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Policy Paralysis Impacting economy

Monday, December 12, 2011

For all the boundless energy of a youthful nation, and for all the acclaimed academic wisdom of its economic policymakers, India’s political leadership betrays a fear that has paralysed all capacity to make and implement tough decisions. And that is taking its toll on the nation as a whole, but more so, on the economy. Mayura Shanbaug spoke to the leaders of industry and comes back with the view that most of them are “aghast” and believe that the present trends portray potential for an ‘economical catastrophe’. Her report...

India’s problem, reasons Jim O’Neill of Goldman Sachs, in a recent speech in London, is one of a state of mind. “It all boils down to one issue: leadership.”  So what’s going wrong? For starters, the Government has failed to arrive at consensus on most major policy decisions, the latest example being Foreign Direct Investment in Multi-brand Retail and there after FDI in Insurance sector which was to be raised to 46% from existing 26%. 

It is to be noted, the Union government reeling under accusations of corruption and black money could not take any prominent decision from January to December in 2011. “The coalition dharma has taken over all other dharmas for the ruling party,” says Jiban Mukhopadhyay, a Senior Economist. “Our politicians appear to be myopic in vision and oppose policies for their individual gains rather than looking at the interest of national economy,” he says. The Opposition Party in Parliament is denouncing their heritage and policies for the sake of opposition,” he adds.

“The indecisiveness or bad governance is the root cause for all that is going wrong in India right now,” says Ramesh Bhojwani, a financial Analyst. “On the economic front, the news is going from bad to worse. The pace of growth is the slowest and inflation remains untamed. The rupee is in for a free fall, and corporate earnings are south bound  We have gone back to square one, to a pre 1991 phase, when the then Finance Minister Manmohan Singh had launched  economic reforms to get India out of the fiscal chasm it was in,” he says. “Sadly, what he could achieve then as a Finance Minister, he could not achieve now as a Prime Minister of this country,” he adds.  

From Unbounded Optimism To Down-in-the-Dumps Pessimism.     

India is a country which has yo-yoed between looking at the double digit growth to facing a possible return to a balance of payments crisis in less than a year, say experts.

“The about turn of sentiments can be attributed to many reasons, including the overall effect of the slowing global economy, the European crises and untamed inflation. But the burden of not capitalizing on positive sentiments and taking growth to another level lies with India’s flawed leadership – across the political spectrum,” says Bhojwani. 

“We have a 40-42% increase in our agri produce this year, with rainfall being above average for two consecutive years. But food inflation remains high as 44% of our produce gets lost due to lack of storage capacity and ineffective supply chain. FDI is one of the very powerful reforms tool to curtail inflation. At least 1% of incremental GDP growth could have been achieved with the FDI in retail space,” he adds.

The FDI mess…
With the Government’s decision on allowing 51% FDI in Multi-brand retail and 100% in Single brand after a very long wait, for the first time ever, economists and analysts felt that this would break the dogma of India’s inability to deliver on its promises, with India finally looking to double-digit growth rates. But the optimism was to die a premature death.

“The decision of the Government to allow FDI in multibrand retail actually signalled much more than this one reform. It indicated that India is still very much on the track of economic reforms which are perceived to have slowed down in recent times”, says B Muthuraman, President, Confederation of Indian Industries (CII), who expressed disappointment over the decision of the Government to hold back FDI in multibrand retail.

 “This does not send out very positive signals to investors in India and outside. The introduction of FDI in Retail is one of the most significant reform measures that have been pending for years and Industry celebrated the Cabinet’s decision when it cleared the proposal.” he says. Muthuraman also warned of spiralling negative sentiments, “. In times like these, the importance of sentiments can hardly be overemphasized. Too much negativity acts like a self fulfilling prophesy”, he adds. 

Harsh Mariwala, President, Federation of Indian Chambers of Commerce and Industry (FICCI) also echoed similar sentiments. "It is a highly regressive move. For the growth of this vital sector of the economy which is likely to result in strong linkages with the farm sector and for the economy as a whole, it is imperative that the reforms like these should take place," Mariwala said.

As per a recently released CII study, opening up of FDI in Retail can increase organized retail market size to US$ 260 billion by 2020. This would result in an aggregate increase in income of US$ 35–45 billion per year for all producers combined; 3–4 million new direct jobs and around 4–6 million new indirect jobs in the logistics sector, contract labour in the distribution and repackaging centres, housekeeping and security staff in the stores. The Government also stands to gain by this move and can be expected to receive an additional income of US$ 25–30 billion by way of increased tax collection and reduction of tax slippages.
“The no go decision by the government on FDI will cost 1.5-2% (y-o-y) to the GDP growth,” says Mukhopadhyay.  “It was the final act of ritual humiliation for a government that has experienced several policy and political setbacks in these two-plus years,” he adds.

“The consequences of this indecision is going to be horrendous, even though we are not affected by the global crisis at this juncture, we will fall prey to the hand-crafted homegrown economic crisis crafted  by the politicians, who I suppose are masters in crisis creation, and we do not have the capacity to withstand any crisis,” warns Bhojwani.

“We need to turn the cycle back before our politicians are successful in committing economic hara-kiri,” he says.

The ‘no go’ decision by the government on FDI will cost 1.5-2% (y-o-y) of GDP growth… It was the final act of ritual humiliation for a government that has
experienced several policy and political setbacks in the past few years. We need to turn the cycle back before our politicians are successful in committing economic hara-kiri

In times like these, the importance of sentiments can hardly be overemphasized. Too much negativity acts like a self fulfilling prophesy.
B Muthuraman, President, CII

Our politicians appear to be myopic in vision and oppose policies for their individual gains rather than looking at the interest of national economy.
Jiban Mukhopadhyay, Economist

The withdrawal of FDI is a highly regressive move… it is imperative that reforms like these should take place.
Harsh Mariwala, President, FICCI

The indecisiveness or bad governance is the root cause for all that is going wrong in India right now.
Ramesh Bhojwani, Financial Analyst

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