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December     Last updated: December 23 : 7:00 p.m.

Imperatives of the economy

Amit Prakash

Information in the IT age, travels wide and fast and comes back with equal speed, loaded with reactions and responses. After a diffused government and the somnolent regulatory authorities were caught napping, having failed to detect the slowdown in the Indian economy, all and sundry are now warning about the slowdown and are calling for effective corrective measures. The solutions being bandied are the usual standard fare, the economic rhetorics being spelt out by the spin doctors. Second generation reforms, structural corrections, consolidation of public finances and a further liberalisation of the economy. The PM does say that the time for soft options is over, but conditions the need for tough measures, on the building of a political consensus, which will be surely elusive, at a time when the Congress harps upon an oxymoronish Nehruvian socialist touch to the economic reforms.

All these measures are long term remedies, which even if now initiated, will take a few years to fructify. Immediate rectification measures are needed, or else the slowdown will only tighten its vicious noose, around a skittish economy. It will become a case of inappropriate excessive softening of the economy. The efficacy of such measures, which are in the nature of structural adjustments has never been doubted, but they cannot be the sole measures. The need of the hour is a golden combination of such long term measures, with short term ones, which provide immediate succour and prevent the economy from skidding. The measures being currently suggested, are inherently of a long term nature, which could get further elongated, in a maze of missing coalition consensus, which makes short term measures even more imperative. New projects are the drivers of growth and dynamism in every economy. Such projects have widespread benevolent spin offs and benign trickle down effects.

The key to maintain momentum in setting up new projects is formation of equity and its prudent channelisation into various sectors of the economy. The recent experience of Korea and Thailand tells us that a debt based economy crumbles on its own and the Soviet experiment has proved the failure of subsidised and state funded economies. There is thus an immediate need to implement measures, to rejuvenate and regenerate the formation of equity in the economy. Such measures include fiscal incentives for equity formation, building investor confidence in the primary markets, well regulated secondary markets and increased accountability of corporate managements towards building shareholder wealth.

Our country with a large savings rate of over 22 per cent, indeed provides a large volume of floating stock for capital formation. Measures are needed to convert this capital, into equity, in the hands of a responsible private sector. New projects will then come up and the trickle down benign effects shall be widespread and humongous, thus mitigating the adverse effects of a slowdown. The experience of Japan which has already spent over a trillion dollars says that state funding cannot be a sustainable and successful method for economic rejuvenation. Recently a leading industrialist bemoaned that lack of equity formation was hindering growth, in the Indian economy. Over the past few years, due to listless capital markets, equity formation has suffered and corporate balance sheets are laden with debt. Unlike his Asian counterparts, the Indian businessman's affinity for debt is low and there is a growing unwillingness to borrow further. The DFIs have reported a mere growth of three per cent in their debt lending in the current financial year. Equity formation is thus the need of the hour, and the mantra for fighting the slowdown, through continued growth and economic momentum.