11/28/13 Mrunal [Economy] Rupee & GDP Downfall : Steps taken by Government, What is Policy Paralysis?

olicy Paralysis? Meaning Implications Print

[Economy] Rupee & GDP Downfall : Steps taken by Government, What is Policy
Paralysis? Meaning Implications

In an earlier article, we saw about the steps taken by the reserve bank of India to prevent the
downfall of the downfall of rupee.
In this article, we see the steps taken by government of India, to prevent the downfall of
rupee, to boost the GDP, confidence of Investors and Credit rating agencies (S&P,
Moodys etc).

1. Steps already taken by Government

2. Policy paralysis: What are the problem areas?
FDI issues
Oil Price
Gold Import
Aviation Fuel
Roads, Railways and ports
Telecom

See this diagram

mrunal.org/2012/06/economy-policy-paralysis.html/print/ 1/5
11/28/13 Mrunal [Economy] Rupee & GDP Downfall : Steps taken by Government, What is Policy Paralysis? Meaning Implications Print

Steps already taken by Government

1. Infrastructure review meeting by the Prime Minister, he says we need investment of
Rs.1 lakh crore in the infrastrcture. (hahaha, in another meeting or seminar he had
said we need Rs.2 lakh crore investment, As if money falls from the sky!)
2. Investment tracking system to monitor the status of project of Rs.1000 crore and
above.
3. Manufacturing industry promotion board (MIPB) headed by the commerce and
industry Minister, has been set up.
4. Aviation Ministry has cleared and India's new operation plan.
5. Cabinet has cleared the National Telecom policy 2012, and a move to introduce
unified licensing regime.
6. Empowered group of Ministry on spectrum pricing, has endorsed Telecom
commission suggestion that a 10 MHz spectrum per circle be put up for auctions.
7. A nine-member ministerial panel has been formed to hasten the draft coal regulator
bill.
8. Finance Ministry set up a meeting with pharmaceutical industry, to work out a
mrunal.org/2012/06/economy-policy-paralysis.html/print/ 2/5
11/28/13 Mrunal [Economy] Rupee & GDP Downfall : Steps taken by Government, What is Policy Paralysis? Meaning Implications Print

mechanism for fast clearance of FDI proposals

9. Finance Ministry has issued austerity guideline to ministers and bureaucrats

a.
Restrictions on foreign travel.
b.
Restrictions on purchase of new vehicle
c.
Ban on meetings in the five star hotels.
d.
Although Planning Commission has been kept out of these auterity measures,
and allowed to build toilet worth Rs.35 lakhs.
10. Government agreed to amend the pension bill and incorporate the suggestions of the
standing committee of Finance, including a 26% FDI and a mechanism for minimum
assured returns. (update this was put on backburner after Mamatha blocked it.)
11. Individual Qualified institutional investors (QFI) are allowed to bring up to one billion
dollar in the Debt Market. (i.e. the Bonds market, for explaination read my Debt Vs
Equity, Bond vs Shares article.) Apart from that, rules have been relaxed to allow
entry of QFIs from gulf countries. More on that given in previous article (click me)
12. New sops for the exporters in foreign trade policy 2009-14.

Policy paralysis: What are the problem areas?

FDI issues
Proposal for the foreign direct investment in the key sectors such as multibrand retail,
aviation, banking and insurance are either stuck at various level or simply put in cold storage
because of coalition politics

coal
1. There is a huge gap in demand and supply of the coal, and it is negatively affecting the
IIP and WPI Index, and electricity supply.

a. How does coal price affect WPI? Click me to understand.

b. What is IIP? Click me to understand.
2. Gas output has declined, directly affecting the CNG and Fertilizer prices.

Oil Price
Higher petrol / diesel price has snowballing effect on entire economy. It increases
the cost of production and transport of various goods (milk, vegetables ) = Supply
side inflation. What is Supply side inflation? Click me to understand.
On one hand Oil companies say we are making losses so well hike the prices, one the
other hand Government (At union and state level) keep high taxes on fuels to finance
their bogus Development schemes. So you and I are crushed from both the sides
paying Rs. 80 per litre of petrol.

Gold Import
Already explained in the previous article, how Gold import increases our Current Account
mrunal.org/2012/06/economy-policy-paralysis.html/print/ 3/5
11/28/13 Mrunal [Economy] Rupee & GDP Downfall : Steps taken by Government, What is Policy Paralysis? Meaning Implications Print

Deficit, thus increasing the demand of dollar = rupee downfall. Hence there should be a
heavy excise duty on gold, to prevent its consumption.

Aviation Fuel
high cost of aviation turbine fuel (ATF)
State taxes upto 33% tax on ATF, thus airlines are not generating decent profit. Some
are exiting, some are cutting down the staff.
Proposal for allowing FDI in domestic airlines = stuck
Air India = loss making, financed by tax payers money.

Roads, Railways and ports

Slow pace of highway projects, because of the land acquisition issues and
environmental clearance. Strong road-infrastrucutre is a prerequisite for boosting the
economy.
Railways is messed up because

Passenger fares are not hiked due to vote bank politics. And to cover up the
losses, they keep the freight costs high (i.e. the price youve to pay to get goods
delivered from one place to another.) this is called cross-subsidization.
Higher freight charges = lower profit margin = higher MRP = Supply side
inflation
Because of the Naxal blowing railway tracks, the Indian Railways doesnt run
many trains through the red-corridor during night hours and the pilots are
instrucuted to drive the train at 30-40 kmph speed only, while going through the
naxal regions = slow transport of men and material = bad for economy.
Most of India's major ports are short on capacity and grossly insufficient in terms of
tonnes of cargo handled and turn-around time for vessels, when compared to
Singapore or Japan. (Example: If you come up with a cargo-ship containing 500MT of
goods from US to India, itll take 2 days to unload the ship in India while itll take
merely a few hours in Singapore, due to the unskilled manpower, lack of latest
machinary and lots of paperwork and bureaucratic procedures.)

Telecom
Telecom and internet are essential to generate more business and employment.
But the foreign investors are exiting because of the flawed implementation and court
orders.
Because of the policy uncertainty in the telecom sector, there is very low investment
thefore prices of mobile connection and broadband internet are extremely high
compared to Japan or USA. It directly affects the profit margin of cybercafe / call
centre and other similar businesses.

Credit

IndianExpresss business section dated 7th June 2012

mrunal.org/2012/06/economy-policy-paralysis.html/print/ 4/5
11/28/13 Mrunal [Economy] Rupee & GDP Downfall : Steps taken by Government, What is Policy Paralysis? Meaning Implications Print

Restrcturing, elaboration by You know who.

For more articles on Economy by Mrunal Patel, click www.mrunal.org/economy

URL to article: http://mrunal.org/2012/06/economy-policy-paralysis.html

Posted By On 06/06/2012 @ 15:00 In the category Economy

mrunal.org/2012/06/economy-policy-paralysis.html/print/ 5/5