BJP accuses Congress government of stealing nation's wealth for personal gains

Jaswant Singh, Yashwant Sinha and Arun Shourie
The near criminal determination with which the Government is not taking recognisable measures to stem the present economic crisis confirms our worst apprehension that there is a definite design to its inaction. It has been well known for weeks – we had ourselves drawn attention to this two weeks back – that P-notes are being used to anonymously take money out of the country.

It has been known for weeks – we had ourselves drawn attention to this two weeks ago – that short selling, in particular naked short selling, is being used to beat down the valuations of Indian industry and that markets were being manipulated. Weeks have gone by. Other countries, even conservative Governments like Japan, have acted to plug misuse of such devices. Our Government has doggedly refused to do so.

Are these loopholes being kept open to enable unscrupulous elements to make money and take the money out of India?

The Government has been explaining away its inaction by saying, as the Finance Minister did a few days back, that the crisis affecting the world will not affect India; then, a few days later, he asked how did it matter if a few companies lost money in the stock market; then, dismissing the calls for action be proclaimed, as the Prime Minister has now done, that the turbulence that is affecting millions of investors is just “casino capitalism”.

Even as the Finance Minister and the Prime Minister dismiss calls for action in this casual manner, they assiduously keep the loopholes open for speculators to play the market, and for unscrupulous elements to haul money out of India.

The precipitate collapse in the stock market is not just a matter of a few companies losing valuation. This collapse hurts millions of small investors. Second, it reduces the valuations of our companies to levels where they will become easy and tempting prey to foreign predators. Third, it destroys confidence: so telling by way that even a malicious rumour could hammer the standing of an institution of repute shows how fragile things are today. A recent study warns, “Markets have singled out India as one of the most vulnerable Asian emerging markets due to its current account deficit, large fiscal deficit, and reliance on portfolio and debt flows.”

Furthermore, this collapse of confidence has already caused industries and companies right across the economy to curtail their investment plans. Most IPO's in recent weeks have failed. This will most certainly impede growth of employment and incomes of millions – this at a time when 1.2 crore persons will be entering the labour force every year for the coming five years.

Sector after sector of the real economy is already getting bruised.

• With investment falling; with infrastructure projects having been slowed down; with households having to pay interest rates of 12-13 even 16 per cent instead of 7 per cent of just a few months back, the construction industry, with 25 million workers the second largest employer after textiles, is beginning to spiral downwards. Who is to hold to account.

• Manufacturing sector growth fell to 4.9 per cent in April-August 2008 compared to 10 per cent over the comparable period last year. In August, industrial growth plummeted to 1.3 per cent. Forty to fifty per cent of firms surveyed reported sharp reductions in profitability – a development which will naturally lead them to curtail their investment plans. Of particular concern are reports that the labour-intensive sectors, the industries that employ the largest numbers – textiles, leather and footwear, handicrafts, food processing, even IT hardware and electronics – are the most severely affected.

• The sector that contributes 40 per cent of the country’s industrial output, 35 per cent of its direct exports, and almost 90 per cent of our enterprises – namely, the sector of small and medium enterprises – is being virtually denied credit by banks; where credit is still given, it is at interest rates that make the operations completely unviable. Hundreds of these units have been compelled to shut down. According to the Government’s own admission, twenty lakh jobs had been lost up to March this year in the textile, leather and handicrafts sector as a result of losses in exports.

• Exporters are getting doubly hurt. On the one hand, letters of credit are not being honoured by foreign importers: we have received reports of foreign buyers not even lifting the goods that have reached ports abroad. On the other hand, and in particular because of the falling value of the Rupee, they are being hit by higher input costs – this is particularly true of some of the very sectors which have been among the success stories of recent years like gems and jewelry and automobile components.

• And yet the Government keeps chanting, “India will not be affected”, “Our fundamentals are strong”, what is happening is just a reflection of “casino capitalism”.

As the real economy is already beginning to hurt, as the consequences are particularly severe for specific sectors, we feel that, in addition to the general measures of the kind that we had suggested two weeks ago – the reduction in interest rates, in CRR, the inclusion of oil bonds in the SLR category, judicious use of foreign exchange reserves -- sector-specific measures are also urgently needed.

Infrastructure :

• A large number of projects are stuck – waiting as usual to make their way through the Government’s departments and sundry other such “octroi posts”. The first requisite is that all pending projects be cleared expeditiously.

• A programme of massive incentives should be instituted to reward states that complete projects expeditiously, ones that ensure that sanctions are available at the earliest. Here is an excellent occasion to convert a pressing difficulty into an opportunity.

• Investors all over remain extremely skeptical of the Government’s ability to implement infrastructure projects efficiently. Highest priority should, therefore, be given to finalizing projects to be taken up as Public-Private Partnerships.

• With this pipeline of projects in hand, investors both in India as well as in Japan and countries in the Middle East should be approached for investment. Several of these countries have large sovereign funds and are looking for investment opportunities in countries other than in the West.

• For these investments – especially from within India -- to fructify liquidity has to be assured and interest rates lowered as we had suggested earlier.

• A massive project for which external funding has long been available, and which can at once provide a vast number of jobs as well as improve our competitiveness is that of building railway freight corridors. Along with the National Highways Programme, the PM’s Rural Roads Programme, the inter-linking of rivers – each of which has been neglected by this Government – these are the kind of projects that need to be expedited on a war-footing.

• Special attention needs to be paid to the development of rural infrastructure like rural housing, minor and medium irrigation, construction of warehouses and construction of schools and hospitals. Government of India's budget needs to be restructured so that these needs can be met from within the expenditure budget of this year.

SMEs and Agro-based industries

• Credit must be assured for agro-based industries as a first priority. These include sugar mills that need funds to purchase cane; textile units that require funds for purchasing cotton; and rice mills that require funds for purchasing paddy. Unless this credit is met, our farmers will be directly and immediately hurt.

• Banks must be directed to report every month, and publicly announce, the quantum of credit that they have made available to the agricultural and SME sectors, and the interest rates at which it has been advanced.

Manufacturing

• Units across an array of industries are falling sick. A recent study points out that firms in the fertilizer, power and metals sectors are heavily leveraged. It points out that 40 per cent of Indian corporates are in sectors in which the rates of return on invested capital are less than the cost of debt. This is a major crisis that can, therefore, explode at short notice. Defaults by any company will have cascading effects: directly, for instance through the banking sector, as well as indirectly through the blow they will inflict on confidence. To avoid credit defaults, two steps are urgently needed. First, the concerned authorities should closely monitor firms and sectors that are most vulnerable, and devise contingency plans here and now: there will be no time to work out steps, and negotiate them through our mazes when a crisis hits some sector or large firm. Second, the Corporate Debt Restructuring Mechanism must be urgently activated. As a first step, Government must ensure that all proposals referred to the CDR Mechanism are cleared within thirty days of reference.

• Specific programmes must be devised to come to the assistance of sectors – like gems and jewelry, automobile components, both heavy and light engineering goods -- and firms that are most vulnerable: those that are particularly dependent on exports, in particular to western economies, economies that are already in deep recession; those that have high import component in their inputs; and those that are heavily leveraged. It would be foolish to look upon these companies as the concern merely of a few industrialists. They are a source of livelihood to millions. They are national assets which it has taken decades to build. A collapse of even one of them will deliver a grave blow to confidence, and make all of them easy picks for foreign speculators and funds.

Exporters

• As a result of interaction with them, and upon reviewing suggestions advanced by these industries, we find great merit in the urgings of exporters that at the least administrative procedures that are continuing to hobble them should be expedited: that dues on Drawback, CENVAT, DEPB claims, should be cleared expeditiously; that refunds from the Excise Department should be made within a week rather than the present limit of 90 days.

• Duty drawback rates which have been reduced recently should be restored to levels that prevailed till September 2008, especially for labour-intensive industries – like textiles and garments, handicrafts, leather and footwear and carpets.

• It is also a matter of serious concern that, for the last nine months, the textile industry has not been getting releases under the Technology Upgradation Fund Scheme that had been started by the NDA Government. The industry is the largest employer in India. It cannot hold its own in world markets unless its technology and processes are continuously modernized. Government must remove the bottlenecks that are preventing disbursements. This should not become another liability to devolve on the next government.

• Software exports have been among the major success stories of India. Almost 80 per cent of them are concentrated to the US and UK. As these economies go into recession, and as protectionist demands mount in them, it would be foolhardy to be complacent in regard to this vital sector. Incentives must be ensured that the sector needs to be so indispensable for users that the latter cannot but take recourse to our engineers and technologists.

• As defaults by importers in the US and Europe become imminent, the Export Credit Guarantee Corporation must extend its coverage to all affected countries and importers.

• As Letters of Credit and international credit lines are not being accepted, credit lines from our own sources must be activated at the earliest.

And finally, at the international level, the Government of India must make out a strong case for setting up new global financial institutions. The present ones have completely failed to anticipate, much less mitigate the crisis. Merely restructuring them will not suffice. The world needs brand new institutions that reflect the new configuration of economic power; with a brand new culture - one in which they do not impose just standard conditionalities; and a scale appropriate to the scale of dislocations the world financial system has to contend with.