The Art and Need for Creating Employment

Link to FE 29/5/2018:  https://www.financialexpress.com/opinion/the-art-of-and-need-for-creating-jobs/1184633/

If there is one thing that is common to every government since reforms they all had a growth consciousness but equally they all lacked an employment creation strategy. Employment it needs to be realised is like the insulin that delivers the sweet benefits of growth to the individual citizens. Otherwise growth accumulates like sugar in the blood as inequalities in society with their own adverse consequences.

The chart shows the employment in formal sector versus the economic growth over the last 40 years. Unfortunately, reforms have preferred cost cuts over ensuring adequate levels of government services and preferred efficiencies over employment in private sector. If only post reforms had created employment at half the rate as before, it would have taken care of the army of currently unemployed, a ticking time bomb. An employed and hence an engaged mind would tackle several of our social ills far better than investments in tightening surveillance or even infrastructure. Even the 1.3% uptick in the last few years may be more due to informal employment turning formal.

Presentation1

Unsatisfied needs – the basis of all markets and economic activity

Demand or an unsatisfied need is the basis on which any business is created. Meeting an existing demand with an established market and pricing mechanism is a safer approach to success. But, ingenious minds come up with IPL which fulfilled a latent demand (which perhaps even the customer didn’t know existed) for after day entertainment. Our telecom sector saw explosive growth by satisfying India’s motor mouth urges, never previously anticipated. But this requires foresight, some daring, financiers willing to take the bet, besides creative minds to come up with the relevant package of practices.

Demand for Government services arises out of public goods, constitutional rights like justice, safety, protection of property, ensuring equality of opportunity besides some commercial activities. It sometimes is required to serve needs where users may not be willing or able to pay commensurate prices.

Art of creating jobs – an example

Huge negative value is being imposed on the citizens by our unclean surroundings, waste and litter, sewage drains masquerading as rivers, un-cleared urban wastes spilling over to drive ways etc. There is sure a demand for neatness, cleanliness and hygiene, even if all those desirous of the service may not have the ability to pay for it.

India’s employment from rag picking and waste collection is abysmally low at 0.1% of population whereas similar activities employ 0.7% in South Africa, 0.5% in Brazil, 0.6% in Lima (Peru) as per ILO. The GDP from these activities in advanced countries vary from 2.5% to 3.8%. Employing the people required (say 50 lacs at even 0.4% of population) won’t affect other sectors since these skill sets are low and there is an excess supply in the labour market in any case.

The main missing link is who will pay for the services. At the macro level given the direct and indirect benefits it may be worthwhile re-distributing 1-2% of GDP through taxes and expending it in tackling wastes. But there are other ways. Elsewhere, nearly 30% of value of wastes generated are recovered and reused. There are people in various income classes whose desire for ‘cleaner surrounds, safe drinking water, litter free zones’ are more intense and more can be recovered from them for cross subsidizing the lower income strata. Hopefully the net unrecovered portion can be contained to 0.6-0.7% in the initial periods. People taking employment under these schemes could be made to give up all other subsidies.

The direct and indirect benefits of cleaner surroundings should also be taught to the citizens creating over a period of time greater ‘demand’ for them and higher willingness to pay for them. Or higher willingness to move into areas where such services are recovered at higher charges. The capital required for creation of each job in this sector is way lower than industrial or service sector jobs, private or public sector. The skill sets can be developed a lot easier with minimal training.

The open sewages in our cities, unclean rivers, garbage, etc.  are all a huge source of opportunity for employment creation. Of the various links in the supply chain the only missing link in this case is the poor ability or unwillingness to pay arising out of poor sensitisation of benefits and income. In the case of IPL virtually all the links were missing or invisible and it required some genius still to spot the opportunity and put all the links in place to create the ‘market’.  Similar opportunities exist where just one or two links may be missing and some creative thinking can add substantially to GDP, welfare and employment.

The disproportionate fatal accidents per vehicle is an opportunity to set right the systems by employing people (may be a lac or two) and adding positive welfare value. Our ill-disciplined roads, haphazard parking in crowded areas, rampant littering, usage of killer plastics are all potential opportunities of employment at low incremental capital investments. Our collapsed criminal policing and investigation (in deficit by at least 5 lacs); delayed judiciary can easily create new jobs for twice the existing number. Our deficient healthcare as Dr Shetty points out has a 50 lac employment potential at ‘fit for purpose’ doctors, nurses and service levels.

Government at both central and state level should identify ‘demand’ and need for its various services and ways to fulfil them rather than just run after roads, ports or infrastructure: our governance infrastructure for policing, justice, safety, protection of property, education and primary healthcare are in far greater levels of deficit.

Hiding behind our awful deficit of government services and under-development, chaos and disorder is a latent demand which could create 3 crore new jobs at comparatively low capital investment. This level of additional employment would have most certainly returned the incumbent government in 2014 despite all other troubles and could make a difference in 2019 as well.

This level of employment can be created at 1.8% of our GDP at Rs 100,000 p.a. wage levels. It requires some ingenious minds in the government to identify and fit the missing links in each case. The government should perhaps leave the return based (ICOR, IRRs and Paybacks) growth to private sector and chase newer indices like Incremental Employment per Capital Invested (IECI) for itself –a compromise of efficiency for employment.

Tribal protection or Poverty Preservation

The article with the above title has appeared in Financial Express of May 16, 2018.

Link: https://www.financialexpress.com/opinion/tribal-protection-or-poverty-preservation/1169401/

 

Conversations with an Ex-Naxalite

Warning: I have generally decided that Grammar and spelling are useless appendages. If you are not in that genre, pl pardon. Naxalism, for the uninitiated is domestic militancy or localised terrorism.

This was about 8-9 months back. My driving licence had been suspended and i had to rely on Ola and Uber on holidays.
It was twilight and i had hailed an Uber to get back home from Noida. When the cab arrived, I tried to put 3-4 bags with me beside the front seat before taking the front சleft seat as I always do.
‘How is the day treating you Sir’ Came a confident voice – more of a CEOs than a cab driver. I must have murmured some response since i was still at tucking in the bags between my foot/legs and seat.
Once he started driving, i said everything was fine; the day had treated me all fine. I was looking into his face which had the rediance and lustre of say a Kabir Bedi with a 4-5 day cultivated bread which always stays that way.
Me: Are you from Bihar? (I have generally found that people from Bihar and Jharkhand are loquacious and keep yapping and many times excessively to my discomfort dishing out advice on advice even if unsolicited.
No Sir. I am from south- western orissa -Korapur district.  We have a factory in the adjoining district and so know something about the district and naxalite movement in adjoining areas within Orissa, northern Andhra and Chattisgarh.
Somethings I learnt from him about naxalites during the ensuing conversation:
1      It is not like you people think – that naxalites live a life of complete seclusion from the rest of society – in a demarcated land island with boundaries. they move in and out of society. Most of them do farm work during sowing, transplanting or harvest times in the adjoining villages. during slack or non season (or people permanently unemployed work) their activities peak. Most people know them and their families and activities. people in the vicinity dont have the same level of animosity towards them as people distant from the scene.
2      It is only the top 2-3 who dont mix with or expose themselves to the rest of society. They are nearly completely cut off – and some more people who are not known to move around. But mostly they move in and out of the society.
3      The recruits are drafted based on 3 criteria: Physical strength, ability to execute gruesome pain or crime and thirdly loyalty.
4       There are pay scales and cadre depending on the skill levels and experience and years with the movement and of course ‘performance’. They are all trained in their assigned activities.and there is specialisation.
5       the area under their influence has shrunk slowly. It is more or less finished in Andhra Pradesh. (as someone else confirmed in the late 1990s prominent guys in AP from the affected areas felt unsafe or scared even in Hydrabad; now you can drive thru the areas even at night). In Orissa and southern tip of Cgarh their is a marked downscaling of activities.
6      Many of them have moved into Government contracts – road construction, etc. The Govt knows it and has been helping it along. The local politicians and MLAs (who help them with some moneys sometimes) and sometimes even the police help them along.
7       Govts also dont make too much of their past crimes or issues or hound them or their families. there has been a practical approach in the last 10-15 years which helps in normalising their relationship and rehabilitating.

My mind started weighing the new insights with my pre-existing ones item by item saying yes, no , possibly, unlikely and likely as so on. And i muct have fallen silent for a while.
Driver: ‘Kya hua Ji suddenly completely silent’
‘No No just getting frustrated with the jam. I must have reached home by now. We are not even half way through. By the way can i ask you a personal question?’
Yes

Me: Haven’t you thought of joining the naxalite movement yourself. By what you say, it is not as dishonourable as i once thought it was.
He turned and sized me up for may be 20-30 seconds. I was unnerved for those few moments. Not knowing what was in store.
‘Yes I was’.
Hmmmm… i was a bit relieved now.
‘I was a good student normally topping my class and school right thru. suddenly at the 10th std board exam much to the surprise of my teachers, family and self i plugged in 2 subjects. I gave the papers again 12 months later but failed again. I realised my heart was not in it any more. I was loitering around, no work and leaning on poor parents during the time. almost for a year and more. It singed me that i should earn something and thats when i decided i will take it.

But then i was short on physical parameters. But then since i was good with my science, they agreed to train me as a ‘doctor’ (their brand). The training lasted for 3-4 months. I used to stay with my family and they used to pick me up whenever required.
But then it was mostly during night times at whatever time … 10 pm one day and nothing for a few days and then 3 am – very erratic. It took a toll on my health, outlook and general wellbeing. I was getting disillusioned even while the money was OK.
I must have been on duty for 9-10 months – say about 15 months with them.

I was looking around and a sardar offered migration to Canada and i went to Toronto. There it was … I was hold up for 45-50 days. I didnt have money … so was hardly moving out … mostly confined to the garage level shelter. It was not that the sardar wasnt trying but then it was not easy. I lost hope and decided to forget the Rs 2 lacs i had spent from my familys and self savings and loans and came back to India.
As luck would have it, i found employment as a travel desk operator with a French MNC office in Delhi. I looked decent and spoke good English so i guess i was lucky with that one.
Me: So do you know Mr Nathan?
Him: How can i not know him. He was a top boss. He used to live here only in Mayur Vihar somewhere. (actually the Gman was our beighbour for 4-5 years and moved to deep south on voluntary retirement).
Him: I was with them for about 3-years or so.

So why did you quit such a cushy job?
I thought i knew travel management well and so thought of starting a cab service and after some trials and errors started driving for Uber and Ola. For the last 3 years.

Me: So whats the status of Naxalism now?
Him: Havent really been following. Hardly visit my home town these days. Next time i go there i will find out. Meet them. may be some of my friends will be there.

And then there was a long pause.
I looked at him and now asked him ‘So its your turn to go silent now?’.
Him: After some long pause. In a completely different tone now. The gleam and glitter in his eyes gone and voice not exhuberant or decidedly hopeful like in the beginning.
Dont know sir. I manage to make Rs 15-20,000 a month doing this driving and my wife makes some 10-12 doing some office work. (some catering or some such thing). We have a daughter in 3 std and one 3 years old.

But dont know where i am going in life or what next. feeling lost not knowing what to do. I am just 34 and have so many years ahead. Not a great feeling. And saddled with responsibilities.
Me: Oh nothing new. Sounding bouyant  and pontificating (dont know if thats the proper way to respond). Welcome to the world of people trying to figure out their place under the Sun. It happens to everyone … between 32 and may be continue for you for the next 4-5 years.
even Vivekananda could not escape it. (he didnt seem all that convinced and i wasnt sure if he was taking in what i was saying).
even if you thought you had figured out, many other thoughts and doubts will wash that clarity in no time and you will feel desolate again. You will try to figure out the meaning of life, your purpose and so on. (That was the Philosopher myself for his benefit. Lucky he didnt say Enough. Shut up now and wait till we reach the destination).
I dont think much conversation took place for the last 7-8 minutes. he must have gone deep into introspection.
We reached home may be in 45-50 minutes where it should have taken 20-25 minutes normally. I paid him.
Him:“Hope we meet again soon. Hope fursat milega apko. Please store my number.
Yes I will. You too.
‘Sir you are brilliant conversationist. I enjoyed it with you”. (what a lie. he must have spoken for 90% of the time. and i became a brilliant conversationist!). In any case i rarely am at at the receiving end of such compliments and hence gracefully took it saying ‘No it was all because of you”.
And forgot to store his number.

Make in India spoilt by persistent low manufacturing inflation

A Copy of this appeared in Financial Express on 12-03-2018. Link: http://www.financialexpress.com/opinion/make-in-india-delivery-patchy-heres-why-rethinking-is-needed/1094828/

V Kumaraswamy

Make in India is one of the key cornerstones of the current government to raise growth rates and create employment. It has been almost 4 years since the Make in India was launched with much hope and fanfare. The Government has initiated several useful steps and reforms to actualise it. The most recent upgrade in credit rating and 30-odd points jump in Ease of Doing Business will get us some mileage.

But it is clear that the delivery of Make in India is rather patchy. Several reasons have been advanced for its lacklustre show – highly overvalued currency, unfavourable ASEAN FTA, tight and unyielding monetary policies, very high real interest rates, high logistics costs etc. All of them have a degree of truth.

But it has to be recognised that beyond all these, an entrepreneur or corporate will invest only if they get remunerative prices returns are competitive to what the other sectors yield. This last aspect has not been addressed at all by the Government or inflation conscience keepers. Had this single factor been corrected, Make in India would have had a far better report card to show.

Nature of Indian Manufacture

Indian manufacturing is not high tech where heavy engineering, high end electronics, aircraft and space crafts, ship building etc. dominate. It is relatively low to medium grade in its maturity. It has a heavy dominance by industries which prepare or convert produce from agriculture for domestic consumption.

To give a few examples: Textile sector (the biggest industry by employment) is dependent on agriculture for cotton supplies and silk which can account for about 60% of final product costs, Sugar industry on sugarcane, Cigarette on tobacco, Beedi industry on Tendu leaves and tobacco, Vegetable/ cooking oil industry on sunflowers, groundnut, sesame, Food processing industry on wheat, maize, fruits, fish, poultry and Dairy industry on milk. Roughly 40-45% of Indian manufacturing sector depend on agricultural for their inputs. And a few more for inputs from Mining.

It is important to maintain a balance between input and output prices in these sectors and they should ideally move in tandem, if the manufacturing sector has to stay attractive for investments.  In India since agriculture feeds industry and industrial final goods are sold to those in rural and agriculture areas, any persistent imbalance could hurt both.

Our Manufacturing Prices are down 41% since 2004-05 in relative terms.

Terms of trade in international trade means the prices a country gets for its basket of export goods versus what it pays for its imports and how the relative price moves over a period of time. In domestic trade it means how the prices which a sector gets for its output moves in relation to the prices it pays for its inputs from other sectors.

From 2004-5, the terms of trade have been relentlessly moving against Manufacturing. If the manufacturing sector has had to pay 165% more for its key inputs from agricultural sector, it has been able to recover just about 57% from its customers. If Agricultural input prices are taken as the base, the manufacturing sector is getting nearly 41% less today for what it sells to other sectors compared to what it pays for agri inputs. (see Chart)

WIN_20180312_21_17_06_Pro

At one level it helps transfer of income from non agriculture sectors to rural and agriculture sector and thus corrects income skewedness. But a consistent increase of this magnitude has continuously eroded the margins of the manufacturing sector to unattractive and unsustainable levels leading to lack of enthusiasm in investing.

Reasons

Year on year for almost a decade and half, Agri inflation has been more than parity. This has come about by steep and arbitrary increases in Minimum Support Prices (MSP) announced by the Centre for many crops, especially in 2009-10, 10-11, 12-13 and 13-14 possibly due to electoral compulsions (see Table). Although MSPs are restricted to certain crops, farmers tend to gravitate towards higher MSP yielding crops till the yield per hectare for other crops equalises with those under MSP. Thus MSPs impact transmits with a lag on other crops as well. One has witnessed a similar phenomenon in rural wages consequent upon implementation of NREGA.

On the other hand,  ASEAN FTA agreement has more or less put an effective ceiling on the prices that manufacturing can recover for its end products. Free trade has more or less made recovering cost inflation through domestic price increases an impossibility over the years. India’s over-valued currency has played a spoil sport on top of these.

Need for Correction

India’s growth story to continue requires Indian manufacturing to expand and diversify and create employment for those released from rural and agri sector. As the sector saddled with the responsibility of creating jobs for those entering the market, it should be the one which is relatively more attractive. Unfortunately, things are exactly the opposite for the last decade and a half relentlessly.

Ease of doing business can contribute to encourage entrepreneur by making the state machinery less intimidating but it cannot alter the base investment arithmetic of Return on Investments (ROIs).

Year Wise Inflation for Mfg and Agri Products                     (2004-05 = 100)
Year Mfg Inflation Agri Inflation Agri Inflation / Mfg Inflation
2005-06 2.4% 3.4% 140.3%
2006-07 5.7% 8.8% 155.4%
2007-08 4.8% 8.0% 167.0%
2008-09 6.2% 9.9% 160.9%
2009-10 2.2% 13.1% 589.6%
2010-11 5.7% 17.0% 297.9%
2011-12 7.3% 7.8% 107.6%
2012-13 5.4% 10.0% 185.5%
2013-14 3.0% 11.2% 370.7%
2014-15 2.4% 4.7% 195.8%
2015-16 -1.1% 3.4% NA
2016-17 2.6% 5.0% 195.0%

 

The approach announced in the recent Budget for MSP fixation might lend stability and certainty. If the MSPs are linked to the input prices which should include manufactured items like fertilisers, pesticides, seeds, etc. the inflation of manufactured products would have a decisive say in the agri inflation and hence MSPs. They would get inter locked.

Details are awaited on the exact scheme. Even if a margin of 50% is built in (which should take care of imputed interest, rent and profit besides inflation of inputs), it would build some parity and hence rein in persistent deterioration of adverse terms of trade against manufacturing.

Even so the heavy backlog built up since 2004-05 would need to be corrected if manufacturing is to see green shoots again. The States also should have a say in the future FTAs; they should have a choice of what industries and products to offer for free imports and what products to seek exemption from our overseas importers. States should also have a say in the fixation of MSPs.

With Due Apologies to Pensioners

This appeared in Financial Express on 13th December, 2017 http://www.financialexpress.com/opinion/myths-on-pensioners-busted-check-out-the-real-and-false-arguments/971509/

Inflation Proofing Pensioners – the real and the false arguments

V Kumaraswamy

Our tight inflation targeting in the last 6-7 years are sought to be justified on (i) stable prices being a pre-requite for sustained growth and (ii) that pensioners who largely on interest income should be protected. Such targeting is being achieved by RBI through higher interest rates regime. Similar argument is advanced against correcting our over valued currency.

That the pensioners have suffered in the last few years and will suffer heavily if we loosen controls on interest is a big myth at this point in time when coming out of low growth inertia and near nil new employment creation seems so vital.

Have they suffered in recent times?

The main argument is that the pensioners with fixed income will suffer capital erosion through inflation and will have less and less real capital base to earn their future incomes. If interest income remains constant but expenditure keeps going up year on year due to inflation, progressively they will be left with smaller amounts to consume.

Table 1 clearly shows that this argument is clearly overdone in the last 4-5 years. Ever since the 4% CPI inflation target has been articulated and rather doggedly pursued by maintaining higher interest rates, inflation has fallen steeply whereas the interest rates have not traced the same trajectory.

From 2005-06 till 2011-12, the interest on Bank Term deposits were 1.5% more than the WPI inflation and 0.7% less than Consumer Price inflation. Since then, interest earners have had it good and the interest rates have been more than both – by a whopping 5.6% over WPI and 1.5% over Consumer Inflation.

 

Table 1: Interest Rates and Inflation – Pre & Post 2012
Period WPI Inflation @ Inflation Consumer Prices # Interest on Term deposits @
Ave 2005-06 to  2011-12 6.6 8.8 8.1
Ave since 2011-12 2.3 6.4 7.9

Source: @ from RBI; # from World Development Indicators.

But why the all-round feeling of being left out by the Pensioners now as the social media would have us believe when in real terms their income is 3 times compared to the period before 2012. In the years since 1991 except for a brief period between 1998 to 2002 asset prices have always been going up, in many years faster than inflation. When there is asset price inflation there is the wealth effect which makes us feel wealthier and prone to spending more, as articulated by economists. But once again in the last 3 years, real estate prices have hardly gone up. Without this illusory wealth effect backing, pensioners may be feeling poorer off.

Class of Interest Earners and Pensioners

People in agriculture tilling the land are unlikely to be living on interest income. They till as long as they can and then reply on family as the social security net on reverse mortgage of sorts – family supports them on the understanding that on death, his property will pass onto them. This is 50-60% of rural population. Landless labour are unlikely to be hit due to interest rate variations; they would need a safety net of a different kind. Non- farm rural labour is unlikely to be living off bank deposits.

People who are largely living on interest income are most likely urban or middle class. Most of them hedge their bets and have houses, gold etc. as safety nets and only a portion of their savings is in interest bearing instruments.

Amongst these are retired Government employees, whose pension is adjusted for inflation from time to time if they have been in service before 2004. They are a substantial proportion among pensioners. Those who joined after 2004 are unlikely to have retired by now.  Those who are most likely sufferers are those who retired from private service. Let’s see what proportion these are.

The total term and savings deposits of the banking system as of Sept 2017 is about Rs 114 lac crores and with the MF, Small savings and Public deposits it would be about Rs 130-135 lac crores, which is about 80% of our GDP. The comparative figures for US is more than 150%.  At an average rate of 6.6% this would give an income of Rs 8.91 lac crores or 5.5% of GDP.

From the above, we have to deduct the interest accruing to people still in service and Government pensioners. The income accruing to those who are surviving on interest alone is likely to be less than 2% of population.

Effect of Currency Devaluation

One of the strident and stubborn arguments against correction of our overvalued currency is that it will lead to inflation and hurt the interest of pensioners. The Urjit Patel Committee has summarised the several studies (see Table 2) on India estimating the inflation over the short term and the long term from a 10% movement in Rupee versus USD. With the singular exception of Ghosh and Rajan, the resultant incremental inflation (from currency alone) is likely to be 0.6% in the short term to about 1.5% over the long term. This is hardly worth the scare given the real income of pensioners have risen 3 times since 2012.

 

Table 2: Impact from 10% Depreciation of Re vs US $
Author Period Covered Short Term Inflation Long Term inflation
Khundrakpam (2007) 1991 – 2005 0.5% in WPI 0.90%
Kapur and Behera (2012) 1996 – 2011 0.6% in WPI 1.20%
Patra and Kapur (2010) 1996 – 2009 0.5% in one qtr WPI 1.5% in 7 qtrs
Patra et al (2013) 1999 – 2013 1.5% before 2008 crisis 1% after Crisis – WPI
Ghosh and Rajan (2007) 1980 – 2006 4.5%  to 5% in CPI  
Bhattacharya et al (2008) 1997 – 2007 1% – 1.1% in CPI 0.4% to 1.7% in CPI
Source: RBI – Urjit Patel Committee Report

 

Pensioners Vs Job Seekers 

Should our monetary system be so sensitive to such a small proportion of GDP and the group of people behind that (less than 2%). A 2-3% drop in interest rate in line with inflation would help the investment climate substantially especially in utilising capacities lying idle. The number of new job seekers is about 0.75 – 1% of total population each year.  For years on end the job creation has suffered and they will far outnumber Pensioners and its time their aspirations are also met.

Deposits till death.

If term deposit interest rates spread inflation had been same post 2012 (as between 2005/6 to 2012), Banks would be now saving Rs 164,000 crores on the incremental deposits of Rs 40-odd lac crores. If similar reduction had accrued on Central Government’s net additional borrowings, it would be an additional Rs 74,000 crores. These amounts saved would be sufficient to take care of those who purely depend on interest for survival.

The real sufferers can be taken care of by special deposits which can yield 2 % over CPI inflation s.t minimum of 5%. The deposits can be on joint names of spouses and on death of the latter to die, the deposits can be given over to the designated nominees after deducting tax. If prematurely withdrawn by depositors, the interest can be recalculated as per past prevailing interest rates and the balance of deposit paid to the depositor. Those who are entirely dependent on interest alone could be easily taken care through this mechanism from the potential savings as earlier estimated.

The writer if CFO of JK Paper and Author of Making Growth Happen in India (Sage).   

 

Shape of Economy – Interview with CFO Magazine

 

V Kumaraswamy, CFO, JK Paper Ltd says the new indirect tax law will bring rural economy into the formal fold and, thus, help create an inclusive economy

Way to kick start economy – Currency Devaluation or Fiscal Stimulus?

An edited version has appeared in Financial Express on 13 Oct 2017

Currency Correction or Fiscal Stimulus?

V Kumaraswamy

The feeling of sluggishness is palpable everywhere. There are talks of stimulating the economy by fiscal incentives etc. This can be a very innocuous medicine for reasons of (i) dosage, (ii) potency, and (iii) long lead time.

First the dosage. The government may throw Rs 50-60K crores as fiscal stimulus. This is about 0.4% of our GDP. Given the current moribund state of economy with 25-30% underutilised capacities it is too tiny to have any impact. The current closure of capacities or lack of investments have not become so for 1-2% poorer realisations or profitability. While the figures vary for different industries, it is substantial – more in the range of 10-20%. We need a correction of this magnitude. The gaps in our competitiveness with countries exporting to us like China, ASEAN and Korea is 10-15%; not a 1-2% pittance.

Next the potency and wastage. Any incentive will reach both Units operating at full capacity and units with low utilisation and poor profitability. Units which are closed or NPA currently could hardly be revived with a small ‘spread thin’ incentive. The incentives reaching units operating at full capacity will neither create incremental growth nor new employment. There will be a lot of wasted (applying where not needed) efforts.

Finally, the lead time. If stimulus is by way of Income Tax rebates, it will be a year or many quarters before the recipient feels it and reckons it in his decisions. If it is by way of Indirect tax cuts, the recipient knows that it is for a limited period and will not motivate him for taking a long term investment decision. We need some immediate actions and most fiscal measures take a long lead time to get results. It may be well beyond 2019 that one would see perceptible results.

The current problem

The economy is stuck at a low and unresponsive equilibrium.  The current economic impasse is born out of 3 main factors (i) high internal value of currency (low inflation targets resulting in high real interest rates), (ii) may be partially from it, high external value of Rupee and high real interest rates attracting too much forex flows which are beyond the capacity of economy to absorb and (iii) free trade with ASEAN which kicked in from Jan 2014 in full.

ASEAN FTA did increase supplies and kept prices under check. It made import parity as the main basis of price determination for many manufactured goods. But it also eroded domestic industry’s profitability since manufacturing prices have hardly risen to cover inflation of inputs in wages and inputs from agriculture. It delivered customer stable or reduced prices but took away their jobs. India’s growth is creating Jobs but in other countries!

Somehow inflation control has become the focal point of our monetary management in recent years just like fiscal deficit is for our Union Budgets. While the fiscal deficit control is understandable, in an open globalised economy when product of every description could be freely imported, supply shortfall induced inflation is out of question. From Pulses and rice, to apparels, to electronics and Ganesha and Navrathra idols everything can be imported these days. So supply constraint induced inflation is the least that RBI or the Government needs to worry about.

Ways to correct imbalances

The main contributory reason for our lack of competitiveness with other regional players is the high external value of our currency. The sooner it is corrected the better, either by devaluation or dis-incentivising inflows.   But devaluation can cause inflation. As is reasoned out below inflation can be phantom enemy if things are calibrated well.

The first thing is to reduce debt limits available to overseas investors and strictly adhere to such limits. There is nopoint accumulating reserves to earn 1-2% returns by paying 4-5% overseas as interest in $ terms.

Secondly, there could be a temporary tax on overseas investments into India. This can be even for ECBs, investments into government debt and all inflows which are not required for physical imports. Taxing interest on GOI bonds will lower their yields and contain inward flows. There could be a surcharge on inflows till the related imports also take place. These could be used for re-capitalising our banks.

As a corollary, Government can mandate that fresh foreign investments can only be in new government bonds issued, on which the GOI can offer much less interest rate. Such an exercise will help the GOI as well. Such issuances can be allowed for secondary trades may be a separate bond segment with lower interest will develop as a result.

Containing Resultant Inflation 

The Government should bite the bullet like it did with GST and correct the near 22% over valuation in one substantial go. It can reset $=Re at Rs 71-72, which is 11% correction.

Monsoon is good throughout the country and agricultural inflation may not be a risk. If in fact there is excess production, a good forex rate might help evacuate some surplus so that domestic prices don’t crash due to oversupply.

In the long term, a 11% devaluation is about $ 40 billion in added inflation. This on a GDP of approx. $ 2400 is about 1.6% – may not be unbearable. But it’s the short temr effect on imported products and their immediate derivatives and next level products.

Oil is the largest at 25% of import bill.  Government (state and Central) should put a price cap. Their duties (customs, Excise and VAT together) account for a third of final price. There can be a freeze for 12-18 months in Re-terms on these. Oil marketing companies which have expanded their margins in the last few months can be told to absorb a third and the rest can be passed on. An additional 3.7% inflation on oil will amount to about a 1% on final inflation. Gold and Diamonds are next. We should not bother with Gold (the costlier it is, the better) and Diamond is largely for processing and hence related exports will make up for the input inflation.

That will confine inflation largely to manufactured goods. Most prices today in manufacturing sector are determined by import parity prices. A 10-11% correction would most likely translate into a similar uptick in their prices, which could help several factories (most especially textiles) to start chugging again. In any case, buyers of manufactured goods have had it too good for the last 5-6 years without much inflation.

Protecting the pensioners and interest earners needs to be balanced with the interest of freshers in the job market. The total interest paid on all bank deposits and Small savings and MFs is less than 5.5% of GDP. If we remove the government pensioners and those who have not yet retired from this, it would not be more than 1-2%. The number of those entering the job market and finding themselves without jobs will far outnumber those surviving solely on interest.

Currency correction will also solve a lot of NPA issue. A 10-12% increase in industrial realisations will turn many industrial units from potential NPAs to preforming ones.

Superiority over fiscal stimulus

Currency correction will hit the problem where it is. The dosage at 11% on the total value of trade (both imports and exports) is huge. It will alter the domestic profitability substantially and have an immediate impact – from the following day morning.

Sure forex borrowers will suffer. But those who have covered their exposure need not worry. For those who have not covered or partially covered, they have made good gains for the last 12 years on the trot. Why should not they not be made a pay some back now?

An equilibrium cannot be corrected by fiscal stimulus which will be better for rectifying confidence issues.

(The writer is the author of Making Growth Happen in India, Sage Publications).