The global crisis is likely to affect India in several ways. A recent paper by the Indian Council for Research on International Economic Relations points to some key findings. First, India’s current account deficit during 2008-09 shot up to 2.6% of GDP from 1.55 in 2007-08. This is the highest level of current account deficit for India since 1990-91.
Worse still, capital account surplus also dropped from a record 9.3% of GDP in 2007-08 to 0.9%. This is the lowest level of capital account surplus since 1981-82. The year ended with a decline in reserves of $20.1 billion (Rs95,877 crore), inclusive of valuation changes, against a record rise in reserves of $92.2 billion in 2007-08.
What could save India is remittances by non-resident Indians and software receipts from overseas, both of which are registered under an accounting head called invisible receipts. The result: Whether India likes it or not, it will have to fall back on manpower exports more aggressively than ever.
Falling standards? The main building of the Indian Institute of Technology, Kharagpur. Indranil Bhoumik / Mint
The problem: India’s investment in school education and the quality of learning is pathetic. If this is not improved, India’s expenditure on higher learning will be akin to pouring water on sand. No college can fully undo 12 years of poor teaching at schools. Already, the rot has begun to creep into the Indian Institutes of Technology and the Indian Institutes of Management, thanks to a reservation policy that seeks to admit students even if it means diluting entry standards. If this decline is not stemmed quickly, even India’s premier institutions will begin to get a bad name overseas.
That is where India’s unique ID card project—headed by Nandan Nilekani—becomes more important than ever before. It will achieve three critical objectives:
• Help India broaden its tax base
• Allow the country to trim its subsidies bill by ensuring that only those marked as deserving will be considered eligible
• Help India stem the growing number of illegal immigrants
That could explain why the project has been fast-forwarded to be completed within the next few years. Without this, India just will not be able to roll back its subsidies, nor suck in the excess liquidity injected either as loan write-offs or financial bailouts.
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If neither of these two remedies are implemented, expect India to slide back to a position that could be worse than 1990.
Gold’s rally blunted
So, it’s finally official. Last week, GFMS Ltd, one of the most authoritative sources on gold prices and movement in the world, finally admitted that the runaway rally of gold may not really take off as expected.
Crashing: Not even China’s purchases could push up gold prices.
Many had been predicting that the yellow metal’s market price would cross $1,100 per oz. But it has faced resistance at the $1,000 per oz. GFMS also admits that a key factor that blunted this rally has been the recycling of gold and sale of old scrap and jewellery fabrication, especially in India, Turkey and Italy. Not even China’s purchases could push up the price of gold. Indians intuitively knew that the price was too high. This was possibly spurred by the economic meltdown that compelled many to sell gold jewellery at these high prices, knowing that they could repurchase it when the prices came down. It now appears that their hunch was right. All this surplus jewellery from recycled gold found its way into the world market and prevented gold prices from taking off.
So, will gold become a bad investment? Maybe yes, if one goes by what happened in 1980, when gold crashed from its peak of around $800 an oz, causing investors at those high prices to wait for at least 20 years to just recover their investment (not counting interest and opportunity costs).
But this time could be different. The economic meltdown could prevent gold from sliding too sharply and the expected weakness of the dollar could still see it rise, albeit marginally.
US tax moves
On 20 July, ‘The Wall Street Journal’, which has a content sharing partnership with ‘Mint’, revealed that the US Internal Revenue Service (IRS) had stepped up scrutiny of offshore accounts and foreign income. The newspaper expects this scrutiny to cover several tens of thousands of taxpayers.
This is in addition to moves made by the US government to pressure Swiss bank UBS AG to release the names of 52,000 American account holders in order to catch tax evaders.
Compare this with India’s moves to catch tax evaders. Telgi’s diverted funds from the stamp paper scam remain unearthed. Hasan Ali’s assets remain unattached. And there is no sign of any pressure being applied on Swiss banks and tax havens with secrecy laws to reveal names of Indian investors.
That is one major reason why inflation in India can be expected to skyrocket soon. India will not be in a position to suck back excess liquidity caused by the financial bailouts. Nor will it be able to raise tax receipts by touching the powerfully connected. India can, therefore, be expected to go after controlling relief expenditure instead. And possibly, try to widen the tax base with prospective effect.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at email@example.com