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The crux of the problem
Highlights
Few doubt Raghuram Rajan’s brilliance. In his new job as Governor of the Reserve Bank of India, Rajan faces a pressing dilemma: he has to...
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Few doubt Raghuram Rajan’s brilliance. In his new job as Governor of the Reserve Bank of India, Rajan faces a pressing dilemma: he has to stabilize the drooping rupee value and, more importantly, advise the government to find ways to control prices. With the general election due by May 2014, the government is focused on winning votes. Rajan himself admitted in his inaugural address that he has no magic wand to set the economy right. The future of the country’s economy is largely in the hands of the government and its ministers, and not solely with the central bank. Therefore, there is nothing much that Rajan alone can do.
The country has been too preoccupied with the growth process and little effort has been made to eradicate the parallel economy and political corruption. If we were to compute growth by adding the quantum of black money to the growth indicators of the real economy, India could well be the world’s fastest-growing economy. Estimates vary, but the parallel economy today accounts for as much as 50 per cent or more of India’s economy. India’s political system is oiled by the black economy. Politicians are among the richest Indians and they thrive on the so-called cash donations. They hardly pay any taxes.
India’s first prime minister Jawaharlal Nehru took steps to end feudalism in the country, little realising that democratic India’s politicians would emerge as greater feudals. The money used by political parties and their leaders, the new feudal lords, comes from the parallel economy. In fact, it is daylight robbery of India’s resources; for, no tax is paid on these cash transactions. The figures are staggering and the bulk of this money is reportedly stashed abroad.
Those who thrive in the parallel economy are the ones who have the money power to indulge in massive hoarding of essential commodities. It makes good sense for them to keep their cash in warehouses as commodities instead of keeping bundles of currency notes. Thus, we have a situation where certain commodities required by the people for their everyday needs – be it onions, sugar, potatoes or lentils – would be in short supply because of hoarding. These goods would come into the market at higher prices whenever hoarders and black marketers deem fit. The investor, who has high stakes in the parallel economy, thus makes a larger killing, multiplying his unaccounted wealth. This, in a nutshell, is the crux of the problem.
No doubt, the forces of demand and supply have had an impact on the current price rise. The country is producing enough onions, potatoes, tomatoes and other essential commodities. If so, will the prices come down? Unlikely; for the simple reason that the hoarder is in no hurry to bring goods into the market. For, that is where he has parked his cash.
What can the government do? Pretty little. For, the vast majority of those who play for high stakes in this nefarious trade are precisely those who make huge donations to political parties and keep the system afloat in a kind of symbiotic relationship. No politician will accept this, but can he deny that he receives cash donations? This canker of black money is now eating into India’s vitals and hurting its people. The politicians keep promising that the prices would come down. They will not. One has to consider why prices have gone up. The government needs to have the strength and political will to deal with this basic problem. It has to eradicate corruption and black money to ensure that prices remain stable in the long run.
The government is making an effort to curb black money by making PAN number mandatory for all financial deals. But, in the case of most big-ticket transactions, unaccounted cash is the medium of exchange. In property deals, the flow of black money is common knowledge. It is 50:50 or even 60:40 ratio of black money in cash and white money in the form of cheques. Do you think our Finance Minister doesn’t know about it?
As prices go up, there are legitimate demands for higher wages. The demands cannot be denied for long. In the long run, it would make Indian economy an expensive one. Already there are complaints from foreign investors that India’s labour force is expensive and less productive compared to that of China. Even some Indian companies are investing abroad where labour and power are cheap and water is abundant.
As the nation pushes ahead to fight poverty, lift the poor, and create more jobs; more money, whether through deficit financing or otherwise, is bound to be released into the market. Also, huge investments need to be made in infrastructure and poverty alleviation programmes like the one put in place under the recently enacted food security law, which is a huge drain on the exchequer. Thus, all our efforts to bring down inflation will be a futile exercise. However, in order to bring down prices we need to devise a system wherein the supply chain grows bigger and where demand doesn’t outstrip supply.
Yet another factor responsible for price rise is the globalization of the economy. As economies of different countries become interdependent and interlocked, prices become volatile. Economies are like water and find their own level. For example, Hong Kong and Singapore, once preferred destinations for less expensive shopping, are today as pricey as London or New York. While taking steps to control prices in the short term, the government must also embark upon a long term plan to deal with what ails the Indian economy. Prime Minister Manmohan Singh should initiate a process that would rid India’s political system of black money and make political parties accountable by submission of audited accounts. Dr Singh has often talked about the ‘Second Green Revolution’. He should make it sure that the supply of essentials outgrows demand. The Centre should then go all-out to eliminate the black money by plugging areas where it flourishes. As things stand, high prices are here to stay, unless the government roots out the disease.
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