This article of mine is published in Hindu Business Line on Oct 1, 2012. Link: http://www.thehindubusinessline.com/opinion/article3951736.ece
“When you see that in order to
produce, you need to obtain permission from men who produce nothing -- when you
see money flowing to those who deal, not in goods, but in favours -- when you
see that men get richer by graft and pull than by work, and your laws don’t
protect you against them, but protect them against you, then you may know that
your society is doomed.” ~ Ayn Rand
These words foresight-fully surmise
the root cause for most of the ills that have plagued our nation for the last
65 years. Notwithstanding the breath of fresh air brought about by the
loosening of bureaucratic shackles as a result of the economic liberalisation,
India finds itself at the bottom of the pile on various socio-economic
indicators. What’s worse is that not
just have we been unable to catch up with the western nations but have fallen
behind even when compared to many of our Asian & South American peers.
The only way for the living standard
of millions in this country to improve is by increasing the availability of
various goods and services in the economy (defined by GDP growth) and ensuring
that these increased resources are not held by just a few people. Often
inflation is defined as money losing its purchasing power, the fact is that
this is the most innocuous form of inflation for e.g. 10% inflation in this
case would mean a 10% increase in money supply distributed equally within the
population while at the same time the supply of goods & services remain the
same. The most damning from of inflation is when the same 10% increase in money
supply goes to a handful of people and thus the living standard of almost the
entire population shrinks by 10%; unfettered graft in the society is the main
reason behind any prolonged inflation of this kind which leads to a large
number of people in abject pecuniary even as the economy might clock a decent
GDP growth for a few years.
It is important to understand how as
a result of the unfettered graft this phenomenon of wealth transfer has been
playing out in this country.
To start, a sectoral breakup of our
economy reveals its fault lines. The output/per capita of agriculture (which
sustains majority of our workforce) as a percentage of overall GDP has been
declining over the years or in other words people working in this sector are
increasingly finding it difficult to access resources produced in other sectors
of the economy.
Considering that in a normal course it’s
difficult for this sector to show high growth, the prognosis for the Indian
economy looks simple; move the excess workforce into manufacturing and allied
industries. With so much people employed, the supply of goods would increase
and with it the living standards of a large population. The reason why this
beautiful sculpture has never taken any shape is because the key to increase
production dramatically is by improving the productivity of labour which
happens only by using technology and capital goods/machinery. A developing
nation like India can either hope to create them indigenously but that would
mean slow growth rates or import these from abroad.
However corruption leads to a gross
misallocation of capital which in turn implies that a lot of capital held by a
few, goes into consumption especially of luxury goods, real estate, stocks etc.
So while there is an actual need to import machinery and capital goods to boost
supply instead funds are squandered on consumption related and other imports.
As can be seen from the graph, India’s import of capital goods and other
manufactures products as a percentage of total merchandise goods has been consistently
lowest when compared to other developing peers.
Hence due to a lack of infusion of manufacture
goods there is a natural dearth of supply of essential goods and services thus
leading to an increase in their prices and hence depriving a large part of the
population from access to these goods and thus lowering their living standards.
A decreasing supply (growth) in the
face of a given credit growth leads to a consistent depreciation of the
exchange rate thus making the import of capital goods further difficult and
contributing to further increase in prices. Perhaps an apt example for this is
the recent increase in the prices of diesel and LPG cylinders soon after "Coalgate"
came into light. But for a depreciating rupee, the cost of petroleum products
was much lower from their all time high (in USD). Had the mines been auctioned,
the revenue from these auctions could have been used to reduce the outstanding debt
of the GOI, a reduced non-productive government credit and thus money supply
would have led to some appreciation in exchange rate and thus reducing the
subsidies on petroleum products automatically negating the need for the price
rise. People who would have bought the coal mines would have been largely for genuine
business and would have started the production rather than holding onto them
for trading profits and the country at large would have received increased
supply of goods and lower levels of inflation, of course the mine owners and
some investors would have seen lesser equity appreciation i.e. a transfer of
wealth would have happened from a few to the masses.
Instead today as this episode has
shown that because of graft the income is being transferred to a handful of individuals
from the masses, partly reflected in the higher equity prices (see graph).
The good thing about this country is
that people have the right to choose their own destiny. So as this nation fast
approaches another election; if the Indian masses and it's diaspora want to see
a better future for their children and not the ignominy that this nation has
faced for more than half a century, they must keep in mind that this unfettered
graft is not just a social evil but the root cause of the economic malaise
prevalent in this country and the response that is needed is something similar
to what happened when elections were held after emergency which instilled the
fear of God among the political classes so as to not fiddle in that area again.