Sunday, July 21, 2013

Tackling crisis of confidence in economy

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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