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Rescuing the rupee: What can be done

May 25, 2012 14:32 IST

Rajeev Srinivasan suggests some ways that a layman, not an economist or politician, might accept.

  • Part I: The saga of the rupee and why it is falling

    I listened to a recent talk by Paul Krugman of Princeton, a proponent of Keynesian economics and an opponent of austerity; he was insistent that you could spend your way out of a recessions. This 'tax-and-spend' is what the UPA believes, only with a special Indian twist to it: it is 'tax-and-loot' as in the innumerable scams that keep popping up regularly.

    There was a time just a short while ago when Indian economic planners were preening about how well India came through the 2008 crisis; they started believing their own mythology about how India's time had come. 'Incredible India,' I understand they started calling it. The fact was that it was a mere accident, and had nothing to do with their stewardship. The fact was a favourable demographic, and the foundation for growth that had been laid after the 1991 reforms.

    P V Narasimha Rao is the unsung hero of the story; the liberalisation that he imposed under duress has had something like a 20-year run, but it has run out of steam. There was an interesting survey in The Economist in October 2011 (Business in India) which noted that the effects of this lasted roughly until 2004-2005, with an entrepreneurial flowering. But during UPA-1, it was back to business as usual, with the stultifying dirigiste State of old.

    Well, what can be done now, when the economy is tanking? 'Austerity', the officials cry. That would be fine, but austerity by whom? Normally, the answer is: Belt-tightening by the common man (Indians already pay some of the highest prices in the world for petroleum products, and a lot of that is punitive taxes), but ostentatious spending and extravagance by the political classes and their cronies.

    Let me suggest how there could be real 'austerity' that will bite, and this has to start at the top. That is the only way there will be real progress. I suggest an inflation-linked austerity programme for the government, as follows, given that inflation is (nominally) 9.5 per cent, although in actuality prices are galloping ahead at some 20 per cent.

    Let us say that we will pick 20 per cent as the target for austerity measures. (If inflation goes down, then the targets can also go down).

    1. Reduce government expenditures top to bottom by 20 per cent. This means each minister has to reduce his/her staff by 20 per cent, his/her budgeted expenditure by 20 per cent, and his/her petrol/diesel consumption by 20 per cent. (In fact, ration fuel, and insist that instead of the massive motorcades ministers enjoy, there will be only one or two escort vehicles, preferably motorcycles)
    2. Reduce the size of the bureaucracy. The Sixth Pay Commission advocated giving bureaucrats a pay hike (which was implemented), but also slashing the size of the bureaucracy (which was not implemented). Give every government department a target of 20 per cent reduction in staff immediately. (Yes, this will not be popular with bureaucrats who do vote; but that's the price to pay for profligacy).
    3. Shut down demonstrably useless programmes. One of the reasons for the ballooning deficits is the huge increase in entitlement spending, bringing in no discernable value: For instance, NREGA (Rs 70,000 crore); then there was the Rs 30,000 crore forgiving of farmers' loans, which, at the very least, creates a moral hazard; the Rs 30,000 crore Pay Commission giveaway to bureaucrats. NREGA in particular is merely creating a cargo-cult dependency on the State.
    4. Sell off or shut down loss-making white elephants. For instance, Air-India looks beyond repair, so just shoot it in the head. Similarly, stop rescuing private sector entities. Kingfisher Airlines has a lot of loans from public sector banks, but be equally ruthless with Kingfisher as well. Let it die, not limp on with public funds.
    5. Get off oil as much as possible. One of the biggest problems India is facing is the reliance on petroleum products. Notice how the Americans, incidentally, sold India a bill of goods with nuclear power, whereas they themselves have moved smoothly on to shale gas, which they have in plenty. Moral: We have to get off hydrocarbons, and not fall victim to other dependencies, as on uranium.
    6. Disband the NAC. This is the low-hanging fruit and should be done first. These people keep dreaming up all sorts of hare-brained ideas which the country cannot afford; and their prescriptions are likely to lead to severe problems based on the Nanny State they are creating. For instance, the ruinous (as far as inflation is concerned) Right to Food Act, the remarkably discriminatory Right to Education Act, and I hear there is a Right to Pension Act in the wings. The NAC consists of a bunch of radical elements whose major pastime is creating pork-barrel entitlements.
    7. Rein in the tax-man and repeal both the retrospective revisiting of FDI deals to 1962 and the threatened GAAR. It is literally incredible, that a major economy would do this sort of arbitrary taxation. Yes, maybe Vodafone got away with hiding its capital gains in an offshore tax haven, but this vendetta is ridiculous. It shouts from the rooftops that India is not a mature State, and that strange things may happen. The impact this has on investor confidence is much greater than the $2 billion that may be extracted from Vodafone. Look at the deals that are falling apart: Arcelor Mittal is abandoning plans for its steel plant, the Posco deal will probably be withdrawn shortly, and the Piramal Group invested $635 million abroad, confessing that India doesn't look business-friendly. Unleashing the tax-man on small investors and savers, while letting the big fish get away (like the stud-farm owner whose tax arrears are some Rs 70,000 crore) is hardly the way to create confidence.

    India, renowned economist Jagdish Bhagwati once said, suffers from having clever economists. From the time of P C Mahalanobis who convinced politicians that he had a magic box that would spit out all the right answer, to the self-proclaimed economists (and other general busybodies) that populate the NAC, this has been India's curse.

    If the government is serious about regaining credibility, it can take some of these short-run steps now; that will help stop capital flight and support the rupee. But there needs to be long-run steps as well to improve the economic fundamentals: Such as investment in education, infrastructure, and health. This is what the government should be doing instead of trying to do social engineering with all these absurd Rights to this, that and the other.

    There is no way to prosper except the old-fashioned way: Slowly, and with forethought.

    You can read more columns by Rajeev Srinivasan here

  • Rajeev Srinivasan