The "trust deficit" in the economy is much larger than all other deficits put together. The "trust deficit" swamps the fiscal deficit and current account deficit and has the potential to pull down economic growth well below trend levels. There is an urgent need to rectify this "trust deficit" if the economy has to go forward.
If one were to measure the "trust deficit" it will be well over 100% of GDP. The reason is no one trusts anyone in the country and that lack of trust has the capacity to widen deficits, bring down investments, slowdown consumption and pull down the economy.
The "trust deficit" is the complete lack of trust of anybody and everybody in the system. The general public does not trust politicians, bureaucrats and businessmen. Businessmen do not trust politicians and bureaucrats. Bureaucrats do not trust businessmen and politicians. Politicians trust no one.
The country has been hit by a series of scams, allegations and corporate failures over the last few years. Scams in telecom, mining, coal allocation and irrigation have led to massive loss to the exchequer.
Crony capitalism allegations have exposed the businessmen, bureaucrat and politician link. Corporate failures from Satyam to Kingfisher have exposed mismanagement.
The general public have been hit on all sides. Inflation has eaten into earning capacity, falling economic growth has hit job prospects, high property prices have hit ability to purchase a home and weak equity markets has hit wealth creation.
Retail investors do not know whom to trust their money with. The government inflates away their savings and the businessmen take away the capital. Flocking to expensive real estate or gold does not make sense at such high prices.
The "trust deficit" keeps away investors from financial markets. It keeps away businessmen from capital expenditure. It restrains bureaucrats from moving files and politicians from undertaking infrastructure projects. In short, nothing happens in the economy leading to a downward spiral in economic growth.
The media too is not trusted by the general public, as there is lack of transparency in declaration of paid news. Media houses are clubbed with political parties or with big businesses leading to a further lack of trust. Where does the investor, whether it is retail or even institutional, go to collect unbiased information to take investment decisions?
The RBI refrained from reducing the repo rate in its 30 October 2012 policy review largely due to the question mark on the government's commitment to fiscal consolidation. The repo rate cut was kept on hold despite the government projecting a lower fiscal deficit for next year. The Finance Minister did not take the RBI's status quo on rate cuts too kindly and made his displeasure public. "Trust deficit" is visible between the government and its banker.
The question is "who will work towards rectifying the "trust deficit"? It is everyone's job to bring down the "trust deficit" in the system but at this point of time there are more fingers pointing at each other leading to increase in "trust deficit". In this scenario, the judiciary, the regulators and the public have to take the lead in bringing back trust into the economy. The businessmen, politician and bureaucrat are too busy counting profits or hiding behind vague laws to take any kind of lead in bringing down the "trust deficit".
The Judiciary is the obvious place for anyone who has doubts on wrongdoings of businessmen, politicians and bureaucrats. The regulators have to deal firmly with cases where there doubts of losses to shareholders and lenders. The general public will have to exhibit more conscience when dealing with day to day corruption issues or when making investments.
It is time for someone to act on bringing down the "Trust Deficit" before it is too late.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors.
Published Date: Nov 02, 2012 15:10 PM | Updated Date: Dec 20, 2014 13:57 PM