Monday, May 28, 2012

Things in India need to be in black and white

May 28, 2012

FDI is the only source that can mitigate the country\'s current account deficit

The economy is going through a rough patch. Growth has slowed dramatically after a tight-fisted monetary policy for nearly two years dented consumer spending, while delays in approvals held up several large projects and hurt productive investments.



New Delhi\'s penchant for populism and inability to push the much-needed economic reforms are now coming home to roost. With trade and current account deficits ballooning to multi-year highs, the rupee is under enormous strain having plunged to record lows for days together.



Finance Minister Pranab Mukherjee and other policy-makers blame global factors, especially the Greek debt crisis, for India\'s economic problems. However, it would be foolhardy to ignore that many of the issues hurting India are self-inflicted, or domestic factors. In an interview with Oommen A. Ninan, Deepak S. Parekh, a management guru and Chairman of Housing Development Finance Corporation whose sage advice is often sought by top honchos and the government, says India\'s political class needs to pull up its socks. Excerpts:



You have been a trouble-shooter in the financial world. The great job you did to rescue scandal-tainted Satyam was appreciated by all. The economy is in big trouble. The current account deficit has jumped to the most since 1980 and the rupee plunged to record lows. What are the problems and what needs to be done to retrieve the situation?



India has a problem. A holistic approach will have to be taken. We have to convince the political bosses of numerous hues how today\'s situation is hurting our country. It is hurting our youth and it is hurting our future.



The government has not been able to push reforms because of ideological differences between coalition partners. The cohesiveness required in the ruling party, which was there in UPA-I, has deteriorated in the last few years, particularly in the last one year. While one coalition partner opposes increase in FDI (foreign direct investment), another opposes the increase in petroleum product prices.



We have got to get our act together. FDI is the only source that can mitigate the country\'s current account deficit. Without capital inflows, the rupee is going to collapse and inflation is going to increase.



We can\'t boast that India is having a demographic dividend. Half of our population is under the age of 25, and 60 per cent is under the age of 30. Where are they going to work, if you don\'t set up manufacturing units? Who is going to give them job? Educated youth with no employment is the worst thing that can happen in any country.



It is the start of a disaster. It is the start of a civil strife. We must set aside differences, individual whims and fancies of political parties and ensure we don\'t go down that path. Politicians must recognise that something needs to be done in the interest of the country and the economy and the future of our youth.



Otherwise, if we continue like this, we will go downhill faster in the next two years.



Foreign funds had poured about $9 billion into stocks and debts between January 1 and March 15; the budget was a huge disappointment — it had no reforms and came up with controversial tax proposals which spooked business sentiment, particularly foreign investment. What went wrong? What are your thoughts, especially on FDI?



Foreign investors have lost confidence due to some of the provisions introduced by the government in the budget. The chairman of a big sovereign fund said, "We are not going to go away. We are always interested in India. But till you put your house in order we are not going to invest."



Another chairman said: "It is not possible to work with the present government and it is not possible to work with the difficult tax regime in the country. So, 'Sayonara\' to India for the moment."



There is no justification for the government to hold up plans to allow foreign carriers to invest up to 49 per cent in domestic airlines. We need to open up the aviation sector, which is bleeding and dying.



Why is the government so sentimental, so emotional? It is a sector that needs foreign capital, and majority ownership would still be in Indian hands. There is a major problem with the industry and believe me even other airlines will be forced to close down. I know how precarious their positions are; many are delaying payments to staff as well as for purchases and to airport authorities.



The government must encourage FDI, which is more permanent capital than fickle foreign portfolio inflows.



But Pranab Mukherjee said in the Parliament that no one needs to think that India is a tax haven?



No one is saying that India needs to be a tax haven, but things in India need to be in black and white. Everything today seems to be in grey.



There is uncertainty about how laws will be interpreted; there is uncertainty when you start a project whether you\'ll get all approvals. Foreign investors think it is difficult to do business in India; even Indian entrepreneurs think so.



In fact, the top 10 entrepreneurs have said that it is easier to buy a company abroad and work. No one knows why government approvals take such a long time; and whether they will be given at all, particularly in sectors such as energy, mining, coal and cement. The growth last year has suffered in these areas. Energy is critical to achieve higher growth.



What are your thoughts on reforms and growth?



We can\'t just do nothing and expect growth will happen. We need agriculture reforms to begin with.



Unless we increase our foodgrain productivity significantly and the efficiency of the distribution system is improved, we will not be able to feed the Indian population.



In agriculture, the cost of distribution in India is the highest. I agree we are a large country and there are pockets where foodgrains are grown. The global average of the distribution cost is one-third of the final price, while the farmer gets 66 per cent. In India, this is reversed because of middle-men, vested interest, wastage and inadequate warehousing facilities.



We did a survey in rural India, while health and education for their family are the top two concerns, the other issue was storage and not housing or anything, We have no place to keep our foodgrains. Until the Food Corporation of India man comes, we have no storage place and we have to keep it outside.



So storage and distribution are the main issues. Lack of proper warehouses is a huge concern.



The National Rural Employment Guarantee Scheme is a good programme. We don\'t have a national social security system, so the government is giving some money in a small amount to unemployed people. Remember recipients use 90 per cent of the money they get to buy foodgrains for feeding their family. So the demand for food goes up significantly.



Even for people with larger disposable income, the first priority is to provide proper food for the family. As consumption increases, inefficiency in logistics and distribution are exposed. This is fueling inflation and will not come down unless production and infrastructure are improved.
News From: http://www.7StarNews.com

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