When Government Inaction Cripples Economic Activity

It is a known fact that demand and supply decide the direction of a free market economy. However, it is the government that creates an atmosphere where market forces can operate without any fear for their investment.

After years of high economic growth and billions of dollars in foreign direct investment, the Indian economy is struggling to maintain the momentum it had accrued after the economic reforms of the 90s. Marred by high inflation, free-fall of the Indian rupee, a fiscal deficit of 5.9 percent, and an apparent policy paralysis of an unstable government, India is headed for some tough times. The job opportunities are sliding and investors are finding a haven in Southeast Asian countries like Indonesia. Sadly, there are not many buyers for the “India Shining” story in 2012.

An analysis of two statements – one by the prime minister and the other by the president of an industry body will give a clearer picture of the current economic scenario.

On December 23, 2011, Prime Minister Manmohan Singh, at a meeting of his council of trade and industry said, “I must confess that it is a little disappointing to sometimes hear negative comments emanating from our business leadership or be told that Government’s policies are causing slowdown and pessimism in the industrial sector. Such comments have added to uncertainty and have emboldened those who have no stake in our economic growth.”

On April 19, 2012, president of the Confederation of Indian Industry (CII), Adi Godrej expressed his concern in New Delhi, “With the series of happenings and some rollbacks, clearly the brand India image is hampered and it has impacted long-term foreign investment. It is imperative that the focus should be on reforms and good governance.”

In the light of these two statements, it is clear that there is a mismatch of priorities between the government and the businessmen. Businesses are apprehensive of the current market scenario and are shying away from venturing into Indian markets. A report published in Reuters validates the concerns of businessmen as it points out that foreign investors have pulled a net $540 million out from India during March and April 2012 as against $13 billion in inflows during the period January-February 2012.

Moreover, investors are worried about retrospective tax amendments and an increasing role of the executive and the judiciary in business affairs. Cancellation of telecom licenses is another issue that has bogged the investor sentiment. The onus is now on the government to clean up its act and come up with a clear policy on what its priorities are and how it intends to achieve respectable GDP growth.

Chairman of the PM’s economic advisory council, Chakravarthy Rangarajan, seems to have an answer. In an interview to The Times of India in the last week of May 2012, the former RBI governor admitted that Current Account Deficit is high and capital inflows have diminished. It is surprising, however, that Mr Rangarajan is riding his hopes on good agricultural growth to achieve a 7 percent growth rate in the year 2012-2013.

What is the solution?

As accepted by Mr Rangarajan, a cut in government expenditure is the primary solution to the economic woes of India. Investors and businessmen will gain confidence only when they get an assurance that the fiscal deficit will be maintained as mentioned in the budget.

Britain’s Chancellor of the Exchequer, Nigel Lawson, was once quoted as saying, “the business of government is not the government of business.” There is a lesson for the present government in this quote. A free market economy, where private enterprises can flourish and generate wealth is in the best interest of the country. The government must focus on framing policies rather than keeping a tab on the day-to-day functioning of the businesses. Moreover, a cut in government expenses will definitely be a bonus point. The government can further revive divestment of PSUs to cut down the fiscal deficit. I am optimistic that the government will act before it’s too late.