Dr. Ashwani Mahajan
Prime Minister, while addressing the nation on the September 21, 2012 on the imperative to go far economic reforms, talked about the economic crisis of 1991. He ‘reminded’ that in 1991, economic position of India had worsened to such an extent that no one was ready to give even small debts to India. The country does painfully remember that in order to pay off the foreign debts, it had to send its gold to foreign countries due to the lack of foreign currency. That situation was highly unfortunate and caused a big blot on the image of India. Prime minister in his address said that although the current situation is not that bad but some steps need to be taken to ensure that situation does not worsen any further.
In our country, it is the second innings of UPA Government. Since 2004 to the present time for 8 years, the Government has been working under the stewardship of Dr. Manmohan Singh. If we leave a few controversies, he has been running the Government based on his own understanding and has been receiving the support of his party (congress) as well as that of other alliances, though the ‘friends’ of this Government have been changing. In the first innings, they enjoyed the support of the left parties among others and in the second, their supporters included Mamta Banerjee, DMK, Samajvadi Party and Mayawati’s Bahujan Samaj Party.
However, for the last two-three years of its second innings, the Government has been faced with a number of economic problems. Before the general elections, UPA-1 Government reduced the prices of petrol up to 9 rupees, but as soon as the elections were over, the Government again impacted a heavy dose of increase in the price of petrol in two installments. The price of petrol was increased a number of times in the year 2010. The common people, found them extremely helpless due to this policy. Due to the continued increase in the prices of petrol, the prices reached Rs. 67 per liter in Delhi. The price of LPG cylinder was increased by Rs. 50, diesel by Rs. 3 and kerosene by Rs. 2 per liter and recently, there was an increase in the prices of diesel by Rs. 5 more. This has been due to the decontrol of petroleum prices by the government since 2010.
In March 2010, the Reserve Bank of India increased the repo rate and reverse repo rate 13 times consecutively which lead to increase in these rates to 8.25 per cent and 7.25 per cent respectively. The Reserve Bank of India said that these steps have been taken due to continued price rise in India. Repo rate is the interest rate at which banks borrow money from the Reserve Bank of India. Reverse repo rate is that interest rate at which banks deposit their money with Reserve bank of India.
The increase in the interest rate 13 times in less than 21 months by the Reserve bank of India has mainly been due to high rate of inflation, primarily due to faulty economic policies. Generally, the increase in demand is considered to be the main reason behind price rise. The decreased availability of products and their increased demand puts pressure on prices, thus, conventionally the Reserve Bank tries to control price rise by increasing the interest rates. However, the major cause of worry is that in spite of increasing the interest rate a number of times in such a short span of time, the inflation is continuing unabated. But there is no end to the Reserve bank’s illusion.
It is true that the economic situation of India is not good. However, foreign investment is not the remedy of this problem; we need to manage our economy well. We can see that the foreign trade deficit of our country is continually increasing. In the year 2010-11, the foreign trade deficit was US$130 billion, but the total of foreign currency received from non-resident Indians and money received from software and BPO exports was merely 86 million dollar, leaving a balance of payment deficit of US$ 44 billion. This deficit was managed through foreign investment and drawing upon forex reserves. The major justification given by the Government for foreign investment is our helplessness to cover our balance of payment deficit. Government also shows its complete helplessness, as the prices of crude oil and some other commodities have been rising in international markets. But in 2011-12, we witnessed an unprecedented increase in foreign trade deficit as our trade deficit reached US$ 185 billion. Even foreign investment was insufficient to cover this deficit and this started putting a pressure on the foreign exchange reserves of our country. This directly affected the value of rupee which in February 2012 reached Rs. 48.7 per dollar and then approximately Rs. 57 per dollar in the month of July.
Weakening of the rupee resulted in the increase in the prices of raw material and fuel. Industries which were already facing the problem of rising costs, owing to increased interest rates, now had to pay higher prices for raw material and fuel as well. Rising interest rates not only affected new investments, but also lead to deceleration in the demand of durable consumer goods like cars, electronics and even houses. The obvious result was deceleration in the rate of growth of industrial production. Due to high inflation rate, Reserve Bank is finding it difficult to reduce interest rates. Scenario is extremely worrisome not only for policy makers of India, but for the whole world, as India along with China has been an engine of economic growth of the world and a big pause in the economic growth of India may affect global efforts to fight recession.
In this situation, the government of our country is trying to hide its weaknesses and mismanagement by shifting the entire blame on political scenario and is suggesting the opening of foreign investment in multi brand retail, pension funds and raising cap of FDI in insurance sector, as solutions. But the present ills of our economy are not due to absence of these policies, but are actually due to unprecedented economic mismanagement of our government.
The lack of political cooperation cannot be held responsible for deceleration in growth rate of industrial production, devaluation of rupee or foreign trade deficit of US$ 190 billion dollar. Huge trade deficit in 2011-12 and weakening of rupee are not caused by the lack of political cooperation but by the inability of the Government to limit the import of gold and silver. It is important to note that in 2011-12, gold worth US$ 50 billion was imported whereas in 2010-11, it was merely US$ 25 billion. Rather than going for foreign investment in the garb of recession and economic crisis, it would be better if the Government tries to set its own house in order.
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