The news of the slowdown in the rise of the wholesale price index (WPI) last week was greeted with whoops of joy in media headlines. More elbow room, it was felt, for the Reserve Bank of India (RBI) to cut rates.
Forget, for the moment, what the RBI thinks. Is the WPI really the correct inflation measure? Any housewife would laugh. Consumer price inflation — measured by the consumer price index — is in the teens. There is no arguable case for lower interest rates.
Actually, inflation is only a part of the story. We are still to get serious on tackling the economy. And our problems are getting worse and more worrying.
Inadequate response
Because of the other facts: slowing growth, increasing forex deficits and debt, and falling investment.
Our responses are not only inadequate but do not address the real issues. The Finance Ministry customarily invites the captains of industry for pre-Budget meetings to get their wish lists — usually tax concessions of various kinds. Instead, they should be exhorted to maximise exports — and do it quickly. So dire is the forex situation, with a monthly shortfall of about $20 billion, mainly because of rising crude oil prices and oil imports. If remittances and portfolio flows fall significantly, reserves of $300 billion will not be much of a cushion.
In a crunch, the International Monetary Fund (IMF) can’t help either. Our gap is too large for the IMF’s balance sheet.
Apparently the Finance Ministry has fallen for the ‘cut the fiscal deficit and all will be well’ mantra hook, line and sinker. What else is one to make of the silly exercise of building the Union Government’s cash balances with the RBI ahead of the Budget and fiscal year end? Are we accountants or economy managers? The Government surely knows that it’s debt-servicing, salaries, unfunded pensions and ‘non-merit’ subsidies which account for the bulk of its revenue gap. Much of these are not only inelastic but also completely ‘unearned’ incomes.
Rentier class
Thus productive sectors support a large rentier class. A sort of tax, getting bigger by the day, as they are inflation-indexed.
A flow-of-funds analysis would show that these rentiers lend money to the Government through SLR (statutory liquidity ratio) bonds to pay them their inflated salaries and pensions. Banks are mere intermediaries in the process. It’s analogous to China exporting to the US and investing its earnings in Treasuries.
To be fair, the private sector is not free of rentiers, the difference being that some of them live off the capital market or bank credit, which will eventually be restructured or written off.
India is an under-taxed country compared with that bastion of minimal Government, the US. There is room to charge much more for public services, where subsidies can be confined to those below poverty lines. Also, there is scope for a considerable increase in property taxes — even five- to tenfold, the owners can afford it — in prime areas of urban India where real estate is more expensive than in many Western countries.
It is worthy of the Finance Commission’s consideration, as, in our federal set up, States seem to believe in a maa-baap relationship with Delhi, doing as little as possible of revenue-raising themselves.
If the Government is serious about inflation, it must sequester, without interest, say, 10 per cent of the salaries in Government and organised sector as well as the incomes of tax payers above a level for at least two years. In short, we need blunt fiscal instruments, not blunt monetary instruments to achieve inflation-growth objectives.
India must earn and save its way to growth on its own. The world — especially today’s bank-dominated one — can be tough and ruthless in a crisis.
(The author is a Chennai-based financial consultant.)