Musings on new FY

A new financial year (FY 2008-09) dawned today, in India. There are hopes as well as fears about the same. How will the new FY pan itself out? Even if one goes by the trend as in previous years, this time around, the scene is a bit confounding and confusing for all stakeholders. The beginning of an FY is important to me on a personal front too, given my job.

 

The thing that is foremost on everyone's mind is inflation. The WPI-based inflation rate is far above RBI's (as well as common man's) comfort levels. And, it is a politician's nightmare, especially when elections are round the corner. For the time being, let us not think about the response - it is most likely to be a rate hike. What could have led to this sort of an inflation?

 

Basically, it's the primary food articles including wheat, rice and pulses whose prices have risen. As a World Bank study put it, the price rise is a global phenomenon and is due to a variety of factors, including higher demand from India and China...

 

What is ailing India's agri-sector? Everyone knows it and it has been very well-documented too.....but no action has been forthcoming from any quarter to reform India's 'core business'. The latest example of inept handling of agri-sector issues is the banning of exports of rice, except the basmati variety. Yes, to rein in domestic inflation, such a measure would be necessary, only as a last resort. Think for a moment about the farmer as a businessman. Would it be fair to dictate to a businessman not to sell his produce at a price it commands, wherever it is?

 

Even more ridiculous happenings are unfolding in Kerala. There is a bumper crop, but there are not enough farm workers available to harvest the same. The CPI-M- affiliated farm workers' union is opposing and resisting usage of harvesting machines. An unexpected and heavy summer rain came and the crop is literally in the water!! Bumper crop is now 'no crop'!!! A few farmers have taken their lives, but again, there are only empty promises. Blaming the summer rain, all ministers are happily attending the CPI-M party congress in Coimbatore and are proudly showing off to the media their latest member - director Mani Ratnam's son!! These are the real Neros of today........

 

The measures announced by the government, ostensibly to combat inflation, seem more like knee-jerk reactions. More concrete measures to set the supply side alright, or rather, to ease the supply-side constraints need to be there - till then, the problem of inflation will surely not go away.

 

When you look at the monetary policy response that is going to be out soon, as I said before, it may be a rate hike and some associated measures; whether it is going to solve it all, one needs to wait and watch. A rate hike will widen the interest-rate arbitrage and put more pressure on the INR. The problem may be compounded due to lack of a developed bond market. More curbs on ECBs are likely and it will affect the corporates adversely. Though the 'India Growth Story' is intact, it may drive down the stock prices.

 

As for financial reforms, it is best forgotten in the new FY. Those opposing reforms now have a 'point' - the reckless lending, complex financial engineering stuff and the consequent slowdown / crisis in the US are now a potent weapon in their hands. Also, elections are coming up and so, reforms, RIP for a year!!

 

The bottom-line is that strong fiscal measures are needed to avert a real slowdown in Indian economy; will they be forthcoming in an election year?

Budget 08-09 - What's the big !dea?

And, Finance Minister P Chidambaram has presented the budget for the year 2008-09. Lots of bouquets and brickbats......yes, but what is the bottom-line?

 

The two things that dominated all discussions seem to be the farm debt waiver plan and the substantial relief for the salaried class..And, therein lies the big idea, at least to me.

 

Almost all people know that even as growth rates are moving up, agriculture continues to be the laggard. Yes, farmers are in distress, the farm sector employs more than 60% of our workforce and with each passing day the farmers are finding it more and more difficult to continue with farming. But, debt waiver is a patently wrong idea in that it sends out a wrong message to the borrowers - "do not repay; the government will waive it" - as well as the lenders (mostly banks) - "Give them loans; we will give it back to you". It may be OK with public sector banks, but what about the private banks? How can the government dictate to them how to lend and waive debts? What happens to the net worth of the banks and ultimately the country?

 

Again, who are going to benefit from the scheme as is proposed? Farmers' miseries are caused, inter alia, due to their borrowals from the informal sector, at usurious rates of interest. But, the waiver announced now does not cover these borrowings. Add to that, there are several "Conditions Apply" tags - you have to be small farmer, having the specified area of land, borrowals upto the specified date, and so on. Doesn't misery / drought strike uniformly? Why these restrictions, then? There is also the news that the bulk of the amount will go to the co-operative banks! We all know the set-up in co-operative banks - it's the petty politicians' goldmine. Rather than letting the money go down the drain, the Rs 60000 Cr estimated as the waiver amount (how did he arrive at that 'magical' figure, by the way?) could be better deployed in developing agri-infrastructure.

 

Again, surprisingly, no resources have been allocated for this plan. The Finance Minister says he is intelligent and that he will soon spell these out. One hopes he does it soon! What about raising the money through disinvestment in public sector undertakings? Go and list PSUs like BSNL, MTNL, LIC and further stake sale of other listed PSUs? After all, Economic Survey also suggests it. Left too will not oppose it! "Disinvestment for farmers' welfare" - this is the 'big idea' for me!!!

 

The income tax incentives, in my view, were long overdue. But, the FM could have hiked the savings limit u/s 80C to something like 1.5 lac. But, the FM seems to have an ace up his sleeve - he may be believing that what he gives away by way of raising the exemption limit and change of slabs, he is going to get it all back (and may be more) once the 6th Pay Commission submits its report and it is implemented!! Another 'big idea'!!