Governance paralysis adds to Economic woes

When the whole world is fighting abnormal Economic upheaval and finding fast remedies so that it becomes equilibrium. However, in India we are seized of various issues for which undue focus has been forced upon, with the result that there is a leak in our vessel of economic woes. The governance of the country is not with the executive, but with others who see no reason to indulge in removing the litters that the economy has left behind. Alas, we are at discomfort with the reality. Government’s dithering and hesitation to act because of coalition’s compulsions left a void in economic recovery. We are not even at the cross roads. Every planning prophecy made need alteration. Growth has gone dismal. Industrial production has trespassed to negative territory. The Rupee continues its slide with venom. Interest rates remain prohibitive. GDP growth during 11th Five Year Plan was expected to garner an 11% growth. This year’s growth if it achieves 6.5%, it would be remarkable. These show negativism in the Economy. They do not show a positive sentiment for the economic growth. But no alarm bells rung. We should be worried, and alarmed at the state of affairs to declare a financial emergency. But we accept difference in every idea, that in every action all the political parties agree to dissent. True, we should not concern only in growth figures, but look at lackadaisical industrial and economic climate, scams vitiating pro investor policies, focus on corruption, and only on corruption, negative monetary prescriptions like interest rate increase 13 times in 18 months, hikes in petroleum products periodically making planning inconsistent, roll back on FDI on retail sectors which has sent a wrong signal to foreign investors. This has put a halt to FDI and FII and repatriation of investment which has created the dollar crisis. Rupee devaluation has hit the roof with as much as 20% slide against the greenback at a time the Dollar is vacillating. This increases input costs, import cost of capital goods, prices of petroleum products. RBI says the crisis has been caused by Euro crisis, instability of the American dollar, intense buying of dollar within the country, repatriation by FII, FDI, re-payment by Corporates of their External Credit Borrowing, higher import costs of Petroleum products. RBI has been clearly in the wrong with its monetary policy. Raising interest rates caused narrowing in the Spread between the interest on what banks pay to its customers and what interest they get from the corporate debtors. As per RBI, In Table 6.4 of Statistics, in 2011(Nov 14, 2011), the Banks had provided additional advance to 24.11 lakhs accounts (including direct and indirect agricultural advances) @ Rs 42,414 Cr. The total advances to agriculture and indirect agriculture is estimated as 339.32 lakh accounts with a Credit of Rs 4, 14,990 Cr. This poor advance to the agricultural sector has been responsible for agricultural growth failing to achieve a modest 4% growth envisaged under the 11th Plan. The Banks should give a new boast of fuel to that leg of the priority sector. Credit growth, best predictor of financial crisis, said an eminent Economist. Debt inflows could pick up only if differential monetary policy stance is adopted by the Central Banks in developing Economics against advance economics. Our central Bank inaction is the only action taken so far. Coal Sector, Kundankulam Nuclear Power project, crisis at Mullaperiyar, infrastructure deficit, country’s export related problems, including inflated country’s export by $ 9 billion (April-Oct) by DGCI&S, poor investor confidence, policy paralysis, needs exemplary solutions. Fundamentals are strong, says Finance Minister. Where are our fundamentals?

Relationship between Inflation,Growth,Capital

India is a growing economy, set to join a League of Nations (BRIC) to emerge as one of the emerging economies by the middle of the third millennium. It had an impressive growth rate, upward of 9%, its Foreign Exchange reserves enlarged more than 7 times of the figure in 2003-4, its trade grew to beyond three century mark, its poor slowly were growing and had better living conditions, the purchasing power of the middle class grew, and consumption began to drive the economy. Inflation was at its lowest, in contrast to the high growth returns. India was on the red carpet growth to prosperity. India slowly emerged as a economic powerhouse with investments from abroad soaring in making it the favourable foreign investment destination. Ever since March, 2008 there has been a constant increase in the rate of inflation. In Nov 2008, it touched 10.45%, in Dec 2009 it was 14.97%, in January 2010 it went up to 16.22% and in September 2011 it posted 9.72%. The Government, made a monetary Policy amendment by increasing the low Bank interest rates, which has seen revision more than 13 times since the last 18 months. Relentlessly, the Banks went on expanding the interest rates with the hope that they would be able to slide down the inflationary impact on the economy. More they tried, more difficult it became. India’s war against inflation resulted in sacrificing its growth which came down to 7.5% and may slip to 7.2%. The Government gave the Magna Carta to the Oil companies to decide the petrol prices. The Petrol prices have been increased repeatedly, so that it increased the percentage of inflation. It has become very difficult to tame inflation as it has gone beyond a point. Our markets have seen a lull. Foreign investors do not beseech India like before. There has been a fall in percentile of investment. American economy is creating a Permbra situation in the Indian economy. When markets are lull, it passes on the feel to the Economy. Interest hike has seen the Non performing asset of Banks increase by 20% in the period, June-Sept 2011 (Rs 16,132 Cr). All the Public sector restructured their loans and 17% of all the advances show that it had turned bad. Many Small Medium Enterprise are turning red or closing shop as they are not able to get proper and timely Credit. A propped up credit at 14% makes availing loans unviable for units. Big Corporate companies can opt for External borrowings, but with the Indian Rupee turning meek against the dull Dollar has made foreign loans costlier than before (Rs 49.70= 1 $)(from Rs 40 = 1 $). They are indeed, waiting for some threshold. The aviation industry is in the dole drums because of this. The Exporters are also facing brunt on this front. Their dollar worth of goods account for more rupees while the expenses in the domestic market has gone sky high. The cost of credit through Foreign Exchange for Packaging Credit is not sustainable. Conflict over Policy objective higher level of well-being, that is means of achieving it- by higher growth or by lower inflation, trade-off is necessitated; both cannot be achieved simultaneously. Government intervention in financial and goods markets, due to macroeconomic rigidities has caused market failure and microeconomic instability. Inflation is harmful rather than helpful to growth. Policy implications will see inflation- growth nexus. Negative co-relation between inflation and growth in the long run would result in the influence of the former on reducing investment, productivity and growth. We are in the thick of core inflation, inflation on the basis of CPI, food inflation, low asset creation, declining value of parity (Rupee- Dollar parity), monetary inflation, and price inflation. There was a semblance of over heat in the economic growth and its irrational exuberance has seen the trajectory of growth going hay-wire. More than the fiat currency (paper currency), over supply of bank notes has resulted in depreciation of their value (Classical Economists David Hume & Ricardo). This may perhaps be one reason that the Draft which had a life of 6 months was traded in the market between persons. (This was treated like commodity money). Money is what money does. Money is transferable. It is constantly exchangeable. So long as money is in circulation, money gives equal value of other goods and services. Somebody may invest money to make some product. He employs workers and other managerial persons who look after his unit. They buy the raw materials out of the funds from their working capital and manufacture end product for sale to some wholesaler or retailer, on receipt of which he pays the money towards the cost of the goods which are demanded on the basis of Invoice. He pays the money and takes the consignment and sells the same and makes money. Again, he places the order. These steps are repeated. The money received is put in the Bank account. Salaries are paid to workmen, other staff on duty. Bills of Raw material supplier, embellishment supplier, packaging supplier, transporter, telephone bill, electricity bill, other temporary staff bill, other bills towards purchase of merchandise, etc are all paid, and they in turn pay for goods and services. There is circulation of money. Bank charges interest rates. The owner takes the Profit. Money capital is recycled again and again, and another session he will restart the cycle of reproduction with the aim of accumulating more capital and its disbursal. Suppose, the businessman feels that he does not want to continue his industry, so he sells his company to somebody and puts the entire corpus in the Bank. Instead of putting his money-capital back into commodities, he invests it in the bank. He now holds in his hands a claim to capital, perhaps in the form of a bank-account, or a bond, shares or whatever, rather than capital as such. Now his money lies idle in the bank vault. But his claim to the money is secure. However neither his claim nor the money itself are capital as such and can earn no interest, because the money is not in circulation. By its being in the self, it is not expected to produce more money. The Bank, need to loan this money to somebody. May be one person. Or many persons. The persons who have availed the loan should use it productively to earn a return by which he can circulate the money, pay interest, instalments due to the Bank out of his profit. The Bank should pay interest to the depositor as well. It should also make profit to be in business of banking. However, as the class of speculators, bankers, brokers, financiers, and so on, grows, as is inevitably the case wherever the mass of capital in a country reaches a sufficient scale, what happens is, for example, the bank finds that it is able to loan out far more than it has deposited in its vaults; speculators can sell products that they do not possess, “the right kind of person” is good for credit even when they have nothing, .etc., etc. Thus one and the same unit of productive capital may have to support not just the one retired industrialist who deposited his savings with the bank, but multiple claims on one and the same capital. If the bank accepts one million as Savings, but loans out ten millions, each of those ten millions has equal claim to that same value. This is how fictitious capital comes about. Fictitious Capital is value, in the form of credit, shares, debt, speculation and various forms of paper money, above and beyond what can be realized in the form of commodities. The ability of the bank to make unsecured loans is dependent on “confidence”, and at times of expansion and boom, the mass of fictitious capital grows rapidly. Then, when the period of contraction arrives, and the workers can no longer feed the voracious appetites of all these capitals, the bank finds itself under pressure and calls in its loans, defaults occur, bankruptcies, closures, share prices fall, and things fall back to reality – fictitious value is wiped out. In times of recession, even good, useful commodities cannot be sold because money and credit has become scarce, and the commodities prove to be valueless. Fictitious capital is that proportion of capital which cannot be simultaneously converted into existing use-values. It is an invention which is absolutely necessary for the growth of real capital, it constitutes the symbol of confidence in the future. It is a necessary but costly fiction, and sooner or later it crashes to earth. Roughly every ten years, the mass of fictitious capital grows while trade is good, and then, as the capacity of the workers to sustain the mass of hangers on reaches its limits, the downturn gathers momentum and fictitious capital is wiped out, and the cycle begins again. The scale of these crises grew continuously until the Wall Street Crash of 1929, and the Great Depression of the 1930s. The Depression and the War which followed wiped out all the accumulated mass of capital so that a new cycle of reconstruction could begin again in 1945. The New Deal in the US, Keynesian economic policies and particularly the international monetary arrangements set up at the Bretton Woods Conference of July 1944, created conditions for an exceptionally long period of growth after the War. The particular mechanism for the creation of an unprecedented mass of fictitious value in this period was the role assigned to the US dollar as the medium of international exchange in lieu of gold. Under the Mashall Plan, Europe was rebuilt and the US capitalist class further enriched by the labour of all those workers who did the rebuilding. But capital could not organise that reconstruction other than by creating a new mass of fictitious capital, in the form of inconvertible dollars. Today, we are seeing the declining value of the Dollar. There is currency depreciation. By the mid-1960s this mass of fictitious capital began to collapse and world entered a prolonged period of crisis. The mass of fictitious capital circulating in the money markets, futures exchanges and so on today is, however, far greater than ever before. 98% of the value of monetary transactions in the world is speculative, only 2% involve actual use-values. Capital continues to exist by means of the delicate balancing act performed by all the governments and banks of the major capitalist countries, staving off the collapse of this gigantic and parasitic fantasy. The collapse of Banks due to ‘mortgage crisis’ can be attributed to this fictitious capital. The Banks could not recover the debt as the value of property had shrunk. Money is substitute to Capital (Tobin effect). Money, according to Stockman, is complimentary to Capital.

The Petrol price oligopoly?

We see a whipsaw market performance, huge runaway inflation including core and food inflation, bank’s already high interest increased 13 times in the last 18 months, poor contribution of government sector banks in nation building, unfair credit/colossus saving rate policy which is not conducive to Saving, freezing of administered prices of petrol in June 2010 has seen greedy and competitative Oil companies raising petrol prices at least half a dozen times- these are myxovirus that hurt India’s economic mobility to the top as an emerging market. We also see a government which is insensitive to Public reaction .The salaried class is epitome of woes of escalating prices. Government’s obsession with Growth rate, and reduction of fiscal deficit, as the main formula of public Policy, and privatization of all administered price regimes so as to reduce government’s subsidy allocation, is a retrograde step contemplated by the Planning Commission to change the edifice of economic policy followed by the architects of Indian economic growth. Momentum of growth depend upon the increased output of manufactured companies who should be given a level playing field with the foreign investors, the high growth in exports (US $ 275 billion) added the Foreign Exchange Reserves, but the industry’s perseverance to grow is cut in the bud by the insensitive support given by the Government with its oscillating Foreign policy which is self defeating. Gross Domestic Product is calculated on the Expenditure method, and thanks to the social sector schemes with huge outlays, excessive liquidity in the system creates inflation. Another factor that adds fuel to the price is born again retail Trading houses which were mega Wholesale super markets, withdraw some of the daily use item causing artificial scarcity, causing too much money chasing two few goods. Prices soar. When domestic banks raised interest rates, Government allowed the Corporates to raise funds from foreign debt markets at low LIBOR rates as the limit of borrowing was increased from $ 20 billion to $ 30 billion per year. But the exchange parity rate did them in, as Rupee depreciated to Rs 50 against a Dollar, making the loan costly. Corporates deserted the external markets. The cost of 1 barrel of oil is $ 110 in the international market. 1 barrel is approximately about 160 liters. The cost of Refining 1 litre of Crude oil costs around Rs 34.09. There is Central Excise levy, Customs duty which is around Rs 5.148 per litre. There is an addition of State levies, and the states have been opting for nil additional duty. One Crore litres of Crude is refined every month. This huge refinement of oil would bring down the per capita cost to negligible percentage. According to the statement of the Finance Minister in the floor of Parliament, more than Rs 8,000 Cr is given as subsidy to IOC, Rs 2,000 Cr to Bharat petroleum, and Rs 1500 cr to Hindustan petroleum. Last year, according to the balance sheet published by Indian Oil Corporation, the net profit after tax was Rs 10,000 Cr! The CEO of IOC went on record two days ago, and made a comment that under recoveries came to Rs 2500 Cr. What has necessitated an increase of Rs 1.80 per litre according to these oil Cos? One, cost of under recoveries need to be embedded in the sale price. Second, the appreciation of the Rupee (Rs 50 = $1) need to be compensated. Just like private exporters, the exchange fluctuation is a market phenomenon, and the Oil companies cannot ask the public to compensate it for the fluctuation. When all along it was the other way around, what concession you have provided, the oil companies must answer. PSUs should cut the cloth according to the cloth and not resort to Arab Spring tactic to raise prices at will. Reliance and other private sector companies also cannot make market phenomenon responsible for enhancing market prices indiscriminately. If you are in the market economy, you should try to adumbrate market perfections. When the profit of PSU is given back to the Government, it goes as Government’s receipts. Why don’t the government reduce Customs duty just as they have done for private players who are getting edible oil from certain countries at “nil” customs duty? If they can favour private cos, why not the PSUs who are essentially government run companies? When the administered price mechanism was dismantled, the Oil Companies should obey the tenants of the market. Since these PSU hold monopoly, they cannot form a cartel and rob the public in the name of factoring in imaginary losses as they may appear from time to time. The problem with the oil Companies is that their expenditure is beyond comprehension. Their operative expenses should be reduced. The quantity of import and the quantum of sale, there should be a match. What is the carry over stock? If an audit is conducted, many Skeltons may fall. Government should always opt for hard options and not easy options. All Companies should have due diligence on expenditure. It would also include the maximum percentile return of refined from the Refineries. What is the cost to the company to work out the sale price? Follow expenditure per customer centric mode and not per employee centric. Even after giving Rs 80,000 pm plus perks to the Government Secretaries, the output of Government babus have not under gone even 1% higher productivity. Higher economic growth would mean je ne sais quoi, unless they reflect in the poor graduating to the next higher class by begetting higher income. It must not be an empty rhetoric and lot of economic jargon explanations. The administered pricing of Petrol must be reinstated, as Companies are going haywire without accountability. They are not mature to handle pricing on their own. Market prices must be determined by competitative pricing and not monopoly pricing. The gap of 30% between Budget Estimates and Revised Estimates should be introspected; government expenditure must be reduced. Let us not be a Jeremiah, predicting discontent!