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Economy: Look and learn - Views on News from Equitymaster
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  • Sep 6, 2002

    Economy: Look and learn

    The government recently approved yet another UTI bailout. And as usual, most analysts are crying themselves hoarse to mark their protest against the move. The government on its part, wants to show itself as welfare state and hence save the small investor. So are experts correct in thinking otherwise?

    This is not the first time the UTI has been bailed out. After every stock market scam UTI has been stripped out and the government is left picking up the tab. Where does this money come from? Are these funds perennial?

    The money obviously comes from us, the taxpayers. And of course, PSU banks are also arm twisted to shell out the necessary funds. These funds could have been used for developmental work. But wasting money for PSU banks is not new. One just has to take a look at their NPAs and the stark reality comes to light. The government with its control and public welfare policies made sure that banks continue to lend to industries, which are risky (steel, textile etc). It is only now that these banks can take independent decisions.

    If we continue to see Indian banking system drained like this, in a decade or so we could be in a situation like Japan is in today. The Japanese political establishment is so linked with the banking sector, that there is no effort on transparency and accountability. In the 80’s Japan was an economic superpower. Between 1950 to 1973, Japan’s per capita income rose by 8% every year. As per estimates, between 1980 and 1994, Japanese households saved 23.9% on an average per year. But poor decisions have seen Japan looking at a total banking system collapse.

    The country’s deficit stands over 6% of GDP The public debt has risen to well above 100%. The country’s per capita product has risen by only 1% between 1990-98. The economy's balance sheet, including public and private sector, suffers from a long history of poor transparency. The banking system does not have adequate capital and has no supervision. The misdirection of banking funds backed by political interference is one of the major contributors for the state of affairs.

    Quick stats...
      Japan India
    Per capita GDP US$ 24,848 2,136
    Savings rate* 34.0% 23.0%
    Budget deficit* 6.0% 5.7%
    Public debt* 100.0% 58.4%
    *as a % of GDP    

    If we look at the Indian stats, the similarities are startling. Indians, like Japanese are high savers. India’s Gross domestic savings are 23% of GDP. Like Japan, India’s budget deficit stands at near 6% and public debt at 58.4% of GDP in FY02. Government’s role in banking decisions is important in both the countries.

    So there is a worry that bailouts could become a noose around the Indian economy. Though the situation in Japan and India are not exactly comparable, the objective is to learn from the mistakes that happened in Japan. If any other mutual fund or institution had done the same fiasco as UTI, its operations would have been suspended. The idea is to do away with bailing out and make the government organisations more accountable.



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