BackThe UPA has learnt nothing
Under the UPA, growth is built on the quicksand of two consumption trends—govt and private, and not on savings and investment
Premium(Priyanka Parashar/Mint)
Little more than a year ago, my wife and I had gone on a temple tour in Tamil Nadu that resulted in a Mint column titled “A Purposeless Nation". We repeated the tour last week. Whether or not the nation had become purposeful, politicians remain so. In Tamil Nadu, the ruling party appears certain that their chief minister would be the next Prime Minister of India. Although the weather was exceptionally hot, the Tanjore belt sported a green look thanks to the bountiful southwest monsoon in Karnataka. Water was flowing in the Cauvery river and all her tributaries.
Regardless of the clumsiness, the cunningness or the cleverness with which the issue of overturning the Supreme Court judgement on convicted politicians holding public office was handled, the fact is that the judgement has not been overturned and one high-profile politician is now behind bars for a corruption scandal.
This is, undoubtedly, a positive thing even if the Congress party does not deserve any credit for the outcome.
The good news stops there. The finance ministry made a rather puzzling announcement on 4 October, linking the recapitalization of banks with a scheme to lend to consumers to buy two-wheelers and refrigerators. The scheme has been apparently blessed by the Reserve Bank of India (RBI). This newspaper has done well to call attention to the apparently confusing signals from the central bank. In the meantime, K.C. Chakrabarty, a deputy governor of RBI, questioned the soundness of such schemes. We share his concerns fully and yet we are puzzled at the manner the whole thing is being played out. Of course, the central bank cannot stop the government from doing what it wants to do with the banks it owns. However, it should be concerned as a regulator. This is a short-sighted decision that runs against commercial soundness and governance. Indian household savings have stagnated for more than eight years. It is because of erosion of their real incomes due to high inflation caused by high and unproductive government spending and its monetization. Inducing households to spend more is not the way to restore growth.
Notwithstanding all the mindless comparisons between the performance of the two United Progressive Alliance (UPA) governments and that of the previous National Democratic Alliance (NDA) government, the fact remains that growth under the NDA was built on the foundations of roads, power and telecom reforms and privatization. Under the UPA, growth is built on the quicksand of two consumption trends—government and private, and not on savings and investment.
Standard & Poor’s has correctly warned of India being a potential trouble spot in Asian banking landscape. Bloomberg carried a news story on record defaults in India’s restructured corporate loans. Around a fifth of them are in default. Banks had routinely restructured non-performing assets to show them as current debt so that bad loans will not rise too much. Unsurprisingly, such loans are turning bad eventually. Yours truly saw a branch of one of the public sector banks in Chennai exhorting its customers to come forward to negotiate on their debt servicing problems. Bad loans of Indian banks are not fully accounted for and nor has the problem peaked.
Similarly, while RBI has appointed a committee to screen applications for banking licences, the finance minister said that seven new banking permits will be issued soon. It is pre-emptive and puts pressure on the committee and the central bank.
The announcement betrays political pressure on the central bank on the sensitive matter of new bank licences. It is unwise on the part of the government to prejudge and announce the outcome of the selection process.
Evidently, the suspension of the immediate sense of the crisis has not heralded a return of sanity to the proceedings. Returning the country to a sound and sustainable growth path comes a distant second to the immediate task of winning the next election and, more importantly to funding the next election campaign. Spain has gone through eight quarters of GDP contraction on an annual basis and its current account is returning to surplus. The euro is strong while the stimulus-seeking American dollar is weak. Austerity works. In India, everyone is impatient for growth even as the mindless pursuit of unsustainable growth from 2004 remains unaccounted for. It may yet pay a price for failing to rebuild the foundations of growth.
Thanks to the lessons not having been learnt, despite the rupee’s recent depreciation having given some sectors such as exports of jewellery and diamonds and some textile units some hope, India’s growth prospects must still be deemed dim for the next 12 to 18 months. It is not clear how long the current stability in the Indian rupee would last. With India not doing much at all to restore the structural soundness of its growth, a lot would depend on American economic woes. For now, the latter appears to be obliging. There lies the only hope for stability in the rupee.
V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at baretalk@livemint.com.
To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk -
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