Sunday, October 30, 2011

An eye-opener for the emerging market economies

Economic growth fails to reduce unemployment
The agitation in the West against the Wall Street (means ‘market-led') culture is an eye-opener for the emerging market economies, especially India.

After the fall of the U.S.-based mammoth financial institution, Lehman Brothers, a symbol of market economy, in August 2008, the world was at the crossroads to choose the economic ideology which would be able to save it from a recessionary cycle. The developed nations are undergoing this phenomenon today. But the emerging market economies, which tried to follow the footsteps of the market-led economies, are in a more vulnerable situation.

Greed and fear lead the markets. Rajat Gupta, former director of Goldman Sachs, a leading investment bank, and former head of McKinsey & Co., a leading global consulting firm, was recently charged with breach of trust by a U.S. District Court.

This case itself proves the greed at the highest level of corporates. Mr. Gupta was also a former director of Procter & Gamble Co., a leading consumer products company with world-wide presence and one of the 30 companies that form the Dow Jones Industrial Average index. Earlier this month, Mr. Rajaratnam was sentenced to 11 years in prison. Mr. Gupta's arrest was the latest in a series of initiatives taken by the U.S. Government's Federal Bureau of Investigation (FBI) since 2007 against some market participants who cheated investors.

Occupy Wall Street and Occupy London, the present agitations against the irresponsible capitalism, are the anger of the people who were suffering because of the greed of markets. “Occupy Wall Street is leaderless resistance movement with people of many colours, genders and political persuasions. The one thing we all have in common is that we are the 99 per cent that will no longer tolerate the greed and corruption of the one per cent. We are using the revolutionary Arab Spring tactic to achieve our ends and encourage the use of non-violence to maximise the safety of all participants,” heralds the website, OccupyWallStreet.

India almost engulfed into the same market-led economic philosophy.

“India's integration into the global economy has been accompanied by impressive economic growth that has brought significant economic and social benefits to the country.

Nevertheless, disparities in income and human development are on the rise.
A large section of the population — especially the poor, scheduled castes, scheduled tribes, other backward classes, minorities and women — lack access to the resources and opportunities needed to reap the benefits of economic growth,” says the World Bank in its latest Country Overview on India.

The unemployment rate in India was last reported at 9.4 per cent in fiscal year 2009-10. From 1983 until 2000, the unemployment rate averaged 7.20 per cent reaching the historical high of 8.30 per cent in December 1983 and a record low of 5.99 per cent in December 1994.

Meanwhile, the gross domestic product (GDP) growth in India increased to 7.7 per cent in the second quarter of 2011 over the previous quarter. Historically, from 2000 until 2011, India's average quarterly GDP growth was 7.45 per cent.

It reached a historical high of 11.80 per cent in December 2003 and a record low of 1.60 per cent in December 2002. The economy has posted an average growth rate of more than 7 per cent in the decade since 1997.

The Reserve Bank of India estimated the GDP growth for this financial year at 7.6 per cent at the end of March 2012. This means the growth rate is not able to reduce the unemployment rate.

“Poverty remains a major challenge though it is declining steadily but slowly,” according to the World Bank. Based on the new official poverty lines, 42 per cent of people in rural areas and 26 per cent of people in urban areas lived below the poverty line in 2004-05.

Official poverty estimates for 2009-10 are not yet available but preliminary estimates suggest that in 2009-10, the combined all-India poverty rate was 32 per cent as compared to 37 per cent in 2004-05”.

Resources generated from the recent growth are now being invested in a set of ambitious programmes to deliver services to the poor. These include programmes to provide elementary education, basic healthcare, health insurance, rural roads and rural connectivity, and other services to the poor. But resource mobilisation on the part of the government is tardy as well as it fails to tap new avenues.

The World Bank has pointed out that with India's low taxation base — only some 15-16 per cent of GDP is collected as taxes in India compared to 25-40 per cent in developed countries — the country is unable to invest the required amount through its budgetary resources. This also means that the government is yet to tax the big corporates enough, who get lot of incentives from the government.

Here comes the overshooting of government borrowing which would push the inflationary pressures. If the government is able to tap funds from the corporates either by increasing taxes or by asking them to purchase high interest government bonds, it will be able to tighten money supply in the system and reduce fiscal deficit.

The World Bank's country strategy advocates greater investments in infrastructure as a priority to attract investment and generate employment.

Even though the country tried to keep its pace of growth at higher levels with more economic reforms, it failed to generate more employment.

Financial inclusion will be possible only by implementing financial justice.

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