In this highly uncertain political environment where no politician seems trustworthy because of the number and the quantum of damage caused by the scams unveiled in the recent history, business sentiment is dented because entrepreneurs are left in a dilemma as to which side should they be on. Do what the latent system requires them to do and fear discovery or stick their neck out and suffer directly. Policy paralysis in any case is like a ridge that they have to cross in getting licences, clearances, permissions and other synonyms of the red-tape system. And that is why we see India down at the 132nd spot on the ease of doing business index. Yes it is still shining.
The two largest scams in the country i.e. the 2G and the Coalgate, according to the figures quoted by the Comptroller and Auditor General of India, the have caused a loss of 1.76 and 1.86 trillion rupees respectively, to the exchequer. This money was lost by the state because of corruption, an undesirable form of public private partnership in which neither of the parties can be entirely blamed. According to the Centre for Monitoring Indian Economy (CMIE), in the last fiscal ending this august, India Inc. has shelved investments worth 5.45 trillion rupees, money that should have been fueling a multiplier effect in the economy but is kept locked in the bank accounts of people either in India or abroad. The direct revenue for the government out of this increase in income would have been 2.2 trillion rupees. Adding up the three we get a loss of 5.8 trillion rupees.
We are an economy worth 100 trillion rupees approx. (after adjusting exchange rate differences) with a fiscal deficit of about 5.8% (considering latest economic estimates), arriving to a figure of 5.8 trillion rupees. This may be a coincidence and I am not taking political sides to redundantly blame the government for the ills of the economy, but trying to drive the point about how just the few largest glitches on the corruption picture are single-handedly responsible for it. This deficit is one of the prime reasons for the rupee to depreciate against the US Dollar. The depreciation leads to expensive imports of the two largest components of current account deficit, oil and gold, leading to an even higher fiscal deficit. This deficit is recouped by the government by two methods of borrowings from the public and of the CRR from the RBI. Due to the unproductive nature of the deficit, it leads to even higher inflation because the money is ultimately directed towards people who will raise their demand. Now this debt of the government will have to be serviced by an interest which again forms a part of the expenditure and hence fuels the already soaring deficit. All these factors and a few more combine to form what I would call a Deficit Trap, where a certain amount of deficit leads to even more of it. This also leads to a Debt Trap because debt keeps on increasing as a result of deficits and growth does not and not because of the potential to grow but because of the unproductive nature of the spending which also causes inflation.
India currently is experiencing cost push inflation and the policies applied by the RBI are to control demand and push demand down to balance prices. Such monetary tightening ultimately leads to counter intuitive policies, which curb growth instead of cutting off the excess people have, where the government should ideally try to control input costs. According to a popular research, every 1 trillion rupees of scam leads to a 2.2% hike in inflation. This scammed money flows in the system in the form of untaxed income and under-priced assets both of which increase the disposable income of large businesses and politicians instead of being a part of the public expenditure and hence productive money supply. Therefore the inflation caused is growthless again leading to an even gloomier picture.
The political establishment is ultimately at fault and as they have famously said, “India is growing despite the government and not because it”. Though the entrepreneurial spirit is high, the pocket to carry it through the initial stages is easy (India ranks 23rd on the ease of getting credit index), until the idea is capable of blowing the roof, there is likelihood that it will fail. This is unlike the United States where according to Jim Collins’ “Good to Great”, success of a business depends primarily on factors like management and discipline rather than innovation and ideation. Trial Entrepreneurs therefore are the worst hit and so is the spirit of the economy because the chances that a small plant reaching sunlight are dependent on the crowding out effect of not its competitors but corruption.
-Rohit Seth
