High prices and hoarding will continue in India

New Delhi, February 1, 2010 (ANI): The Indian economy has done well ever since the country decided to open it up in the early 1990s, after experiencing the ignominy of being forced to mortgage a part of its gold reserves to meet economic commitments.

Today, no one wants to talk about that predicament, which was a result of a controlled economy, a license permit raj, and a decision to establish a socialist pattern of society. That controlled economy also gave birth to a parallel black economy that ran on cash.

The country has been too preoccupied with the growth process and little effort has been made to eradicate the parallel economy. If one were to add the growth of the "black economy" to the growth of regular economy, India could well be the fastest growing country in the world. The estimates vary, but some say the parallel economy today accounts for almost as much as fifty percent or more of India's economic activity.

India's political system is oiled by the black economy. Hardly any political party undertakes a proper audit of its accounts. Politicians are among the richest Indians and, they thrive on the so-called cash donations. They hardly pay any taxes.

Many political parties in India run today on massive unaccounted for cash. India's first Prime Minister, Jawaharlal Nehru, took steps to end feudalism in India, little realizing that democratic India's politicians would emerge as greater feudals. The net result is that most political parties have become fiefdoms of various families and are controlled by them because of money power.

The money used by political parties and political leaders, the new feudal lords, comes from the parallel economy. In short, you could call it daylight robbery of India's resources for no tax is paid on these cash transactions. The figures are so staggering that a vast amount of this pile of money is reportedly stashed abroad. Those who own this money do not need it in India.

Those who thrive on the parallel economy are the ones who have the money power to be able to indulge in massive hoarding. It makes good economic sense for them to keep their cash in warehouses as commodities instead of keeping bundles of paper. Thus you have a situation where certain commodities required by the people for their every day needs, be it sugar or lentils, which would be in short supply because of this black economy. These goods come into the market at high prices. The investor, who has access to parallel economy, makes a still bigger kill with his unaccounted wealth. This in nutshell is the crux of the problem.

There is no doubt that forces of demand and supply have had an impact on the current price rise. Will the prices come down?Unlikely, for the simple reason that the hoarder is in no hurry to bring goods into the market. For, that is where he has parked his cash.

In a situation like this, what can the Government do? Pretty little; for the vast majority of people involved in this nefarious trade are the ones who make huge donations to the political system and keep it afloat. No politician will accept this, but can they deny that they receive cash donations? This cancer of black economy is now eating into India's vitals and hurting its people.

The politicians keep promising that the prices will come down. It will not. One has to consider, why the prices have gone up in the first instance. The government needs to have the strength and political will to deal with this basic problem. It has to eradicate corruption and black money to ensure that prices remain stable in the long-term.

The black money is generated in this country in different ways. Huge amounts of excise and customs duty are evaded every day in almost every other factory or the Customs House. That also leads to evasion of other taxes on such goods-be it sales tax, value-added tax or income tax. This can be checked if there is a will on the part of the government. The government is making an effort to curb the black economy by making a disclosure of the income tax PAN number for all major financial deals, but the fact is that in most Indian bazaars, cash is king. In property deals, the flow of cash is common knowledge.

As prices go up, there are legitimate demands by various sections of people for higher wages. These cannot be denied for long. In the long run, it makes the Indian economy an expensive one. Already there are complaints from foreign investors that India's labour force is expensive and less productive as compared to China.

As the nation pushes ahead to fight poverty and empower the poor with guaranteed jobs, it is bound to release more money into the market. Also, huge investments need to be made in infrastructure and poverty alleviation programs. We need to devise a system wherein the supply chain grows bigger and where demand does not outstrip supply.

Yet another factor responsible for price rise is the globalization of the economy. As economies of different countries become interdependent and interlocked, prices are affected. Economies are like water and find their own level. For example, once destinations for cheap shopping, Hong Kong and Singapore are today as expensive as London or New York.

While steps are being taken to control prices in the short term, the government must embark upon a long-term plan to deal with what ails the Indian economy. The Prime Minister, Dr Manmohan Singh, should initiate a process that would ensure that India's political system is rid of black money and get political parties to submit a yearly audit of their accounts.

Dr. Singh has often talked about the next Green Revolution. He needs to personally see that it happens to make sure that the supply of essentials outgrows demand.

That having been done, the government should go all out to eliminate the black economy by plugging areas where it flourishes. By all means, do not tax agricultural income. The filing of income tax returns should be made compulsory for all who earn incomes beyond a certain level from agriculture. The infusion of black money into property deals can be easily checked if the government is sincere about it.

The short-term steps that the government is taking to bring down prices will not have long-term impact. As things stand, high prices are here to stay, unless the government deals with the basics of the disease. By Prem Prakash (ANI)