July 21, 2013:
The economy is facing a crisis
situation. Major parameters such as the index of industrial production,
inflation and consumer price index are not favourable to instil
confidence that some improvement can be expected in the near future.
The Government seems to be aware of the problems and some measures have
been taken to improve the investment climate, but how far these
measures can produce result in the absence of follow-up actions is the
concern of investors, particularly foreign investors, because of the
political uncertainties.
Even if the situation
favours in all respects nothing can be done against the time lag
involved in yielding results. Monsoon appears to have favoured
agricultural production giving some hope to improve food supplies and
related inflation but here again the problem of procurement, storage and
supply chain management remains.
The GDP growth, to
which the other parameters, that is fiscal deficit, current account
deficit and employment generation, are closely linked cannot be expected
to be comfortable in the absence of strong supporting financial system.
What
is the way forward and how to put back the economy on the trajectory of
growth are the questions that linger in the minds of every one
concerned with the economy.
Inflation
The foremost thing is to bring down the inflation at any cost incurred by the Government and the economy.
The
RBI has been doing its best for the past few years but it was not given
the attention it deserved by the Government. The RBI’s efforts have
kept inflation under check and below the double digit.
Raising
resources from both domestic and external sectors are the major hurdle
and herein lies the solution to give strength to the economy.
Domestic
resources are in fact plenty but channelising these to productive
investment is what matters. Confidence building, followed by
result-oriented actions to convert non-productive assets into productive
ones, is paramount to bring back investors into main stream of
production.
Heavy food stocks lying and going waste
if channelled to reach the masses at reasonable prices will, to a great
extent, bring relief to food-related inflation. Availability of
vegetables and fruits needs to be stepped up and their wastage due to
non-availability of cold storage facilities, timely transportation,
marketing and distribution need special attention.
Gold bank
Gold
stock is aplenty in the economy and cash resources are also in
abundance. How to tap them to aid the economy is what the Government
should think about.
The setting up of a gold bank is a practical solution which will wipe out some of the ills of the economy.
This
will help improve the savings in the system in money form and the craze
for gold and its imports, as a speculative commodity and a hedge
against inflation, will diminish if not vanish.
The
cash-rich companies and high net worth individuals should be attracted
to go in for investments by offering tax incentives and special
treatment to do business with ease by removing major hurdles in the
acquisition of land, availability of raw materials like power, raw
materials and transport.
Check Volatility
The
financial system without the support of which the real economy cannot
perform and which is undergoing a tough time due to volatility in
different markets needs to be stabilised.
The
influence of the major markets that is capital, bond and forex by the
external capital flows has to be minimised and for that the local
institutions that deal in these markets need to be strengthened with
resources, products, close integration, regulatory and supervisory
measures.
To reduce volatility in the forex market,
the RBI and the Government can consider the possibility of setting up an
Exchange Rate Stabilisation Fund with the active involvement of
exporters, importers, non-resident Indians and other forex earners. SEBI
and IRDA can do a lot to bring in resources through improved capital
market operations and insurance market.
The recent
steps of the Government to attract FDI funds can be encashed by these
two regulators by appropriate initiatives to retain and properly utilise
the funds. NRI resources need to be tapped to the optimum level.
Financial support
The
banking system, one of the major sources of financial support both to
the economy and the Government, is dependent more on borrowed and
purchased funds and this needs to be changed by massive deposit
mobilisation and other means. Their non-productive assets lying as
advances towards food procurement and other industrial, agricultural,
housing education etc are a major handicap and need some workable and
self-sustaining solution.
The banks with more of
long-term assets and short-term liabilities cannot be expected to lock
in their funds for a longer period and face liquidity crunch every now
and then.
Such long-term nature of advances with
increasing percentage of non-recoveries affects banks’ profitability and
consequent losses to all stakeholders.
Banks should go in more for long duration deposits even if the cost is a bit high.
The
Asset Liability Management of banks has neither helped to reduce the
cost of funds nor the mismatches in interest rate and maturity.
The government can relax the tax on savings and make up the loss through improved use of bank deposits in productive ventures.
(The author is a consultant based in Bangalore. Views are personal)
(This article was published on July 21, 2013)
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