply and demand side pressures on inflation. The petroleum price hike will result in another 1% rise in inflation at the WPI level, while at the retail level, it is likely to be almost double, taking into account the ripple effect on various sectors. However, the unbearable food inflation is purely due to supply mismanagement. We had identified supply side problems for over a year now, but has hardly done anything to combat that. One would have expected Government to come out with a long term Agricultural master plan to to ensure food security for the country. Unfortunately, this Government has shown very little interest in the Agricultural sector, probably because there is no US angle to it. The alacrity shown by MMS in getting the Nuclear Bill, Nuclear Liability Bill, Peace Talks with Pakistan, policies favouring MNC's etc - all with a view to pleasing the Americans, is absent when it comes to a basic issue like Food, which affects the common man.

UPA has been in Government since 2004. Any government is measured by its ability to give a comfortable life to its citizens, with inflation contained and manageable at best. But, Indians have been suffering badly due to inflationary pressures, mainly due to poor governance. Some figures are given below for you to assess for yourself,

The impact of inflation is felt in School fee which has gone up by 100%, public transport charges that has risen by almost 80%. The personal loans have become dearer.

An interesting point to note is that there has hardly been a major farm crisis, or a unprecedented spurt in demand (like export opportunities) for the Sugar, Rice, Tur Dal prices to go up. This can be attributed to bad policies, negligence and downright mismanagement.

We have gone horribly wrong with our economic planning and priorities. The Congress is back to its bad old days of tax and spend high interest rate policies of 1970s and 80s that proved disastrous for India, and took it to the verge of bankruptcy in 1991. I have a bad feeling about the current scenario. Let us just hope we dont end up seeing food riots in the country.