Pro-Rich Policies of UPA Government Are Actually Anti Poor

 The so-called autonomy of the RBI to serve Govt. Policy

The Reserve Bank of India Act 1934 accepts Central Government directions to the RBI “after consultation with the Governor of the Bank and generally eminent economists are expected to hold the post of the RBI Governor like. RBI is saddled with the crucial responsibilities to advice the government on appropriate measures to ensure non-inflationary expansion of money supply, the handling of budget deficits, currency volatility, the hot money inflow into the stock market, etc. 

In India for the past several years RBI governors, generally bureaucrats, are handpicked by the powers that be to be subservient to the government following the World Bank / WTO diktat, including credit control and foreign exchange management. In fact the government is practically in control of all so-called independent and powerful regulatory bodies like RBI, SEBI, etc. 

The most well-known and widely publicized example in recent years was the open dissent in 2005 by the RBI of the ministry of Finance’s unhealthy desire to encourage capital inflows via participatory notes. In the last few years, every time the RBI tried to implement a dear money policy forcing a higher interest rate regime to contain money supply and inflation, the Finance Minister met the Chairmen of nationalized banks , India Inc.,immediately after the RBI’s credit policy announcement to stress the need for keeping interest rates lower for keeping the economy afloat in strains. In the same way, the State Bank of India, a Reserve Bank subsidiary, raised its prime lending rates, the Finance Ministry intervened with cautionary note as such steps were to offend the industrial barons. 

The UPA government’s irresponsible role Vis a Vis the RBI was quite obvious during the skyrocketing inflation in 2008. Till May 2008, the government played down inflationary surge justifying it as a temporary phenomenon and would taper down very soon. The RBI was virtually left ineffective, allowing inflationary rate to soar as high as 12 percent. The RBI as a regulatory body was practically reduced to taking occasional measures for tighter credit policy forcing banks to rise lending and deposit rates. By mid-August 2008, the term deposit rates for the government administered small savings from the public remained well below two basis points less than what the banks offered following the RBI’s revised credit policy. The main reason behind the government’s opposition to an increase in small savings rates emanated from the perceived adverse impact on mutual fund operators and stock markets.

It is notable that the decisions taken by the RBI in this period of global financial crisis have been subject to the scrutiny of the Ministry of Finance. During the tenure of Y.V. Reddy (2003-08’) the ministry of Finance (under the UPA dispensation) made no bones of its dislike of the RBI’s unwillingness to open the doors completely to foreign capital of any and all kinds, while the RBI struggled to neutralize the effect of inflows so that the economy did not overheat. 

It is self-evident that if the Ministry of Finance had completely prevailed over the RBI during 2004-08’ in making the economy even more awash with US dollars, India would be in a far more vulnerable situation today, whether on the question of keeping the door wide open for unrestrained FII capital, or in the rising the ceilings even higher for external commercial borrowings, or in permitting more aggressive lending practices by banks, the RBI played some limited restraining role in checking the ministry’s dancing to the tune of global financial capital. This does not however exonerate the RBI for its non-interference in the prime lending system completely disregarding the agriculture sector of the economy and allowing the layers of money market transactions indulged in by low deposit-based foreign and new private sector banks in determining the interest rate structure, creating distortion in the real economy.

In any case, the government wants the RBI to fallow in toto disregarding the so-called status of RBI’s autonomy. The RBI cannot go the other way in this time of acute financial distress by taking any measure that weakens the inherently distorted economy serving the industrial and financial tycoons. Such a role was evident in October-November 2008 when the RBI had taken unprecedented step to augment liquidity in the financial system on such a large scale and in such quick succession. 

The release of about Rs.1, 40, 000 crore liquidity by slashing 350 basis points of the cash reserve ratio (CRR) within the space of 3 to 4 weeks, the simultaneous release of additional liquidity support to the extent of 1.5% of demand and time liabilities (DTL), equivalent to Rs.60,000 crore, to be used exclusively by the banks for funding the requirements of mutual funds and non-banking finance companies along with reductions in the repo rate from 9% to 7.5% in order to save the economy mired in speculation triggered crisis.

Now in tune with  this” tug of war hysteria’ trend ,  RBI Governor DuvvuriSubbarao who steps down in September met markets more than half way by lowering the benchmark interest rate and banks' cash reserve ratio which was constant for 19 months at 6% by 25 basis points, but  cautioned that risks loomed on the horizon. He raised  red flags on the record high current account deficit and stubbornly high food inflation, which could force him to reverse his stance in the coming months. "The first risk is food inflation. That can put upward pressure on inflation expectations and there will be pressure on monetary policy to respond, and indeed there is an obligation to respond."

Palaniappan Chidambaram, finance minister, s recently travelled to Hong Kong and Singapore and is now in Europe to tell investors that his government is determined to entrench reforms aimed at encouraging investment.Finance Minister P. Chidambaram acknowledged that the "ball was in the government's court" to revive growth, and pledged to present a "responsible" Budget for the fiscal year 2013-14 “It is a positive step which will infuse liquidity and help in catalysing growth,” Industry Minister Anand Sharma .

India Inc. &bankers today hailed the Reserve Bank of India’s move to reduce repo rate and CRR by a quarter per cent, saying it will spur growth and ease the prevailing tight liquidity condition.

Some economists recommended  interest cuts to spur growth, but the Reserve Bank of India was firm on keeping interest rates at the current high levels until fiscal deficit is brought under control — seen as the reason for high inflation for nearly 19 months .

Who Cares for the Unorganized Sector?

While the simultaneous dole packages of thousands of crores of rupees are declared by the UPA government to save the sagging big industrialists, the vast unorganized sector is being deliberately bypassed in a state of deepening slowdown. There are about 58 million enterprises in the non-firm unorganized sector, each with investments up to Rs.25 lakh and fewer than 10 workers, contributing to about a third of the gross domestic product. This is the figure supplied by the National Commission for Enterprises in the unorganized Sector (NCEUS). 

While the fate of these units is intermeshed with that of large and medium industries, their credit needs in the current severe crisis are deliberately ignored with all attention focused on the big bourgeoisie caught in the maelstrom of present global crisis. 

According to the NCEUS, enterprises with an investment of up to Rs.5 Lakh accounted for just Rs.59, 279 crore or 2.2% of bank credit as of March 2007. Those enterprises in the Rs.5-25 lakh category accounted for another 2.1%. What is worse, only 2.4 million of the unorganized units received credit from Banks, critically throwing the vast unorganized small and medium sector to a dire strait. On paper however, the RBI guidelines allow banks to sanction loans up to Rs.5 lakh without collateral. Such reluctance is the outcome of banking policy under the LPG regime.

 Various artificial props like throwing open portfolio investment to Foreign Institutional Investors (FIIs), asking Public Sector banks to increase their exposure to the capital market both directly and indirectly and exemption of dividends from income tax have been given. The result has been severe shifting of the Indian Public sector banks. Moreover, ‘liberalization’ of banking marked a major shift of finance from productive sector to consumption. 

The RBI Annual Report 2006-07 noted that “the share of personal loan (i.e. loans for housing, education, automobiles, consumer durables, credit card expenditures, etc.) in total bank credit extended by scheduled commercial banks increased from 6.4 per cent at end March 1990 to 23.3 per cent to 23.3 per cent at end-March 2006, driven by housing as well as non-housing loans. While the share of housing credit in overall credit rose from 2.4 per cent to 12.0 per cent that of non-housing retail credit rose from 4.0 per cent to 11.3 per cent.” By contrast, over the same period, the share of agriculture in Bank credit fell from 15.9 per cent to 11.4 per cent and that of small scale industry plummeted from 11.5 per cent to 6.5 per cent. The above makes it abundantly clear the prescription for banking sector reforms followed by successive governments in India.

Interest rates cuts subsiding rich

The time has come to start charging industry the right prices for resources that it gets virtually free

There is stubborn inflation, high interest rates and low growth keeping India’s SDI/HDI low. Then why are we avoiding the obvious and simple solution?

We are going through a prolonged period of high inflation that seems to have no real solution, forcing interest rates to be kept high and affecting GDP growth.

While several positive measures are being taken to rein in the fiscal deficit, at the cost of impacting the aam aadmi, by way of a reduced gas cylinder subsidy, decontrol of diesel prices and a possible increase in fertilizer prices, or by trying to save through improvements in the Public Distribution System and direct cash transfers, we may not get to where we should in terms of reining in the fiscal deficit.

The prices of natural resources and energy have risen steeply; the prices of manufactured goods too have risen steeply on the back of very high input costs.

Our export competitiveness in most manufactured items seems to be suffering consequent to high input costs and despite a much weakened rupee. High interest rates are just one of the reasons.

Therefore, we need to look beyond conventional ways of reducing fiscal deficit to rein in the huge deficit without making compromises on accelerated infrastructure improvements, and through it signal interest rate reduction and growth to improve our inclusiveness in growth.

All along, we have been focusing on reducing the subsidy outflow to the weaker sections, without looking at reducing the subsidies enjoyed by the very rich. Often we believe that giving subsidies to the very rich by way of near free resources will result in cheaper manufactured products or offered services. This is completely untrue. In fact, those who get these resources are the ones who are selling their manufactured products much higher than international prices by getting themselves several policies put in place to protect their pricing power

While the neo-liberal programme condemns subsidies such as those on food and fertiliser, and the supposed subsidy on petroleum, it promotes an array of subsidies to the private corporate sector. These subsidies take various forms .interest rate cut is one of the forms.

There are large transfers disguised in form of sums owed to the State by the corporate sector which the State makes no serious attempt to collect. Large borrowers with 11,000 individual accounts accounted for as much as Rs 400 billion of total bad debt of banks by 2001-02. Among public sector banks too high-value defaults involving 1,741 accounts over Rs 50 million amounted to Rs 228.66 billion. (Even these may be understatements, since banks tend to ‘evergreen’ corporate loans, providing fresh loans in order to prevent default.) 

According to a study commissioned by industry body ASSOCHAM, The net non-performing assets (NPAs) of the banking sector in India are increasing at an alarming rate and may cross Rs 2 lakh crore for the fiscal year ending March 2013 from Rs 1.57 lakh crore as on June 30, 2012.Also, banks’ restructured advances would also be as high as about six per cent by March, 2013. 

Whereas banks frequently attach the entire property of defaulting peasant borrowers and even have them arrested, no such stringent measures have been taken with the big borrowers, and, unsurprisingly, efforts to recover bad debts have met with little success. Banks’ bad debts have been reduced over the last few years not largely by collection, but by lengthening the schedule of repayments, making provision for bad bad debts out of banks’ profits earned elsewhere, and infusion of capital by the Government into the public sector banks. Large uncollected tax arrears, amounting to about Rs 390 billion on corporation tax and Rs 200 billion on customs duty, excise, and service tax, amount to another implicit transfer to the corporate sector. 

A second major subsidy is tax concessions. One should keep in mind that a tax concession is no different from a subsidy: it is the equivalent of the Government returning to the tax payer a portion or the whole of tax payable by him/her. The total of tax revenue forgone on corporation tax, excise duty and customs duty was estimated at Rs 2.36 trillion in 2007-08, which was over half the total revenues actually connected under these heads in that year. (Apart from this revenue forgone on personal income tax was Rs 421.61 billion, which was 35.5 per cent of the revenues from individual tax payers. To repeat, the Survey’s opposition to State intervention in the economy is selective: It opposes such State intervention as protects the people at large from the ravages of the private sector; but it envisions a vastly expanded role for the State in micro-monitoring the people, wielding bureaucratic despotism over them, and using arbitrary methods to exclude large numbers from the meagre benefits some of them hitherto enjoyed. It is an “enabling State” for certain classes, a disabling State for the vast majority.

While iron ore sells at Rs.6,000 plus per ton in the international market, those with captive mines are able to extract it at less than Rs.1,000 per ton. Similarly, coal costs less than 25 per cent of domestic prices to those who have captive mines and at a much lower percentage when compared to international prices. The same is the case with other resources like bauxite, limestone, river sand and granite. Resources are being made available at less than 15 per cent of international costs by the States and the Centre.

The people of India, to whom these resources belong, are forced to give them away near free at these cut rates by elected rulers, and they do not get the benefits of the difference between the market price of the manufactured product and the giveaway price of the resource. These virtual freebies to the rich are far in excess of Central and State deficits put together.

The time has come for those who are elected to represent and protect peoples’ interests to start market pricing resources that are now being away almost free to the very rich. This would solve all our fiscal side issues at one go and get us to double digit growth rate in quick time. This would go a long way in improving the quality of life of our people substantially. It would also help us get to interest rates on a par with the developed world.

There is dominant thinking in our policy framers that relaxing interest
rates,greater policy incentives to the corporate world will spur the
economic growth, while it is true at some measures but it is not the
whole story. The Gov't should remember it may be counter productive to
its goal of inclusive growth. The accumulation of riches in few
billionairs of India who constantly figure on forbe's list tells it
all. The pathetic social and development indices of our country, far
behind many of developing countries is an alarming situation. While
finance minister gives audience to corporate leaders before budget,why
not extend the same to grass root level social activists who seek to
bring changes in much needed human development in India?

Indian state and governments have so-long mimicked the capitalist centers of the world substantially fallowing speculation-based growth allowing FIIs, various toxic instruments to serve the economy for a small section of rising middle class by allowing enormous leverage to the MNCs, World Bank and other foreign institutions to control the economy. The e Bank’s India  will once gain has offered home loans at a concessional rate of  for a limited period. It will also extended that to other consumer loan categories like automobiles. All this is to beef up the declining automobile and real estate markets. such “mortgage loan in order to bring the customers” is “for mimicking US mortgage lenders in the sub-prime market.”

Earlier, close on the heels of Barack Obama’s current round of huge stimulus of $787 billion , Mr.Pranab Mukherjee, then finance minister declared on 24 February, the third stimulus package by huge tax cuts for manufacturing companies, consumer durables, steel and cement, automobiles, SEZs, etc. The revenue loss of an estimated Rs.30, 000 crore in a full year is aimed to rescue the faltering business of corporate houses. Industry however claimed for another round of interest rate cuts to buttress such fiscal measures. The RBI will inevitably trim bench mark rates soon to support the pro-corporate UPA government policy. Already The real deposit rates are negative and the real lending rates at about 250 bps are much lower than the long-term average of 400 bps While such blatant pro-corporate generosity is all evident in the RBI policies, the RBI has by this time unleashed the attack on pensioners by announcing curtailment of pension benefits. This is a blatant denial of one of the fundamental rights of pensioners.

In our country as in most other countries, subsidizing the rich at the expense of the poor is commonplace. All advanced societies are nothing but systems perpetuating hierarchies of exploitation, where a select few wield power over the hapless masses.
In this constellation, it is OK to squash those that are even less fortunate than yourself and pay obeisance to the "mai baap" sitting on top. Our civilization, having survived unbroken for the last 4000 years has accentuated this problem.

We'll willingly spend thousands of rupees for any crap sold in a  fashionable mall but immediately haggle over 10 rupees with the autorickshaw driver or the poor  hawker on the streets. What is happening with street vendors in Mumbai must be interpreted in this light.

Moreover, the rich and powerful can and do buy any government and influence decisions. Perhaps a French Revolution every few centuries wouldn't be so bad for us!
S.Srinivasan
President ,
NUBE( NATIONAL UNION OF BANK EMPLOYEES)