-Market
capitalisation of the 30 Sensex companies taken together did not account for
more than 1.5 per cent of GDP.
-Whereas
only 11 per cent Japanese savings are
invested in the stock market, while in the case of Germany, it is 7 per cent.
-In
the U.S., 55 per cent of families are linked to stock market compared to a
minuscule percentage in India.
-Even
if one takes the BSE 500, which accounts for 90 per cent of India’s listed
companies, its market capitalisation is less than 5 per cent of the country’s
GDP.
-The
contribution of the total corporate sector to GDP is just around 15-16 per
cent.
One
should therefore question the application of “ theories and wisdom of the
Western economies to address Indian problems.” – The statistics and questions based on it raised by Mr. S. Gurumurthy, Corporate
Advisor and Commentator on Political and Economic Affairs.
March 10, 2014
Need
to reset focus to rev up Indian economy
 |
| (from left): Rathin Roy,
Director and Chief Executive, National Institute of Public Finance and Policy;
Ajit Ranade, Chief Economist, Aditya Birla Group; Arvind Virmani, Former Chief
Economic Advisor,Government of India; andS. Gurumurthy, Corporate Advisor and
Commentator on Political and Economic Affairs, at ‘Economists on the
economaze’, a panel discussion, heldin Chennai on Saturday.— Photo : R.
Ravindran
Economic issues are set to dominate the
agenda for the coming elections, more than any other in the past. As the major
political parties prepare to release their manifestos, three eminent economists
along with political commentator, S. Gurumurthy, came together on a common
platform to examine the current scenario, and think up ideas for the next
government.
The panel discussion, featuring Arvind
Virmani, Former Chief Economic Adviser to the Government of India; Rathin Roy,
Director, National Institute of Public
Finance and Policy; Ajit Ranade, Chief
Economist, Aditya Birla Group; and S. Gurumurthy, Corporate Adviser and
Commentator on Political and Economic Affairs, was thought-provoking, and threw
up refreshing ideas.
The ball was set rolling by the
introductory remarks by N. Ravi, Editor-in-Chief of The Hindu ,
who moderated the panel discussion. Mr. Ravi laid out the questions: What
reforms remain to be done? How far can India go with this rights-based and
entitlement approach? How can the trade
account be made more sustainable? How can the
rent-seeking opportunities in the economy be checked?
Mr. Virmani identified malnutrition as one
of the biggest problems facing the country. The corporate sector needed
to be revived in order to sustain high
growth, and the regulatory environment should be
made conducive for promoting investments, he said. Using empirical evidence
Mr. Virmani showed that the maximum
catching up was required in the area of malnutrition. “The malnutrition problem
has to do with sanitation rather than food and poverty,” he said. “India is an
outlier only on sanitation, and has more or less caught up on poverty and
food,” he pointed out. Mr. Virmani said empowerment had suffered as the focus
of the Government was too much on budget allocations. “Nobody is fighting to
produce results or outcomes,” he said.The successful reforms in the past had
triggered catch-up but sustaining the process for decades was a different ball
game, Mr. Virmani said, adding that the learning from countries that had grown
fast was that high growth in one decade was no guarantee of high growth in the
next.
To ensure sustainable high growth, Mr.
Virmani recommended reviving the corporate sector where investments and
productivity had ‘collapsed’. Citing the example of the infrastructure sector,
Mr. Virmani said that the focus of government was more on getting funds for the
sector, rather than providing a regulatory and policy environment that was
conducive. “The problem in the infrastructure sector is not funds; if the
policy and regulation problems are addressed, tonnes of funds will come
automatically,” he said.
Different take
Mr. Gurumurthy presented a different
perspective based on his understanding of Indian society and anecdotal evidence
from the field to challenge the convention of using theories and wisdom of the
Western economies to address Indian problems. He emphasised the need for expertise
and research to be India-centric rather than be inspired by Western approaches.
One example he cited was the lack of discourse and research, and, therefore,
policy ideas for the diamond cutting industry of Saurashtra. “There is a
disconnect between institutions and economic agents…where is the study on
diamond cutting when nine out of ten diamonds in the world are cut in
Saurashtra?” he asked.
He decried what he called as the “Wall
Street approach” to policy formulation that was focused excessively on the
corporate sector and stock markets. “In the U.S., 55 per cent of families
are linked to stock market compared to a minuscule percentage in India. We
cannot transplant those policies here,” he said. Dishing out further data to
support his arguments, Mr. Gurumurthy said: “only 11 per cent Japanese savings
are invested in the stock market, while in the case of Germany, it is 7 per
cent.” He pointed out that the market capitalisation of the 30 Sensex companies
taken together did not account for more than 1.5 per cent of GDP.
“Even if one takes the BSE 500, which
accounts for 90 per cent of India’s listed companies, its market capitalisation
is less than 5 per cent of the country’s GDP. Why, the contribution of the
total corporate sector to GDP is just around 15-16 per cent. Yet, policies are
focussed more on the corporate sector. There is something basically wrong about
our approach here,” Mr. Gurumurthy pointed out.
Mr. Roy came up with an interesting
observation. According to him, States were better in their fiscal policies.
Pointing to data, he declared that the states had completed the process of
fiscal consolidation. He said that institutions needed to be able to translate
ideas into results. According to him, the fiscal deficit problem today “is not
as visible in the States as it is with the Centre’’.
“With consistently improving quality of
management of public finances despite their continued demonstrated ability to
give hand-outs, the States have completed fiscal consolidation,” he pointed
out. “India does not even spend as much as small countries such as Kenya and
Nepal on education and health,” Mr. Roy said. “Through the plans, we are
spending more on health. It is still not enough. And, whatever we are spending
is not delivering any results,” he pointed out.
Of the 30 Millennium Development Goals
targets set in the 11th Plan only two — roads and infrastructure and forest
cover — were achieved. Given the fact that the States were proving to be better
fiscal managers than the Centre, the solution, Mr. Roy said, was to shift to
greater devolution of funds and responsibilities to the States. This idea,
however, would not find takers in New Delhi, he said, adding that the impulse
for it would have to come from the States. “The Centre is a well-meaning
institution but the assumption that it is capable of delivering either human
development or take care of tax payers money can be questioned,” Mr. Roy said.
In response to a question from the
audience, Mr. Roy said the reason for the superior fiscal performance of the
States could be their proximity to, and, therefore, better understanding of the
ground realities.
“States know better about the ground
realities. So, the efficiency is better,” he said. In his estimate, about 60
per cent of the fiscal consolidation in the States could be attributed to
expenditure controls prescribed by the Fiscal Responsibility and Budget
Management reforms.
The balance 40 per cent of the fiscal
improvement could be explained by the efficient generation of States’ own tax
revenue through genuine superior management, he added.
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