The finance minister’s remedy

The finance minister’s remedy

In a time of slow economic growth, one would expect Union finance minister P. Chidambaram to be more circumspect in offering advice on revving up the economy. Perish the thought. Difficult problems require far-fetched solutions.

On Tuesday, at the India Economic Summit organized by the World Economic Forum, he asked hotels, airlines, realty companies and automobile manufacturers to cut prices of their products. The finance minister felt that it was much better for companies to cut prices, keep loyal customers and workers, avoid the build-up of inventories, increase non-performing assets, layoffs and retrenchments and dig a deeper hole.

His suggestion will speed up the digging of a hole that’s already pretty deep. In case companies were to cut prices, the fall in their revenues will be instantaneous while the step-up in demand, doubtful as it is, would take much longer. Call it killing the disease faster than the patient or a rehashed version of Keynes’ truism that we’re all dead in the long run, Chidambaram has got it wrong.

Consider excise collections, a proxy for the performance of the manufacturing sector. In October, excise collection fell for a second consecutive month. In September, the figure fell by 3.8% over September 2007. In October, the fall was steeper and collections fell by 8.7% over the same period last year. In an inflationary environment, where inflation is close to double digits, these collections should have been higher and not lower.

Clearly there’s a loss of clear thinking here. In a low to medium inflation environment, government spending is one answer to such problems. But as has been argued in these columns before, the government has exhausted that option. It’s flailing and is trying to pass the burden on to monetary policy.

Another way to spur growth would be to cut taxes, such as sales tax. Excise reductions, too, may work. Chidambaram has signalled his willingness to consider excise proposals. Whether it’s good news or bad depends on your perspective: good because it may help companies and consumers, bad because there is not much room left on that front. Government deficit is already high and such cuts will only add to the problem.

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