Nantoo Banerjee
After the latest hikes of diesel, petrol and cooking gas, it is now the turn of your insurance premium – life, health and motor – and electricity bills. The Government has already asked state electricity corporations (formerly boards) to raise power tariff to bring down their losses. Health insurance will not only become costlier, but also limit coverage. In other words, you will pay more for insurance to get less. This is to make both insurers and hospitalization service providers richer to attract more foreign investment in these sectors. The railways are gearing to raise freight rates and passenger fares, which the UPA Government feels are long overdue. The government is no longer keen on subsidizing railway’s uncovered plan expenditure.
The retail food prices in August had gone up by 20 per cent. They continued to increase through September. Now, the proposed increase in minimum procurement price of sugarcane will push up the price of sugar and, with it, a whole lot of processed foods. With the festival season nearing, the prices of commodities, in general, are farming up. The latter are also partly in keeping with the global trend.
To make things worse in the price front, the Federation of State Truck Operators’ Associations has already notified to leading freight brokers in the north, south, east and western regions a 30 per cent freight increase for all fresh cargo bookings. This is to compensate the 14 per cent increase in the ordinary high speed diesel (HSD) price announced by the government and a much heftier increase in the prices of lubricants and other oils such as mobile, engine oil, brake oil, differential oil and grease, which are all decontrolled items.
A 30 per cent increase in the road transportation cost will have a direct impact on the prices of all goods, including industrial raw materials and finished products, and commodities transported by road. It is bound to increase the costs of coal, steel, cement, fertilizer, pesticides and chemicals, copper, aluminium, timber, paper and newsprint, manufactured items, jute, raw cotton, silk, petro-products, drugs and pharmaceuticals, rice, wheat, edible oils, cereals and what-have-you. High costs of commodities and manufactured items will further constrain India’s export capability and increase its current account deficit, which had reached above the generally regarded maximum permissible level of 3.5 per of GDP, last year.
The two key UPA government investment policies — one favouring higher FDI in industry and, the other, encouraging domestic industries to go for higher external commercial borrowings – have made Indian economy and Indian companies increasingly reliant on foreigners’ money to finish projects already underway or for their new projects. The current account deficit went up to an alarming level of 4.2 percent of GDP in the last financial year. In the last two years, India’s stock of foreign debt had suddenly surged by 32 percent even as the monetary authority’s foreign-currency reserves have fallen.
Unless the current account gap returns to a more sustainable level, a repeat of the 1991 currency crisis cannot be ruled out. Prime Minister Manmohan Singh had briefly referred to the situation in his last televised address to the nation, following Trinamool supremo Mamata Banerjee’s rejection of diesel price hike and FDI in retail and her subsequent withdrawal from the UPA. However, his prescriptions, this time, are unlikely to work as they do not address a very important issue of current account deficit. The reform measures totally missed the point made by a recent RBI research paper which said that a more sustainable current account would mean reducing the deficit to between 2.4 percent and 2.8 percent of GDP. Ideally, the reform measures should have focused on low cost economy, export expansion and import contraction.
Subsidy reduction as a sole goal of any government is useless unless it is complimented by better current account management. Untangling the two deficits – fiscal and current account – and bringing both under control would ideally call for a four-pronged strategy: a competitive exchange rate, focus on export, further reduction in subsidies and a frontal assault on inflation. Achieving all three simultaneously will need deft coordination between the Government and the monetary authority.
According to a Reuters analysis: “without coordination, subsidy reductions might get in the way of a competitive exchange rate and inflation control. For instance, as the government unveils more steps like the recently announced 14 percent increase in the price of subsidised diesel, foreign investors will turn optimistic on Indian equities and will try to take advantage of the pessimism of domestic investors by buying stocks on the cheap. That will put pressure on the rupee to appreciate — pressure that the Reserve Bank should resist by purchasing the incoming dollars for its foreign-exchange reserves.”
But, such an action alone by RBI will be of no help. It has to be backed by a strong monetary policy to contain inflation, which has been made nearly impossible by the across-the-board diesel price hike. Moreover, a possible sudden rush of FDI and FII funds may further complicate the inflation scene as they did during 2006-08, when inflation started spurting following high inflows of foreign money into the domestic economy. At the hindsight, the diesel price hike has been a wrong decision. The lower subsidy in diesel now threatens to bring a more severe additional inflationary pressure on economy which may kill the very purpose of the twin reform.
Though the stock market has responded to the fresh round of economic measures with glee, especially 49 per cent FDI in multi-brand retail, 51 per cent foreign holding in civil aviation and a small cut in commercial banks’ lending rates, the euphoria is unlikely to last long as high prices of end products are bound to contain, if not shrink, consumption or general demand for goods and services, forcing manufacturers to absorb a part of the increased input costs. The corporate bottom line will be under stress. Lower earnings per share (EPS) will certainly restrict the surge of the profit-to-earnings (PE) ratio and, in turn, of the stock price indices. In final analysis, these economic reforms may do more harm than good and add to the common man’s sufferings. (IPA )
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