As the economy slows down and the rupee wilts, Manmohan Singh has bitten the ‘reforms’ bullet with both eyes on the credit rating agencies whose negative reports have done much to dampen the ‘animal spirits’ of investors, foreign and native.
Last November, when the Congress party made a push to introduce foreign direct investment in multi-brand retail, protests in Parliament forced the government to back off. Pranab Mukherjee, who was Union Finance Minister at the time, said the FDI plan was being put on hold until a political consensus emerges.
I asked a senior member of the Prime Minister’s Cabinet what had changed between November 2011 and September 2012. There is still no consensus on FDI in retail, yet a decision has been taken to go full steam ahead. “What has changed is the value of the rupee,” the Minister replied. Every rupee that the dollar gains adds Rs 8,000 crore to India’s annualised oil import bill. “Of course, Manmohan admitted to us that not even one dollar may flow into retail or airlines right now”, he said. But this decision to open the sector and raise diesel prices has to be taken in order to stop the rupee from going into free fall.
Self-serving and deceptive
Signalling is not an unknown tactic, both in economics and in war. Signals can radiate strength and resolve, but they can also connote weakness. How will those whose ‘animal spirits’ are being propitiated look at the petard the UPA has just pinned upon the door of small retail across India? Dr. Singh must not be fooled by the applause he has garnered from editorialists, TV anchors and corporate leaders for being “tough” and “decisive”. These perfumed words may wash the stain of the Washington Post ’s ink on his hands — a recent article in the American paper about his indecisiveness seems to have particularly stung the PMO — but they are self-serving and deceptive. From their vantage point in the White House or on Wall Street, the champions of American finance and enterprise see an Indian Prime Minister who is not tough but vulnerable: a man who believes the only way he can revive the economy and save the rupee is by doing what it takes to pull in foreign institutional investors and even hot money.
There is no doubt that foreign capital inflows, including FII monies, have played a big role in India’s success story over the past decade. But the problem with the Manmohan Singh strategy today is three-fold. First, it leaves untouched the very structural imbalances in the Indian economy that are responsible for the onset of the slowdown and, worse, stagflation. Second, by pinning all hopes on the revival of foreign inflows, those imbalances will most likely get exacerbated. Today, instead of being used for productive investment, capital is getting locked up in property, gold and other ‘safe’ outlets. A revival of the Sensex on the back of renewed FII interest may breathe some life into the stock market. But the risk is that this may trigger speculative demand and have no impact on the real economy. The third problem with the Prime Minister’s current approach is that the appetite of finance capital will not be sated so easily. One concession must necessarily beget another in order for the foreign investor to keep the faith in the India story.
A few weeks ago, we were told that the dilution and postponement of the General Anti-Avoidance Rules (GAAR) on tax — an important initiative taken by Mr. Mukherjee in the last budget — is necessary so as not to scare off investment. The same reason was cited to argue against the ‘Mauritius route’ of inbound investment being shut down. Today it is said that the bait of FDI in retail must be thrown to the rating agencies, or else the rupee will sink. Sure, the rupee has recovered against the dollar by around Rs 1.50 in the past few days but what happens if and when these gains get eroded again by structural factors? Foreign investors will demand more liberalised norms for entry into banking, insurance and pension funds. They will demand a friendlier patent regime for drugs so that generics can be blocked in the name of “incremental innovation.” They will rail against the ‘wasteful’ subsidies on food and employment going to India’s poor.
The slowdown of the Indian economy today is essentially due to manufacturing. This, in turn, is largely the product of poor governance and mismanagement by the Central and State governments and their systematic neglect of basic infrastructure like roads and power over a long period of time. It is also the product of corruption and rent-seeking. The sub-optimal utilisation of the railways and coastal shipping — under the influence of one private lobby or another — raises the cost of long-haul cargo and increases the inflationary impact of any diesel price hike. Thanks to poor monitoring of contractor works, road projects remain unfinished for years on end, even after the land acquisition process is over. Industry is plagued by chronic electricity shortages even as would-be power producers find it more profitable to squat on their allocated coal or gas blocks.
Why is it that the Prime Minister didn’t think about being tough and decisive when it came to allocating coal blocks through a transparent auction? Why weren’t such auctions seen as a way of plugging the fiscal deficit? And we haven’t even begun talking about the allocation of bauxite, iron ore, granite, sand and water. How much revenue is the state continuing to forego by not charging proper prices from the businessmen lucky enough to land concessions for these resources?
The other structural problem the Indian economy faces is the mismatch between a national political culture that is democratic and a model of resource allocation that resents dissent. All those who are busy denouncing Trinamool Congress leader Mamata Banerjee for her decision to withdraw support to the UPA should remember that India is perhaps the only country in the world to have established universal adult franchise and a mature parliamentary system well before it turned to building capitalism in earnest. In virtually every other country, capitalist industrialisation came first and democracy followed, or the two developed side by side. If we are to build ‘capitalism with Indian characteristics,’ this requires a reimagining of the economic decision-making process. This means decisions cannot be taken in a peremptory, top-down manner, ignoring the views and concerns of voters and communities whose land, resources and labour industry needs to utilise.
At the event to relaunch Frontline magazine on Thursday, the noted economist, Prabhat Patnaik, spoke of the social contract of fraternity which lay at the base of the freedom struggle and of the Indian state which emerged. Springing from this are five universal rights which he said were non-negotiable: the right to food, employment at a living wage, education in good quality neighbourhood schools, healthcare and pension security for the elderly and disabled. None of these rights can be realised by granting concessions and subsidies to the corporate sector.
It is the failure of the system to deliver these basic rights that lies at the root of the current crisis in Indian political economy. And the current political crisis is also a reflection of the same deficit.
On Friday, Ms Banerjee delivered on her threat to withdraw support to the UPA. She deserves applause, if only for being one of the few politicians to stick to her stand even at the cost of surrendering her share of power in Delhi. Her other faults need not detain us today — most notably her intolerance. Nor should too much time be spent wondering whether the UPA government will survive her departure. It will survive, and do so handsomely, thanks to the outside support it receives and will continue to receive from the Samajwadi Party and the Bahujan Samaj Party. The Opposition Bharatiya Janata Party is in no position to face a snap poll, whatever L.K. Advani may say or want, nor is the Left. In the weeks and months ahead, there will be skirmishes in the Lok Sabha and some moments of tension too. But Dr. Singh and Congress president Sonia Gandhi — who have proved to be superb tacticians — will survive the bumpy journey to 2014.
What happens after that, of course, is anyone’s guess. It is one thing to master the tactics of survival on the battlefield, and quite another to have a strategy that can win a war. No Congress minister sees the party winning more than 150 seats if general elections were to be held today. Dr. Singh hopes to compensate for this dwindling public support by courting investors. This constituency, of course, is happy to be courted. Whether they deliver what the Prime Minister wants is the 272 seat question.