Govt giving false hopes on economy

Many of the steps taken by the government to give the impression that it has stabilised the economy, in fact, show its desperation to conceal its weaknesses. Its implementation of GST is flawed and has led to an increase in cash transaction and fall in government income. The government has proposed that the LIC take over the IDBI bank, (having huge bad loans) to help keep the fiscal deficit down. The ONGC has bought government’s entire stake in oil refiner HPCL, to help meet disinvestment targets. A massive flow of money into the stock market by domestic mutual funds at the pressure of the administration to give an optimistic view of the economy has created a bubble that could crash at any time. How far these factors have led to the abrupt resignation of chief economic adviser Arvind Subramaniam will only be known later. The government’s actions are around creating a feel good tactic rather than a serious economic effort. It normally wins the approval of international aid agencies because it is pursuing their strategy of more privatisation of public resources.

The GST was controversial because of the high and multiple rates imposed on the businesses and the consumers, but the hope was that it would make tax collection easier and evasion more difficult.

British brokerage HSBC said in a recent report that the glitches in the tax have increased the demand for cash. “The GST regime was originally associated with formality. But so far, in our view, it has not been able to live up to that promise. It has not brought down the demand for cash which has, in fact, only gone up,” the report said.

The RBI, in its latest “money supply” data puts the “currency with the public” at over Rs 18.5 lakh crore as on May 25, 2018 — up 31 per cent from the year-ago level. The World Bank, which was earlier supportive of the GST, has been revising its stand. A recent report put out by the World Bank noted “India’s GST is among the most complex taxation systems in the world. India has the highest tax rates in Asia and also largest number of tax slabs”.

While the GST was an attempt to put into practice a major economic policy that would change the way the country would be administered and taxed, other recent measures have more limited goals. Take for instance the selling of the IDBI Bank to LIC. The IDBI is one of the worst performing banks in the country with bad debts or non-performing assets of Rs 55,000 crore.

Last year, the government had put on Rs 10,600 crore to reapitalise the bank but it clearly wasn’t enough. The LIC already has a 10.6 per cent share in the equity of the IDBI Bank like it does in many others and will have to put in another Rs 12,000 crore to get a majority stake as an investor.

This will put LIC policy holders at greater risk as the LIC is being made to take over a bank it cannot hope to turn around. The risk will increase manifold if they are made to open accounts there as has been suggested.

The government is clearly evading its responsibility in an effort to cut down its fiscal deficit by making a profitable enterprise like LIC take on a loss-making one. The price will, of course, be paid by the policy holders who will get lower returns, and will have to pay the for the government’s incompetence.

Another takeover, though not as shameful as the one involving LIC and IDBI Bank, is the proposed takeover of petroleum refiner HPCL by the oil exploration giant ONGC. This has been touted as the amalgamation of two companies to form a larger one. Earlier this year, the state-owned ONGC bought government’s entire majority stake in oil refiner HPCL for Rs 36,915 crore.

They are both profitable companies, and the sale does not have any financial bearing, other than help the government meet its disinvestment target without having to go through the political minefield of finding an external buyer. Yet the step can only be understood by seeing it as a ploy to meet its difficult disinvestment target by making an existing public sector company pay for it. The existing work cultures at the ONGC and the HPCL are different, much like Air India and Indian Airlines, which led to a disastrous merger. At the same time the merger will deplete funds available to the ONGC to increase production.

The government is also encouraging Indian mutual funds to push up the stock market to unsustainable levels. This is happening against a more realistic view of the Indian stocks by foreign funds. Since the beginning of the year, foreign investors have pulled out Rs 65,787 crore (roughly $10 billion) from the Indian stocks. At the same time, Indian mutual funds have put in Rs 659,267 crore (roughly $100billion) into the stock market causing it to go up 12.9 per cent in the past year with price/earnings ratio of over 24.

This points to a bubble in the stock market that could burst  any time, once the mutual funds decide they can no longer bear the risk. It must be remembered that the stock market has been rising continuously for over four years, an unprecedented factor in financial history if not followed by a fall.

The government is building up a false sense of hope to show the economy is doing well. If one follows a sense of reality rather than believe in fables such as this government propagates, it is not difficult to see the mess we are in.