Commentary/Yazad Darasha

Into the Black Hole

My stockbroker friend recently cancelled his subscription to a business newspaper. He was promptly paid a visit by the news vendor demanding to know why. My friend asked why the personal concern. The vendor's answer was to the effect that six months ago, he used to deliver upwards of 800 newspapers a day. Today he delivers less than 300.

A sign of the times?

Another friend has returned two of his three telephone lines. He says one is more than enough for the volume of business he does. The rest are not worth the rental he pays on them.

A major finance company has closed its swank offices in Bangalore, Calcutta and Madras, and moved into business centres.

A city like Bombay, the financial hub of India, boasted a bakdawala-- literally, a bench-owner -- at every street corner. These guys would simply have an old crate on the pavement, on which they would precariously balance a plank. On the plank were millions and millions of new issue forms, rights issue forms, bond issue forms and so on.

Almost all of them have disappeared. The collapse of the primary market has left them all without the precarious income they earned from their precarious bakdas(benches).

The owner of a high-society department store in Bombay laments that business in the last six months has fallen off a whopping 300 per cent. The strange thing is that, although the owner would admit to no such thing, most of his customers were those who had pots of the 'parallel economy cash' -- alias black money -- to throw around behind the taxman's back.

It seems even the sources of black money are either drying up or the moolah is being stashed away for a rainy day which, by all accounts, is not too far distant.

More signs of the times?

On a more macro level, newspapers scream out the daily scare. Industrial production is falling rapidly, mainly because consumer offtake has dwindled alarmingly. Most of the capacity built up in the last four years is lying idle and generating no returns.

The half-yearly results declared over the past two months have highlighted the dire straits Indian industry is in. Some of the biggest corporations have declared lower profitability. Some have even declared lower sales.

These facts have led to the larger spectre of unemployment. If every news agent retrenches just one casual employee; if just 20 per cent of the bakdawalasare unable to find alternative sources of income; if the share brokers are sacking staff along with their telephones and office space; and if each high-society department store gets rid of just one employee each... The effect is too terrible to imagine.

The GDP this year is unlikely to show a positive growth rate over last year. Neither is industrial growth. And neither is export growth. The only thing guaranteed to register a rise is the budget deficit, fueled by unchecked government spending.

Is there no succour in sight? The government -- not to mention the pundits -- seem to be fresh out of ideas. From all that appears in the newspapers, Finance Minister P Chidambaram not only seems stumped, but the poor man is also battling political forces beyond his control. Forces that seem to ensure that no hard decisions get taken.

Chidambaram appears to have pinned all hopes on inflows of foreign cash. He has set a target of $ 10 billion in foreign direct investment. However, Chidambaram has cleverly not specified whether the $ 10 billion FDI target is for this financial year or over the next five financial years, which he believes (ha ha!) is the term of his 13-party federal coalition.

Besides FDI, the Reserve Bank tinkers to the extent of modifying the Cash Reserve Ratio and the Statutory Liquidity Ratio for banks. The modifications yield investable resources of Rs 40 billion and up at any given time.

Will that help? Highly unlikely. Banks are shy enough of lending to corporates or investing in equity. To an extent, they are justified. With the state of industry being what it is, our banks do not want to increase the ratio of their non-performing assets (a kinder, gentler phrase for bad, irrecoverable debts arising from poor judgement and political interference and pressure), so they would rather put the excess funds in government paper, where the returns are lower but the safety is guaranteed.

The net result of this exercise is that the government is tempted to increase its already gargantuan non-productive expenditure. Which means more deficit financing, runaway inflation, and no guarantee that the money pouring into the government coffers will not be used in newer, more inventive, non-productive ways.

And the Reserve Bank will end up printing more and more currency which will be worth less and less.

How far can tinkering itself go? Will the government next allow provident funds, gratuity funds and pension funds to invest in the stock markets? After the middle class, will it be the retired class to feel the soul-numbing effect of a lifetime's savings being swallowed whole by the markets with scarcely a burp?

Increasing the savings rate is an extremely efficient way of ensuring economic growth. But India's savings rate has been falling when it should be encouraged to rise. It now rules at 20-odd per cent, compared with the savings rates in the Asian Tiger economies of 30 per cent and over.

Even in our small savings rate of 21 per cent, the common man contributes more than three-quarters, while the government chips in with a negative rate! The rest is taken care of by the corporate sector.

And that brings us back, ultimately, to government expenditure -- that one single black hole into which all our money is inexorably disappearing. People have been crying themselves hoarse that our government's spending is too high for economic comfort, that the simplest way to substantially cut the budget deficit is to cut government expenditure by just 5 per cent -- just 5 per cent!

The fact that not an iota of notice has been taken of these exhortations shows how responsive our successive governments have been to public opinion. The mere mention of a cut in government spending sends our politicians -- including the likes of Manmohan Singh and P Chidambaram -- into convolutions of self-justification and, probably, convulsions of laughter (at our naivete, of course, in believing that a government elected by our votes will actually cut its expenditure when we plead with it to do so!).

Manmohan Singh did put a cap on ad hoc government borrowing from the Reserve Bank. While the cap is being maintained, the government is simply shelling out more in interest on borrowings from the market. Its appetite for money has not decreased one bit.

Think: as a householder, how difficult would it be for you to effect just a 5 per cent cutback in yearly expenditure. In fact, it is most likely that in these lean times such a cut has already been put in place.

And then think about the reasons why the government cannot effect the same cut in its household expenditure.

The answer is simple: The government does not earn its money. It simply takes it from us. Why should it be careful how it is spent?

If Chidambaram as finance minister does nothing to put the brakes on his government's spending, this as well as the earlier Narasimha Rao government (of which also Chidambaram was a part) will go down in history as the two regimes that bankrupted India. Does Chidambaram relish the thought of going down in history for that reason?

Next week: Beyond the black hole