Economic crisis the
country is presently in
By Arun Sathe

Economic situation in the country is very critical. UPA government led by Dr. Manmohan Singh has failed to deliver goods on all fronts. The greatest misery is of the rising prices of essential commodities. Common man is suffering. During six years of Vajpayeeji’s regime the economy was on the right track. Foreign Exchange reserves were building up, the essential goods were available in plenty, agricultural production was very good and the problem was of that storing the same, since there was not enough warehousing facility. The inflation was under control. In fact, during Vajpayee government developmental activities were visible. At the same time, the price situation was under control. All these achievements have gone haywire in Dr. Manmohan Singh’s government. When he took over as Prime Minister, Shri P. C. Chidambaram as Finance Minister and Shri Montek Singh Aluwalia as Deputy Chairman, Planning Commission, expectations of the people rose very high. But the two years rule has belied people’s hopes. The issue is not only of hike in petrol prices. The whole economic approach is in crisis. The inflation rate is high. coupled with shortage of food production. The government has to import foodgrains from outside. There is instability in the stock market. Even the work of development of highways, which was started during Vajpayee government, has slowed down during the last two years. The same is true of the rural road development which has also been slowed down under the present regime. As a result, the employment generation has practically stopped. The economy has no direction at all.

The share market has collapsed. It is bound to affect the investors. In fact, the way the share market was going up was itself creating doubts in the minds of the people about its real growth. One can understand the volatility of the share market it should be based on some logical reasons. One should be able to explain why the market is going up and also the reasons if it is going down. When the market crossed 10,000 points nobody was able to explain the logic of it. So also when it reached 12,000 points, it remained unexplainable. The happenings in the share market were certainly a cause of concern. The government ought to have looked into the factors when the market started rising all of a sudden. It is true there are a number of factors which affect the market:

1. There are certain pressures either internal or external.

2. The market can have disturbing trends because of certain major players.

3. The overall economic situation in the country.

When we consider the present situation in the market it appears that the policies pursued by this government has its impact. One will have to analyse the volume of trade in the market done by the financial institutions, particularly by the foreign institutions. It is being said that foreign institutions being major players started pumping money in the market and they saw to it that it goes up. When market started going down, the reason appears to be the same. It is said that the foreign investors decided to offload their investments to make short-term gains.

Finance Ministry tried to stabilize the situation asking various mutual funds and financial institutions to put money in the market. But that cannot be the solution by itself. The main issue is the rate of tax on short-term capital gains. Some are blaming the Central Board of Direct Taxes for issuance of the draft circular, in respect of what is to be treated as trading in shares and what is to be treated as investment in shares and this being explained as the cause for the foreign investors to offload their investment since they thought that this kind of circular may affect short-term investment which may be treated as trading and they may have to pay tax at higher rates and that was considered to be the immediate cause for the crisis in the stock market. But fact remains that reducing the tax rate for short-term capital gain to the extent of 10% what was the purpose of doing this? Which were the forces behind this? Is it a way of attracting foreign investors? What is the purpose of allowing foreign investors to play in the market and ultimately at whose cost foreign investors are making money on the stock market? One can understand the investment of foreign investors in infrastructural projects. But one cannot understand the logic of attracting foreign funds to do speculation in the market. There appears to be a clear case of fraud, which has been played on the investors, and it is certainly done with the collusion of certain elements, which includes policy makers. Another important aspect, which is required to be investigated is the role played by certain elements in respect of forward trading in the market. Allowing the forward trading in the share market has also its own contribution in creating such situation. A comprehensive policy change is necessary.

Considering the stock market situation it is highly essential to investigate the role of foreign financial institutions and also that of some private mutual funds. Nobody is opposed to foreign direct investment in infrastructural projects that also should be on the terms, which will benefit the country as a whole. The terms of payments, the projects in which foreign investment is coming and the kind of impact, which will have on our socio-cultural atmosphere has to be looked into. We must learn from the experiences of third world countries. No foreign direct investment comes without any strings attached to it. The terms of payment and all other issues have to be analysed and country’s interest should be safeguarded and that is the job of the government of the day at a relevant point of time. Foreign direct investment, which will add to the prosperity of the country, should be always welcome. But that should not ultimately put us in a debt trap. Allowing foreign financial institutions to get themselves involved in the speculation activities in our country will have a disastrous impact on our economy. We must go global; there is no dispute about it. But we must not fall prey to the global economic trap. It is essential to have an indepth study of the situation prevailing in the country vis-à-vis the global trends. Globlisation of the economy does not mean we are not to protect our own economic interests. Current happenings on stock market require critical analysis of the situation.

Because ultimately it is going to affect the middle class consisting of salaried employees, retired people etc., their investments are at stake. Investing in mutual funds was considered to be an alternative to the investments directly in equities, which was considered to be a less risky. But happenings on the stock market is showing some disturbing trends. The middle class is worried about its own original corpus fund invested and in this situation people have already started talking of creating “capital protection funds” to safeguard their interests. The role of foreign financial institution in mutual funds and government policies requires investigation and thereafter the solution could be found out.

The other important worry is about inflation. It is the wage-earner who suffers in the process since the real value of money is going down. Asking the State Governments to reduce the sales tax on petroleum products etc is not a solution. It is just a temporary bandage without going to the root of the matter. Vajpayee government certainly deserves to be complimented because in spite of sanctions, in spite of various natural calamities it could manage the country’s economy well. This government has completely failed in managing the economy and to understand the real issues involved. If this situation persists for some time more people will have no other alternative but to come on the streets. There are various other serious issues like naxal movement, terrorist activities etc which are challenging India’s sovereignty and integrity. If people allow this government to drift it will have serious repercussions. The need of hour is strong people’s movement against the wrong economic policies of this government.

(The writer is a Senior Advocate and Incharge of legal & Investment cell of BJP)