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Get to the core of the problem

Can you treat a serious injury with Band-Aid? The common sense answer is: no. Yet, that is what the Union government is attempting to do.

india Updated: Dec 09, 2008 20:16 IST

Can you treat a serious injury with Band-Aid? The common sense answer is: no. Yet, that is what the Union government is attempting to do. The Rs 35,000-crore “booster dose” announced by the Finance Ministry recently to revive the economy falls well short of requirements. So does the move by the Reserve Bank of India to nudge banks to lower their lending rates. Why? Because they only address some of the symptoms and not the root cause of the problem. It will be informative to revisit the factors that fuelled the economic boom that began in 2001-02 and lasted till early this year. It is now accepted that the government’s massive road-building programme sparked off the boom. This was carried forward by the upsurge in the real estate, auto and consumer goods sectors, all fuelled by cheap loans. Of course, there was a happy confluence of other factors as well — like the boom in the IT sector and other exports.

<b1>What the economy sorely needs — and what has been lacking so far — is a big bang, and time-bound, spending programme by the government to create infrastructure assets — like all-weather roads, ports, power plants, etc. This will create demand for construction and related goods and long-term employment and put money in the pockets of people connected to these industries. Since infrastructure projects, typically, generate demand for goods and services from hundreds of sectors (one estimate places the figure at 261), this will, within a short time, spread the cheer across diverse sectors in the economy. Real estate, which, like infrastructure, also has huge backward linkages with hundreds of industries, also needs encouragement. But a caveat will be in order here. Encouraging banks to cut home loan rates is just one half of the equation. Real estate companies, on average, enjoy net profit margins of 49.6 per cent. Such huge mark-ups have made real estate unaffordable for most buyers. The government must, if necessary, arm-twist builders to bring down prices.

A dramatic revival in the infrastructure and real estate sectors will create conditions that will generate economic activity and rub off on other sectors — like auto, consumer durables, FMCG — and broad-base the ensuing economic upsurge. Incentives to individual sectors can fit into this bigger picture. In other words, what is required is a 21st century version of the New Deal. There are reports that Prime Minister Manmohan Singh is looking for a new Finance Minister. These are just some of the points he could ponder over.