Economic Highlights                                     

New Delhi, 5 May 2011

RBI Un-independent Thinking

RATE HIKE CURBS GROWTH

By Shivaji Sarkar

The new monetary policy of Reserve Bank (RBI) has confirmed that slow-down is imminent, but the prescription --- raising interest rates --- is to put a further brake on the growth process.

Another pernicious decision, under Government pressure, has been its suggestion to link fuel prices to international crude prices. The trend was indicated by the Asian Development Bank (ADB), which had said that the GDP growth in India would come down to less than 8 per cent. The international rating agency Goldman Sachs had predicted it would be around 7.6 per cent. Now RBI puts it at 8 per cent against the Government’s assessment of 8.6 per cent.

Significantly, the RBI has raised the repo rate and reverse repo rates for the ninth time in 15 months. Each such upward hike has led to an increase in interest rates. This is supposed to be the panacea for putting a check on money supply that leads to inflation. It has not worked. There are now multiple channels for money supply, including foreign sources.

Food prices that were rising initially have led to general headline inflation, affecting almost every sector. Thus, the obvious reflection on the index for industrial production (IIP) was inevitable. Manufacturing growth is at a mere one per cent in 2010-11 (19.6 per cent in 2009), capital goods at minus 13.7 per cent (42.9p.c in 09) and consumer non-durables at minus 1.1 per cent (3p.c. in 09). There is only a minor growth in electricity generation to 6 per cent from 5.4 per cent in 2009.

The monetary policy coming a week after the ADB warning was expected to take note of it and moderate the bank rates. It has not happened. The hackneyed way of raising rates is not the solution. The RBI is not unaware of it.

It has not worked for any sector except housing, where it has been able to put a check on speculative activities. It may be recalled that RBI had effected the first rate rise to curb the unethical and un-businesslike practices of the housing sector. The rate rise had a singular effect. Housing prices started reaching its plateau and many unscrupulous companies moved out or closed down.

It is difficult to say whether the housing sector has learnt any lesson. So the policy for this sector needs to be continued. But for penalising one sector, all others need not be treated with the same medicine.

The RBI knows it. In its policy statement, it says, “The pace of industrial activity has been slowing mainly due to the impact of past monetary policy actions and high input prices. External demand too may slow if global recovery slackens”.

This is the concern. Despite knowing about its impact, why is the RBI repeating the prescription? Any physician decides on a course of action taking care of the therapeutic needs of the patient. The RBI is not doing it.

If its concern is the housing sector, it is capable of charting out separate rates for it. But to seek one solution, it is not prudent to throw the baby with the bathtub. A higher reverse repo, at which the RBI gives incentive to banks to park money with it, is supposed to reduce liquidity and demand to cool prices. Banks have done it.

This apart, banks have had a high non-performing asset (NPA), euphemism for bad debt. The RBI has now stipulated that the banks would have to keep a reserve of 40 per cent instead of 35 to balance the NPA so that they do not go bust. The cash reserve ratio though is maintained at 6 per cent almost 25 to 27 per cent of the banks’ money is parked with RBI.

It means that not enough money is available for credit. The banks are yet to come out of the syndrome of lending Rs 68,000 crores to the bidders of the 3G telecom spectrum. It is not a happy situation for the industry, which is being starved of sources for raising its funds.

The rising rates are adding to the cost of the industry, which transfers it to the consumers. The common man spends over 60 per cent of his income on food items. As these get more expensive he cuts down his purchases of all other goods, even textiles and garments. As his purchasing power reduces, industrial and manufactured goods glut in the godowns add to the slowdown.

The mood has been best summed up the Confederation of Indian Industry (CII) President B Muthuraman. He says, “Industry is already reeling under the impact of rising raw material costs and an increase in interest rates will be an added burden”.

It is also likely to have an impact on jobs generation. “We are afraid that with growth slowing down, employment targets will not be achieved”, adds Federation of Indian Chambers of Commerce and Industry (FICCI) Director General Rajiv Kumar.

Besides, the industry with rising inflation also faces pressure on wages, high cost of credit and input prices. The RBI has ignored this in formulating its policy. Its suggestion for raising the petroleum prices “to check the Government’s fiscal deficit” is also misplaced.

The Government does not give a dime as subsidy either to the consumer or the petroleum companies. Each petro price hike enriches it with higher accrual of excise and other taxes. Even now over 50 per cent of the retail petro prices comprise of Central and State taxes. The suggestion of further hike would have a cascading effect as with transport price increases, all other commodities are bound to get expensive.

It seems the RBI has stopped its process of independent thinking to monitor the Indian economy. Apparently, the Government is dictating terms to tailor its policies. Interfering in independent, if not fully autonomous, institutions create severe problems of credibility.

The Governments needs to remember that these are internationally respected institutions. Subverting their autonomy might lead the nation to an abyss. The Government’s interest in such subversion possibly stems from its need to take higher borrowings at less cost to meet its fiscal deficit.

Needless to say, this is not healthy. Unless and until institutions like the RBI are restored their basic freedom, the problems afflicting the country would not be tackled in an effective way. ----- INFA

(Copyright India News & Feature Alliance)

Open Forum

New Delhi, 4 May 2011

Rising Unemployment

GOVT INTERVENTION VITAL

By Dhurjati Mukherjee

Prompted by country-wide concerns of growing unemployment and under-employment, the Government set up an expert committee to ascertain the accuracy of the Union Labour Ministry’s annual employment survey and suggest remedial measures.

Shockingly, the survey for April-March 2009-10 released in October last, revealed a much higher unemployment rate of 9.4 per cent spread over a 400 million work-force. This year plans are afoot to widen the survey base and cover all the 629 districts against only 300 last year and interview over one lakh respondents. 

Rising unemployment is all the more alarming against the backdrop that the growth rates are quite high. True, certain categories of employers are optimistic about their hiring plans and the organized sector is set to create around 1.6 million new jobs this year, the figures are far from adequate keeping in view the employment needs of the new entrants into the job market.

The advent of new technology and techniques of increasing productivity (both in the field and factory) have led to increased unemployment. Notwithstanding, that heath care (2.50 lakh jobs), hospitality, real estate, media and entertainment and IT are promising sectors of employment generation.

This has resulted in muted demands being voiced to accord Constitutional guarantee to the Right to Work. Presently, only socialist countries accord the Right of Employment to their citizens but there are no unemployment benefits as an alternative.

A document prepared by the Labour, in the 1980’s pointed out: “The overall approach to the concept of Right to Work has essentially to be that of creating conditions for the people to find productive work in the process of development …. . However, the inclusion of Right to Work as a Fundamental Right in the Constitution would make it incumbent to provide employment to the residuary categories of persons who will still be unemployed during the transition period”.   

Economists and planners feel that the primary reliance must be on the economic system to generate employment. As such, employment generation has to be consciously built into the development strategy of any country. In India, for example, of the over 400 million working force, around 220-230 million continue to depend on agriculture for their living. Thus, the 9 per cent growth of the economy has of no significance to the farm workers.

Leading to surmise that India’s employment strategy needs to be based on revitalizing all segments of the rural sector which have been neglected over many years.  Though, the emphasis on infrastructure development vis-à-vis building roads, bridges etc and extending power and telecom facilities impacted in generating employment, including self-employment, in the last few years but this is inadequate.

Consequently, it is now necessary that the improved infrastructure should be utilized to motivate people to set up tiny and cottage industries along-with agro-based industries which have great potential through skill training and financial assistance.

Besides, the country needs to explore the employment potential in the food processing and horticulture industry which is witnessing a revolution. Undoubtedly, if this development of agro-based industries is given special attention, it could change the face of Indian villages and generate employment opportunities. Towards that end, an integrated food law could be brought to replace the current multiple laws and regulations, which have affected normal growth and standards of the food processing industry.

In addition, horticulture, floriculture and food processing could add value to products and ensure better returns for the farming community. These unexplored areas with active support from research institutes could also help in generating adequate employment opportunities and assist the revival process of the rural economy. Moreover, through a proper plan, the country could also gain valuable foreign exchange through exports.

Apart from these, there needs to be proper development of cottage and village industries. The Government has to come forward and encourage artisans to ensure that they get market value for their products. By identifying around 200 growth centers throughout the country and providing proper infrastructural facilities, roads, power and telecommunication, would ensure accessibility to markets and help sell produce at competitive rates. This could be completed in a time-bound frame of 5 to 10 years, by the Twelfth Plan.

The National Commission for Enterprises in the Unorganized Sector (NCEUS) aptly suggested the need to promote small, micro and tiny enterprises with credit, marketing and technology support. Clusters of tiny industries deserve SEZ treatment more than the rich exporting units. Priorities in credit facilities should go to small farmers and micro enterprises.

Importantly, the entire planning process must now centre on helping the poor and the vulnerable sections. The Government’s decision to provide 100 days guaranteed employment in a year under the NREGS to one member of every poor household at a minimum wage for public works projects should be seriously implemented. As it has helped in serving the dual purpose of generating employment and in building rural infrastructure.

However, the performance review committee of the NREGS found that the national average for April-October 2010 was poor and stood at 34 days. Only Andhra Pradesh had done well by generating 46 days of work per household. It was followed by Tripura (40) and Orissa and Rajasthan (39) each.

Clearly, our leaders need to heed the concerned voices of economists and planners including former President Abdul Kalam who have repeatedly asserted the need to reverse the planning strategy and concentrate on the rural sector. As this would go a long way in tackling the problem of unemployment and under-employment as also boost the living standards of the poor and the economically weaker sections. Thereby, usher in the much-talked about inclusive growth. ----- INFA

(Copyright, India News and Feature Alliance)

Political Diary

New Delhi, 7 May 2011

India: A Soft State

NOTHING BUT CHEAP TALK

By Poonam I Kaushish

“Geronimo EKIA…. We got him.” Thus, ended the life of the world’s most wanted terrorist, Osama bin Laden. Devastatingly and brutally brought home Monday last when after 10 long years of 9/11, the US tasted victory. Not only did Operation Osama, the culmination of the War on Terror showcase to the world what US patriotism and nationalism is all about, earning it the numero uno Super Power tag. More important, it is a country which neither forgives nor forgets. Bluntly, don’t-mess-with-me-I’ll-get-you. Eureka!  

On the flip side, from the Kargil fiasco, Kandhar humiliation and Parliament brazen assault to 26/11 Mumbai blood-bath, India’s security farce continues. While Masood Azhar roams free in Pakistan, ‘death awardee’ Afzal Guru is alive and kicking in jail, Ajmal Kasab is still to be convicted,  Zaki-ur-Rehman Lakhvi  and Hafeez Muhammad Saeed continue to spew venom against India and Pakistan scoffs at New Delhi’s hard rhetoric about crushing terrorism which ends in a whimper.

Regrettably, our leaders continue to wallow in the false belief that wars are born in the minds of men ---- won by waving the white flag! Think, post Washington’s Operation Geronimo, as the clamour for an US-type operation to revenge Pakistan’s diabolic terrorists’ acts grows, led by Army Chief VP Singh (India can stage an Abbottabad-type operation), our leaders refuse to re-draft its Pak policy.

Instead, South Block willy-nilly asserts dialogue with Islamabad is the best option given the volatile situation in the country. Said Prime Minister Manmohan Singh, “The Osama episode will not deter will not change the universe of the discourse between India and Pakistan. Talks with Pakistan will continue...” Sic. Adding lamely, even the US has not broken its ties with Pakistan.

Arguably, is this 'don’t-rock-the-boat-avoid-confrontation' policy responsible for New Delhi’s failure to check terrorism, from across the border, North-East and Naxal country? Do we lack the will for bold, decisive action to defend the country’s security interests?  Is India a soft state? Yes, a big yes.

Undoubtedly, the polity’s powerlessness to deal with hard targets strongly has given us the soft State image whereby everyone takes us for a ride. Worse, the Administration is unable to enforce its writ throughout the country, a natural sine qua non of a State. Remember, it is no use having the instruments to enforce law if one lacks the ability to put them to effective use.

Undoubtedly, New Delhi’s hunger to build bridges with Islamabad appears to have blinded the Government to the web of deceit spun by its duplicitous neighbour. Astonishingly, the Prime Minister turned his cheek to Pakistan's Foreign Secretary Salman Bashir's blasphemous remarks describing as “outdated” India's demand for action against the Mumbai perpetrators and warning of “severe consequences and terrible catastrophe” if it undertook an Abbottabad-type “misadventure.”

Conveniently forgetting the harsh truth. Talks and terror cannot co-exist. Pakistan is a sponsor and user of terror and not its victim. It has not been honest in its commitment that its territory will not be used for terror. Asserted a senior South Block official, “Remember, Islamabad is no pushover, it needs to answer some tough questions. Are they doing enough on LeT, JeM and Hizbul Mujahideen? The Mumbai trials? On Lakhvi, Saeed et al all who remain a serious threat to India”?

In fact, many question the utility of an Indo-Pak dialogue when Islamabad has not delivered on India's demands on 26/11. “Where was the need for India to say that it will continue with the dialogue process irrespective of the fact that Osama bin Laden was protected by Pakistan? India had not called off the dialogue. It reflects poorly on India's foreign policy. It is devoid of any strategy, leave alone objective. All these show that our policy is whimsical and not goal-oriented," said a strategy affairs expert

Indeed, India's approach has been incoherent over the past two years, in fact bankrupt since 26/11. While a section of the Government favoured talks after Sharm-el-Sheikh, the Union Home Ministry talked tough on terror. Finally, the Prime Minister, for reasons best known to him, put the talks back on track by inviting his counter-part Yousaf Raza Gilani to Mohali as part of cricket diplomacy.

But till date all this has yielded zilch results. Clearly, if New Delhi means business it needs to quickly do justice in the 26/11 case by sentencing Ajmal Kasab through a speedy trail. There is no point in asking Pakistan to hand over Hafiz Saeed or Dawood Ibrahim and speculating on the possibility of a special operation to access them when a terrorist caught during a terror  act of terror is being used as a poster boy for Indian democracy and justice system.

The time has come for New Delhi to get its priorities straight and act together. Our leaders need to show some backbone in punishing terrorists before claiming to deal with the phenomenon of terrorism. They need to distinguish between conflict resolution and peace. Make clear that terrorism facing the country is not co-terminus with the Kashmir problem. Kashmir’s resolution and countering Pak-sponsored terrorism are two different issues.  Solution of J&K will not automatically defuse the terrorist threat for India.

Also, work towards evolving a policy that combines open dialogue with diplomatic pressure. Simply inter-acting, is not a solution. Talks to improve trade and cultural ties are not instruments to address terrorism from Pakistan. Plainly, statements like “Pakistan should stop harbouring terrorists” are innocuous demands having only rhetorical value. India should delineate a time frame with specific demands and spell out viable consequences if these are not met. Misadventures like Operation Parakaram (troop mobilization along LoC in 2002) following the attack on Parliament should be avoided.  

Pertinently, perhaps former US President Nixon had India on his mind, in his book "The Real War." Said he: “Nations live or die by the way they respond to the particular challenges they face While might certainly does not make right, neither does right by itself make might. The time when a nation most craves ease may be the moment when it can least afford to let down its guard.

“The moment when it most wishes it could address its domestic needs may be the moment when it most urgently has to confront an external threat. The nation that survives is the one that rises to meet that moment: that has the wisdom to recognize the threat and the will to turn it back, and that does so before it is too late.”

Clearly, La affair Osama should awaken New Delhi India into crafting a long-term Pakistan policy taking national security imperatives into consideration. We need to formulate a clear-cut regional diplomatic thrust. As also get rid of the naïve notion that we can preserve peace by exuding goodwill. This is not only stupid but could be dangerous. It may win New Delhi accolades but it also tempts the aggressor to be more belligerent.

True, one may not be overtly aggressive but we need to think and act smart. Have a clear view of where the dangers lie and the responses necessary to quell the danger. Tough times call for tough action. Above all, our polity needs to hold the mirror and be truthful. That ‘bankrupt’ practitioners of third-rate politics do not have the critical first-rate political will and stomach for making India into an effective hard State. After all, war can only be won by war! ----- INFA

(Copyright, India News and Feature Alliance)

Round The World

New Delhi, 3 May 2011

Osama Bin Laden’s Death

 WAR ON TERROR: WHAT NEXT?

By Monish Tourangbam

Research Scholar, School of International Studies (JNU)

The US has finally hunted down their enemy No.1, Saudi tycoon-cum-dreaded terrorist leader Osama Bin Laden aka the most wanted man in the world responsible for the 9/11 attacks. Probably the longest man-hunt in human history ended with an American operation at the garrison town of Abbottabad, about 50 kms North-East of Pakistan’s Capital Islamabad.

Needless to say, Osama was the primary reason behind the War on Terror in Afghanistan that will now out-live his death. In fact, the War on Terror and the Af-Pak strategy is much more complex at present and it is no longer about one Osama.

 Consequently, despite the debate that certainly arises as to how Osama’s death would affect America’s withdrawal strategy from Af-Pak, US operations in the region at this juncture can hardly be decided on the basis of his death. Indeed, there might be increasing pressure on allied countries to re-assess the war in Afghanistan as all nations involved have experienced war-fatigue and are looking for a safe way out.

But, it is also true that the war in the Af-Pak region has morphed into a bloodier, messy and enduring campaign and the Taliban insurgency and the many splinter groups that Islamic fundamentalism has spawned will hardly be affected with the death of one Osama Bin Laden.

Significantly, the coming days and weeks will be a critical time to see how the Obama Administration, triumphant and energized because of this successful campaign capitalizes on the gains. For one, the Al Qaeda will definitely be in an unsettled mood suffering a leadership void because not many terrorist leaders could be as charismatic as Osama, who had a reputation of unifying ability and carried with him the aura of an iconic leader, a millionaire and a former Mujahedeen who stood with his brethren for the cause of Islam.

Even while he was on the run from the US forces, and maintained an under-ground life, the very knowledge that he was out there somewhere still plotting against the western countries would have been a big morale booster for other like-minded groups and “jihadis”. Indeed, his death will be a big blow to the hearts and minds of Al Qaeda members and their affiliate groups. His second in command, Ayman Zawahiri, for all his capabilities, does not seem to have the same kind of charisma and uniting power.

Thus, definitely some points could be scored at this moment of crisis within the central Al Qaeda. But, again the Al Qaeda itself has become highly de-centralized over the years leading to a lot of splinter groups in different parts of the world, sharing the same kind of ideology and often employing the same kind of terror tactics but without much of a central control.

Moreover, one-man terror plots are equally possible these days, with the kind of reach and connectivity that terrorist operations have shown, using information technology and other inventions of the modern world for their sinister purposes.

As such, the coming days are not going be easy. Hence, the end of Osama is a watershed moment, a tremendous psychological blow to terror organizations, a show of resolve that the effort to catch or kill the mass murderer had not slackened over the years.

But, this is definitely not the end of Al Qaeda, nor any real comfort to the kind of campaign that US forces and other countries would face in their fight against terrorism, especially in the epicenter of international terrorism: the Af-Pak region.

 The Taliban insurgency and the various splinter groups will hardly be affected by Osama’s death. The corruption in the Afghan Government and society, the internal ethnic divisions and the drug money that fuels a large part of the insurgency has hardly anything to do with the end of Osama. Dreaded groups like the Haqqanis or groups in Pakistan like the Tehrik-i-Taliban Pakistan and the Laskar-e-Taiba will hardly tone down their violence because Osama is gone. 

According to Seth Jones of RAND Corporation, a major US think-tank, Bin Laden's death does not resolve the big-ticket issues between Washington and Islamabad, namely Pakistan's support for the Taliban and other insurgent groups battling U.S. forces in Afghanistan, like the Haqqani network.

“As long as many of those issues continue to exist, and they have very different interests, and very different strategic goals in the area, then some level of conflict will likely persist,” Jones added.

In fact, it is being feared that terrorist attacks could actually rise in the coming days and weeks as a sort of reprisal and revenge against Osama Bin Laden’s killing. There could be deliberate effort to show that the Al Qaeda was still very much in action. This could be done through quick-time small-scale terrorist attacks.

The US Department of Homeland Security reportedly said, “The Intelligence Community (IC) assesses the death of Al-Qaeda leader Osama bin Laden could result in retaliatory attacks in the Homeland and against US and Western interests overseas.”

The death of Osama and the circumstances in which he was found has raised a major debate around the role of Pakistan in the War on Terror. The fact that Osama was traced to a mansion at Abbottabad, very close to the Pakistani Capital, and right under the nose of the Pakistani Military Academy has raised a lot of questions on the Pakistani military intelligence and the Government.

Undoubtedly, for quite some time, the top brass of the Pakistani leadership have been denying that Osama was in Pakistan. The present situation puts them in tight rope exposing either the connivance of the Pakistani Establishment or the incompetence of their intelligence.

According to Hasan Askari Rizvi, a military analyst in Lahore, “If Bin Laden’s presence was not known to Pakistan’s security agencies when he was located close to important military installation, it will be viewed as their incompetence or over-confidence. If they knew about his presence but did not take action, this will raise questions about the agenda of Pakistan’s security agencies for fighting terrorism,” he added. 

Importantly, Indian officials also have taken serious note of the scenario, and re-emphasize their long held view that Pakistan continued to provide safe havens to terrorists, thus under-mining the fight against terrorism. “The world must not let down its united effort to overcome terrorism and eliminate the safe havens and sanctuaries that have been provided to terrorists in our own neighbourhood,’’ observed India’s External Affairs Minister S.M. Krishna.

Undoubtedly, Pakistan is an important ally in the US War on Terror in the Af-Pak region but it cannot be denied that Islamabad has not been committed to the purpose and has played a double-game. In the process, sincerely acting against only those terror groups that threaten the Pakistani State, and over-looking and even colluding in the case of groups that target India.

Hence, in the coming days, the location of the operation to kill Osama, Abbottabad might assume more importance opening rounds and rounds of debate regarding the nature of Pakistan’s assistance in the War on Terror and testing various nuances of the US-Pakistan alliance against terrorism. ----- INFA

(Copyright, India News and Feature Alliance)