The record low of the Indian Rupee (INR) against the USD has prompted the Finance Minister, Pranab Mukerjee to speak out. The FM has promised austerity measures in order to improve government finances, which will in turn strengthen the economy and the INR. However even if the FM was serious on austerity the fact is that it will not help the INR. Austerity in current context is seen as anti growth, and if austerity involves cutting back on essential expenditure such as developmental ones, the INR will extend its fall. Austerity to boot is seen as anti people and the FM’s party will start losing allies leading to mid term polls, which will further exacerbate the fall of the INR. In fact austerity will only take the INR to Rs 60 plus to the USD sooner than later.
The government at the center has to realize that reforms are the only tool that will strengthen the economy and the INR. Reforms on subsidies, reforms on taxes, reforms on PSU’s and making state politicians accountable to the people is the way forward. Subsidy is the one single factor that has made the government bankrupt. India’s subsidy bill in 2011-12 was the highest ever at Rs 216,297 crores and this does not take into account the cross subsidy borne by ONGC, which is over Rs 40,000 crores. The subsidy bill has made the government overshoot its fiscal deficit target for 2011-12 by 130bps. If the government reduces the budget subsidy burden of Rs 190,000 crores, it can easily help correct the INR by 10%.
Tax reforms are the second point on the agenda. The Indian government’s tax to GDP ratio has not improved from 10% levels over the last many years. There is an urgent need to broad base tax collections. Implementation of the much awaited GST (Goods and Service Tax) tax will send out the right signals. The government has to crackdown on tax havens and double taxation treaties that are being misused but it should do so quietly and efficiently as media loves to use it as a reason for market meltdowns!
The government has to make PSU’s (Public Sector Units) shareholder and investor friendly. Using government’s majority shareholding to milk PSU’s for funding government’s deficit is a complete no-no. Once PSU’s are made shareholder friendly, the government can easily get better valuations and lower its stake in these companies.
The three put together i.e. subsidy plus tax plus PSU reforms will be equal to the INR at Rs 40 to the USD, which is 25% plus gain from current levels of Rs 54 to the USD. There is one more issue that needs to be addressed and addressed fast and that is accountability for taxpayer’s money by the center and states.
The central government has much higher transparency in its spending than the states. The
central government’s finances come under public scrutiny and at some levels there is a sense of accountability. The RBI prods and pushes the center to keep its borrowings down while the market punishes the government for poor finances by taking up government bond yields.
In the case of the states, there does not seem to be any accountability. You have a situation where state government entities such as electricity boards and transport corporations are bleeding but state government heads throw free money to the people or spend it on personal glory. State governments are also prodded by the RBI and the markets to straighten their finances, but state governments that are run by local parties are more or less run as a dictatorship leaving finance secretaries toothless. This has to correct or else there is no difference between an Indian state and an African dictatorship. States are an important part of the government and the center has to work with the states to improve finances.
Lets hope policy makers are listening.