Tuesday, June 26, 2012

I am not wrong, but you certainly are. Solving economics problem through words?

One of the most striking lines I read recently was 'India may become first ‘fallen angel’ among BRIC countries'. Even though I didn't read that article, the headline was bad enough to disturb me for days.

Plunging growth rates,
Ballooning trade deficit,
Evaporating rupee,
Falling industrial confidence,
Pathetic growth in industrial sector,
Exploding import bill,
Reduction in ratings,
Political paralysis.

The list is long. But the core fact is somewhere we made some big spelling mistakes. Everything can't be blamed on low US growth rates or Euro zone problems or middle-east crisis as our government do. Many of the problems are our own creation. May be, we became more comfortable with the high growth rates and didn't work enough to sustain it. May be the frequently heard demographic dividend and other advantages made us lazy enough to think that economy will run on autopilot.

This picture clearly explains the problems in starting the reform process,

Still in love with command economy?

There is a problem with outlook, we often find the socialist ideologies and command economy so good that political parties often try to overdo that. But, when they reach a  stage from where there is no way to go forward they started thinking about buying one or two ideas from capitalism like opening up the markets, reducing the monopoly of state enterprises etc. When we reach a comfortable stage after opening up a little, we often forget the rest of the marathon and starts sleeping.

This is what exactly happened in India, when Goldman Sachs put a tag around our neck saying that you are an emerging market, we became so comfortable with the idea that we ran the beginning of marathon like a sprint and then started sleeping. Now when S&P and Fitch reduced the ratings, instead of analysing our own situation we are blaming them!!! It looks like the agencies are the problem not what we are doing.

High inflation, crisis in power sector, stalled reforms, mounting debts, huge corruption scandals, slow moving governments, poor economic situation of various states, falling rupee and investor confidence - the problems we are facing are numerous. I don’t think the credit agencies have some special problem with India. Ratings are not some arbitrary decisions; there will be a well defined set of parameters to define growth and decide the ratings.

Instead of blaming everyone else for our problems we should go for an introspection of what we are doing. When we carried out the last big ticket reform?

FDI in aviation, GST...

Consider the case of allowing foreign airline companies to raise the stake in Indian aviation companies to 49%. I don't understand what the political problem here is; foreign investors are already permitted to invest up to 49% in this sector. Moreover, it’s hardly a related to common man. Even if we allow foreign airlines to buy stake in Indian airlines, they will think hundred times before buying Air India or Kingfisher. Commercial airline service is hardly a critical one like water/power supply. Still we are not able to take decisions. This is the case with Goods and Services Tax reforms (GST) too.  If we can’t go ahead in issues like this how we are supposed to carry out the non-digestible but essential reforms?

Do it now

If someone tried to pull the reform off from the cold storage, there will be hundred others to push everything back to cold storage. Each time, reforms go back to cold storage FII's confidence in Indian market will plunge in to next low level. Corruption accusations are another spoiler in this area, now a day it is difficult to count how many zeros are there in the amount said to be involved in scandals. If the government is so paralysed now - when there is 2 more year to go for next general elections - when we will start these life saving surgeries? Next year it will be difficult for the government to carry out reforms as the one after that will be an election year. So whatever we need to do, we have to do it now.

Political leadership is also so paralysed that, they are not able to move forward with any reforms. Now only two years left, if they are not doing any true reforms which are difficult to sell to the people in this year, the chances for doing the same in the next tear is very long. Two years of full paralysis will assure that that India will be the first fallen angel in BRIC.


Announcement of one big ticket reforms and its clinical execution can act as a morale booster. This should be followed by continuous reforms in retail, supply chain, agriculture, infrastructure, governance etc.


Fitch revises outlook on Indian financial institutions to negative
Fitch lowers rating outlook of SBI, ICICI, PNB
Congress rejects S&P criticism

Photo Courtesy: Please note that I got this photo through a forwarded mail. I don't own copy right for this photo, nor i know who holds the copyright. 

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