According to TV reports, the Tatas have cut down their commercial production by as much as 40 per cent. It has been said that Ashok Leyland too is looking for customers - it has over two month’s production lying idle. Unitech, one of India’s biggest builders, has defaulted on the loans taken from the Greater Noida Authority. The firm blames the farmer’s agitation but there is little doubt that slack in demand is an equally strong reason. There is no doubt that international events have affected Indian industry. Risk aversion techniques, modern computers and communications technologies, were all combined by financial market whizkids to extend more and more unsafe loans to people who would never have received a loan earlier. Once banks realised that they were holding “assets” that were far from deserving that name, they started unloading, leading to a vicious circle: Banks wanted money in cash but there was no money in the market to meet those demands, which in turn led to a greater worry and further demand for more money. Several banks have gone bankrupt, leading to the meltdown we have been witnessing in the past few weeks. Keynes said that in a situation like the present, where demand is slack, the government should induce expenditure. “Spend” he said, but the people, particularly those with surplus money, will actually try to save - leading to escalation of the vicious circle. In a country such as India, with people nervous about spending money, the Centre should take courage in its hands and spend on infrastructure. That will lead to increasing budget deficits, and a denial of the Washington Consensus. Washington Consensus was alright when demand was in excess but is inappropriate when demand is slack. However, the public-private partnership, which the Washington Consensus commended, still remains valid. Government rules are not the best for infrastructure development. The Government should enforce laws, establish security and regulate. The rest of the economy, including even primary education and healthcare, is better handled by private enterprise than by the state. Suppose, for example, the government gives developers long-term loans (say, 30 years) at very low rates of interest (say, 0.5 per cent a year) but only for capital expenditure on schools, hospitals, civic infrastructure, roads, rail and air traffic. The developer has to generate on his own the revenue needed for running the business. Then, a large amount of demand will be created which, in turn, will increase further demand for both material goods and services. That way, a virtuous cycle will be set up. Unfortunately, there is a downside to this optimistic picture - farmers’ resistance to surrender land. We are currently ruled by the 1894 law on land acquisition and, as Singur has shown, that is no longer acceptable. In the present Parliament, a new law on land acquisition has been tabled, highlighting mainly the following main issues: The acquirer should buy minimum 70 per cent land at market rates when the government will acquire the remaining land needed; Future prospects should be factored into the price offered; If not used in five years, land must be returned to the government; All persons, including those who did not own land, must be rehabilitated; Land Disputes Authority will clear cases within six months. These laws are definitely an improvement on the existing situation and, yet, have their own defects. For example, the proposed Act stipulates that 80 per cent of the capital gains should be handed over to the original landowners or their heirs. After some time, that will be virtually impossible to implement. Similarly, the rule that all persons including those who did not own land should be rehabilitated can become a mistake. Remember, the list of persons who have claimed compensation in the Bhopal disaster have included many who were not by any means affected by it. Apart from undeserving cases, any number of middlemen and do-gooders can crop up making it impractical to do anything meaningful. I have advocated earlier a different version of land acquisition. I had suggested (and still suggest) that landowners should be given commercially saleable land, the rent from which is expected to produce an income that is two-three times what the farmers are earning now. The rent is guaranteed for the initial ten years and is also indexed to the price of grain. Then, the farmer is guaranteed a substantial increase in income. I know farmers like it, but administrators and industrialists are sceptical; they fear that farmers will need cash. Some may, but it should be possible to get most of them accept substantially increased income - which is also guaranteed - in preference to money. In any case, those who who need cash can always sell their entitlements. Instead, economists are relying more or less solely on monetary measures. The Reserve Bank of India has reduced CLR by 250 basic points, SLR by 150 points and the repo rate by 100 points. Those measures will no doubt inject money into the market but evidence so far indicates that they are not enough. On behalf of the government, Mr P. Chidambaram has announced that it will try both conventional and unconventional methods but has not explained what “unconventional” methods mean. What the government has done so far is to provide more money to bolster the share market, to raise the Sensex and Nifty. It may be worthwhile for the government to leave the stock market to reach its own level. After all, India’s stock market is barely one or two per cent of the country’s assets. Instead, the government should announce that it will not bother anymore on fiscal deficit. India can absorb two million houses or more - provided the prices are right. Suppose the government gets builders to develop housing estates for relatively poor people by giving them soft loans. Suppose the government gives them also loans for constructing buildings for schools and hospitals. Further, let’s assume the government moves away from large cities and gets all such infrastructure developed in small towns. Let, further, the government provide soft loans to builders for constructing buildings for new industries. All these will force the fiscal deficit to shoot up. At the same time, it will create jobs and generate incomes better than the stock market will. Even as the stock market is collapsing, we are witnessing agitations in Tamil Nadu, Maharashtra, Bihar as also in Kashmir. None of these would have erupted had the Centre nipped the agitations in the bud. Seeking collaboration from one and all, the Centre has steadily weakened itself; it is now so unsure of itself that it takes two steps backward whenever it takes one forward. Let us hope that the Centre will handle the economic situation better than it is doing the political ones. It is hoped that the government will not be tempted to take on the job of developing infrastructure on its own shoulders but lets private enterprise do the job. Let us hope also that the government will not make rules rigid, but keep them flexible enough for honest contractors to survive and prosper. However, price is the key. It should be low enough to induce more and more people to buy houses and household goods.
