Ethics and Economics

Michel Bachmann, co-founder of the Zurich Hub, says that "all the problems we are facing today with debt are manmade problems. We created them. Its called Fantasy Economics. Fantasy Economics only works in a fantasy world. It does not work in reality". Finance and money can never work on fiction. Represented, as they are, by finite numbers, they will produce finite results. Any fictional padding on the credit side and downplaying the debit side will mislead and misrepresent reality, if not immediately, then soon enough. It will eventually add up to disaster, be it a government treasury or a commercial entity. Perhaps no other human endeavor demands a high level of integrity and ethics as matters of finance.

G K Chesterton had wisely said that "every politician is emphatically a promising politician". In our country, promises have been galore, so much of competitive populism has seen to it that we have emptied the state treasuries. Free power, subsidies of all kinds, for farmers, for backwards, for those below the poverty line and more. Some more are being thought up like 'teerth' subsidy! Add the loan waivers race that has been started to rescue the farmers in distress, while the public sector banks are being cajoled to accept 'haircuts' on loans to big businesses, non-performing assets crossing 8 lakh crores and counting, add some more of the public financial institutions whose fiscal misdemeanours have been opaque so far, both of the Centre and the states' lenders. It may be a good idea to ask if the economy of the country has any net worth left. Yes, sovereign treasuries have a running account with the country's Central bank, the net worth may never be questioned. This enigma wrapped in a mystery gets fuzzier when you see the GDP still growing at a healthy 7-plus per cent on the trot! Ours is not to question, but the net result is that the rich remain rich, increasingly so and the poor, still very poor.

Our tryst with destiny was different and the redemption of the pledge made should have 'substantially' altered our poverty to prosperity journey of 70 years and counting. The landmark oration set the culmination of the non-violent mass struggle for Independence as well as signaled the advent of a democratic and a just order. Sure, with limited resources, the beginning was made in the hope that the momentum of performance and economic returns would benefit all sections of the population. This has proved a vain hope. The continuous slide in the integrity of our public expenditure has been the vital weakness in our economic progress.

Ethics and economics have an integral relationship. Adulterate economics and we have a recipe for financial chaos. Under normal circumstances, expense must be less than revenue, or at most, it can be equal to but should not exceed revenue. If it does, then revenue has to be raised or money has to be borrowed to equal the expense. Ethics of business demand that the borrowed sums must be returned. This return has to be ideally through increased revenue and not more borrowings from another lender. The deficits have grown continuously and today neither the borrowers nor the states have the resources to pay back or service their debt. The government guarantees or letters of comfort given for borrowings have lost all real value as recourse to them yields nothing, no cash, and no assets backing. Private borrowers did not have access to a government guarantee, so they provided inflated collaterals to acquire loans from public sector banks, in particular, and mortgage godowns with no stocks. The result is a massive pile of non-performing assets threatening the very existence of the public sector banks. Deficit of ethics has, indeed, been the defining paradigm of public transactions in our world of finance.

The consequences of playing fast and loose with ethics of finance almost brought us to our knees in 1990 when gold shipments had to be sent to foreign lenders to secure loans. The 1991 reforms leading to liberalised rules of our economy were thus out of absolute necessity mandated by the multilateral funders in the World Bank. Our provenance for playing with shadows continues in public finance management. The public sector will never get really privatised on the specious plea of likening it to selling family silver. So we resort to smart stratagems like getting another public sector to buy the ailing one, aka LIC buying the IDBI, like asserting management control over IL&FS after it amassed a huge debt of nearly Rupees forty-eight thousand crores without performing over the years. Every now and then, which is often, the government is in danger of crossing the fiscal deficit margins, all it needs to do is to direct a cash-rich public sector to buy government's holding. The government gets the money it needs and still retains control of the divested company. Eyewashes will only fan illusions and half measures will burden huge costs on future corrections. Such a time can be delayed but not avoided ever, as the internal logic of financial propriety will enforce the consequences of deliberate or motivated imprudence. It is indeed fanciful to promise free power, free water, free education, and more, but we must remember that somebody will have to pay. Either, we have endless money or are able to manufacture it endlessly at will, but free lunches do not last.

It is true that the story of the developing economies has many similarities and one of them has been the ethical dimension of public finance. Africa, Latin America, East Asia economies, and the ASEAN too, with some exceptions have remained sluggish because of poor capital management or plain capital leakage because of political and administrative corruption. The lesson coming through is that any economy will gain its full potential when the instruments of financial governance stand public scrutiny without exception.

(The views expressed are strictly personal)