With due respect to ministers and other managers of Indian economy, it really pinches to read statements where it is repeatedly said that the worst in yet not over; GDP growth rate may fall further; fiscal deficit may increase over the revised budget estimates; and Indian economy may not turn around unless the global economy recovers; however once the global economy shows the signs of recovery, India’s turn around will be sharper and swifter.
Challenges should be viewed as opportunities:
Gratitude to Dr. Reddy for his contributions enabling us to fight against financial crisis; and hats off to D. Subbaroa for his well acquaintance with political and economic scenario and timely taken monetary measures to boost enough confidence in the economy. Since chances of error and omissions might be there for everyone; just possible that we might be missing something in evaluation and analysis of data and plans. It is thus desirable that we should find and remove the regulatory hurdles for growth, adopt alternative measures after reviewing the strategic plans and impacts of adopted measures. Indian economy is facing hard time due to global recession, but as India is one of the top emerging economies with huge domestic consumerism, the challenges could also be viewed as opportunities for India to pick up higher growth rate again after adopting innovative measures. If India succeeds in doing so, many other nations may like to follow her. Thus, India has an opportunity here to become a global economic leader.
Overweighing GDCF ratio to GDP:
It is rather unfortunate that the strategy for financing 11th five year plan is not in accordance with the fundamental principles of economics of development and planning. How can we resolve a plan allowing continuous fall in the ratio of consumption expenditure to GDP? Somehow we have overemphasized Gross Domestic Capital Formation (GDCP) to boost GDP growth. No economy can achieve sustainable higher economic growth if consumption expenditure ratio to GDP falls below 70 percent. Since 11th five year plan was finalized, the economic environment in India and around the globe has drastically changed. The proposal to finance the plan was based on higher saving and investment growth rates which was going right according to the plan till capital inflow was increasing, but after reversal of capital account status, the falling consumption expenditure ratio to GDP along with falling international demand revealed that economy cannot grow at higher rate if consumption expenditure ratio to GDP keep on declining and the GDCF ratio to GDP keep on increasing.
Continuous falling TCE ratio to GDP should be arrested:
After liberalization of capital account, our GDP growth rates in India have been more than impressive, but proportionate share of Total Consumption Expenditure (TCE) to GDP has declined from 73.2% in 2003-04 to 67.8% in 2007-08. Even with higher GDP growth, our consumption demand has weakened during this period. On the other side the GDCF ratio to GDP has increased from 27.7% in 2003-04 to 31.9% in 2007-08. There is a limit to stretch the GDCF ratio to GDP. At present India needs to increase consumption expenditure compared to investment expenditures which is possible if liquidity is allowed to flow towards unorganized sector where workers have higher Marginal Propensity to Consume (MPC) as compared to workers in organized sector. But after analyzing the scope of increase in consumption expenditure with increased liquidity through currently adopted monetary and fiscal measures, it may be found that funds are not really reaching to those who have higher MPC, rather financial adjustments are more composite in these measures.
Uneven distribution of financial resources:
The fall in consumption expenditure and increase in saving and investment do not indicate inclusive growth because data may prove that after liberalization of capital account, capital inflow through stock market or through External Commercial Borrowings (ECBs) has relatively benefited the corporate sector and the financial sector more than other sectors; but the domestic unorganized sector were somehow remained neglected and suffered due to insufficient financial resources for growth. The uneven distribution of financial resources within the economy has put the corporate sector on higher growth trajectory at the cost of unorganized sector. As a result the rich became richer and poor became poorer.
Corporate Sector might have exploited financial regulations:
At this stage, one may advance the hypothesis that the corporate sector has exploited the financial regulations framed with regard to fuller convertibility of capital account. The recommendations made by the Tarapore Committee have been somehow overruled. Corporate sector have been investing locally raised equities into Mutual Funds, while enjoying ECBs to expand their businesses because ECBs have been cheaper than domestic credit sources. It has pulled the equity funds and ECBs to the corporate sector and the unorganized sector enterprises were left under mercy of local banks with higher interest rate which was enough to discourage the domestic small scale entrepreneurship.
Flow of Funds for inclusive growth:
Study might reveal that the financial sector enjoyed liberalization of capital account; thus the financial sector growth rate surpasses growth rate of GDP and many primary and secondary sector industries and trades. The data on growth rate for organized and unorganized sector during last five years and fund flow ratio to these sectors would reveal the script of high growth trajectory for India. It would help us assess the role of financial sector enterprises to help the economic enterprises grow. We may observe that financial intermediaries have more benefited with liberalization of capital account while domestic industries and trades with local base have missed the fruits. We need to assure that liquidity is genuinely guided to flow according to sustainable and real inclusive growth plan.
Appropriate flow of equity funds may reduce fiscal deficit:
As an emerging economy, India has high potential for investment expenditures, but when GDCF ratio to GDP crosses 25%, this potential is bound to moderate. The fall in TCE ratio to GDP for last ten years could not hold the high economic growth rate and it became faster when global recession further weakened the external demands. Since October 2008 after intensified global financial crisis, Indian authorities provided excess liquidity worth around 10% of GDP through various monetary and fiscal measures; but even 2% increase in domestic consumption expenditure ratio to GDP has not been achieved. It is critical to review whether the measures are appropriate enough to divert the liquidity to the group with higher Marginal Propensity to Consume (MPC). With the combined debt of Central and state government at more than 70% of GDP, it would be imprudent to increase the fiscal deficit any more. Domestic consumption expenditure could be increased at higher rate along with entrepreneurship development if equity funds are extended to the unorganized sector enterprises where workers have higher MPC compared to corporate sector where workers have higher Marginal Propensity to Save (MPS). If we genuinely priorities the flow of equity funds it may work more effectively to boost domestic demands compared to increasing public expenditures and making fiscal deficit beyond revised budget estimates.
Workers with higher MPC do not access Equity Funds:
A study may reveal that we need to track the fund flow guided through monetary and fiscal measures to boost domestic consumption. Around 79% poor and vulnerable workers engaged in the unorganized sector enterprises with higher MPC still find difficult to access equity funds while corporate sector with higher MPS enjoys all equity funds. Undoubtedly equity funds encourage entrepreneurial expenses whereas higher risk mitigating capacity and sound collateral base is required to afford debt based credits. Since poor entrepreneurs in unorganized sector do not have sound collateral base rather they have low risk mitigating capacity, thus debt based credit is unaffordable for them. They really deserve more of equity funds as compared to debt based credit to exploit the entrepreneurial skills. The working patterns of enterprises in unorganized sector are not suitable to avail equity funds from stock markets and it is not feasible for SEBI to help millions of smaller domestic enterprises where self employed workers do a lot, thus are deprived of equity funds.
Banks should be allowed to deal in small equity funds:
India needs to establish small banks dealing in small equity deposits and credits at local level so that the small domestic enterprises working in the unorganized sector could be provided with commercial credit that are otherwise beyond the reach of stock markets. It might be reasonable to allow local banks dealing in equity funds to extend equity support up to a limit of Rs. 3,00,00,00 from their equity funds. This way banks may not overrule the market regulated by SEBI. This way RBI and SEBI may have separate equity market to regulate in their own way. Thus smaller equity funds may be maintained by banks which could be easily monitored at local levels through their own business managers.
Huge domestic consumerism is the main strength of Indian economy:
Such initiatives may increase flow of equity funds to the unorganized sector enterprises whose factor costs (especially wages and salaries) would certainly boost expenditure capacity of workers. Since such workers are around 93% of total Indian work force, it may increase the consumption expenditure to considerable level because their MPC is much higher compared to workers in the organized sector. It would really boost the demand forces enough to push India out of recession. The investment through equity funds in unorganized sector enterprises will raise output whose consumers may locally based, thus increased output is supposed to be consumed by huge domestic consumerism where MPC is much higher and is still unaffected by global recession.
Equity Funds to the unorganized sector is the key:
If we succeed to provide equity funds to unorganized sector workers who have higher MPC, India may be on higher growth trajectory again with much inclusive and sustainable growth in nature because it would not depend on international demand or supply, but grow with domestic demand and supply which is much strong at present as indicative through the difference in wholesale and retail price indices. Equity funds to the unorganized sector will help 93% Indian workers make more expenditure on consumption and investment allowing India grow faster than ever before with really inclusive in nature.
Let’s guide the global economy:
Since recession is more acute in developed nations with uncertainty about recovery, it is insane to wait for their recovery. On the contrary with innovative measure of allowing equity funds to unorganized sector through local banks, if Indian economy comes out from recession, it will certainly guide other nations to follow this pattern. India will then certainly lead the international economic growth strategy.
Tags: Capital Account, Capital Account Convertability, Equity Funds, External Commercial Borrowings, External demnad, fiscal deficit, GDP growth rate, Higher growth Trajectory, Huge Consumerism, marginal propensity to Save, Marginal propoensity to Consume, planning commission, Public debt, Reserve Bank of India
