Should we call it policymaking by inertia — to do nothing until external conditions force a reaction? Or policymaking by habit — the wait-and-watch, one-step-at-a-time method in the ongoing economic madness? At a time when economic history is being written and when public policy is being forced to resonate and respond to global cues, are the sharp interest rate cuts by Reserve Bank of India (RBI) on Saturday combined with marginal tax cuts and increased government spending on Sunday enough to prevent a further slowdown?
Then there is the corporate sector that is able to organise ideas, entrepreneurship, material, money, and physical and intellectual resources under predictable conditions, overplaying the ‘Cry Wolf’ card. For, no amount of relief — fiscal or monetary — seems enough to this set of opinion-makers. Even before the packages were announced, the whining of their being ‘not enough’ or 'too little too late’ had begun. Sensing that the weekend package is only the first of many, the corporate, like a smart entrepreneur, has realised that the new currency for policy transactions is ‘dissatisfaction’. So, whatever the government does today will end up being ‘inadequate’.
That inadequacy is being benchmarked with packages of the US ($700 billion and rising) or China ($580 billion). This is a rather myopic way of looking at things. The GDPs of US and China is $13 trillion $10 trillion, respectively. India's stands at $1 trillion. The fiscal deficit — a number that tells us how much financial flexibility a country has while devising such packages — of the US is 3 per cent, while that of China are less than 1 per cent. Taking the Centre and the states together, India’s stands at over 10 per cent. Sure, a $700 billion package will make India soar. But where’s the money?
The government's intention is to reduce the cost of doing business and increasing credit demand by cutting the price of money, or to spur demand directly. These benefits are expected to be passed on to consumers. To that extent the immediate price cut intentions by the low-margin and highly competitive automobile companies like Maruti, Tata Motors and Mahindra & Mahindra are a direct translation of public policy for the general public. Other sectors should follow soon.
But when it comes to the absurdly high margins in a competitive sector like real estate, which on Sunday got a boost for low-income housing, the reactions were muted. For an industry whose net profit margins are 50 per cent — of the Rs 50 lakh house you bought, Rs 25 lakh went to the builder as net profit after taxes — we didn't hear one word about low-cost housing or price cuts. Instead, between DLF, Unitech and Parsvnath, the best reaction was ‘a good first step’. I’m no votary for controlled pricing. But when I see my taxes go towards supporting the high margins of real estate firms while I continue to be houseless, it offends my sense of economic justice.
The other issue real estate, the country's largest employer, throws up, is of jobs. This, however, is not restricted to real estate. Sectors like textiles, handicrafts, gems and jewellery in particular and small and medium enterprises in general are all labour-intensive. When their businesses shrink, a large number of non-agricultural jobs come under pressure. That’s happening right now. At my daughter’s Sports Day, I met another parent, an exporter, who had been forced to lay off 70 people the previous week, many of whom had been with him for over a decade. “There is no business," he said. When I asked him what the government could do for businesses like his, he was ruthlessly honest: "What can the government do? There are no orders, the buyers have vanished.”
When the government offers dole to labour-intensive sectors, it expects that people won’t be laid off. Apart from the economic pain that each family feels, there are enough studies that show a positive correlation between home ownership and political participation, between employment and home-ownership. No government can live with rising unemployment; no State can accept it.
Any policy, therefore, that attempts to prevent labour-intensive industries from imploding is really seeking to prevent unemployment. When taxpayers’ money does not serve this purpose and fattens profits — or even counters losses — it’s a failure of public policy. The government must be sensitive to this, particularly the invisible constituency of unorganised, contract labour.
We have no problem with fat profits. After all, through mutual funds and pension funds that will buy equities, the last quarter century of our lives will be that much richer. This is important as the country moves from defined benefits to defined contributions for retirement-planning. Creating fat profits with no job losses is an ideal situation. But fat profits with job losses, or benefits not trickling down to consumers, are absolutely unacceptable.
In these trying times, the objective of public policy, while supporting faltering businesses, should be two-fold: one, it should protect jobs; two, it should lower prices. Beyond that, allow the markets to play out their efficiencies.