People's Democracy

Editorial

Expansion of Public Investments

Is the “Corrective Strategy”

AS we go to press, the prime minister addressed the national conference and the annual general meeting of the Confederation of Indian Industries (CII) this morning.  He tried to generate a `feel good’ factor saying that “We can in my view get back to 8 per cent growth…”.  Saying that “we have entered a decisive phase in our post-independence economic history” he urged “Indian industry to have faith in our determination and avoid getting swamped by a mood of negativism”.  Indeed, as a 16th century nursery rhyme goes, “if wishes were horses, beggars would ride….”

Claiming that “the consensus today is that unless the government acts swiftly, our growth, which has already decelerated will be perennially stuck at 5 per cent” the PM called for a “speedy and decisive government action”.

Such action, while paying lip service to `inclusive growth’, must, according to the PM, concentrate on fiscal consolidation and creating a better investment climate in the country.  This, he emphasised, is all the more necessary given the global scenario. 

With regard to fiscal consolidation, the PM takes pride in rationalising subsidies (read reducing),  particularly fuel subsidies.  Petrol prices are now fully decontrolled and he said that diesel would be completely decontrolled over the next few months.  The LPG subsidy had been capped.  He emphasised that the Direct Cash Transfer scheme based on the Aadhar platform will further reduce the subsidy bill on the pretext of better targeting.  Naturally, there was not a single word on the whopping tax concessions that this government has been doling out to India Inc. and the rich.  The tax foregone in the last fiscal was over Rs 50,000 crores more than the entire fiscal deficit.  Tax concessions for the rich are defined as `incentives’ for growth while concessions for the poor are `subsidies’ which are burdens on the economy.  That such a trajectory will be continued over the coming years to reduce the fiscal deficit further means imposing greater agonies on the people.

The prime minister turned on its head the Nehruvian vision of the public sector assuming the commanding heights of our economy.  He said, “Government is not the prime mover of growth.  In a private sector led economy – and I repeat, we are a private sector led economy with 75 per cent of investment being in the private sector – the driver of growth is indeed private investment.”  While outlining the various measures taken by his government, in easing the bureaucratic obstacles and environmental clearances for domestic investments, the prime minister emphasised on speeding up the process of attracting foreign investment. He said, “We have given clear signals that we welcome foreign investment”. While stating that FDI in retail trade, civil aviation and other areas are important signals, he announced that “We are reviewing the FDI policy comprehensively to see what more can be done in the coming months”.  Virtually announcing another round of new generation reforms, the PM said, “Other reform measures are also being contemplated.  The Financial Sector Legislative Reforms Committee had made a number of recommendations which will be carefully considered”.   He hailed the recent legislative measures in the banking services that will allow private foreign banks to mop up Indian savings thus negating the rationale behind bank nationalisation.

In other words, precisely those measures that in the first place protected India from a complete devastation following the 2008 global economic meltdown are now being undone.  This will make India more vulnerable to global financial fluctuations. 

Strangely, the prime minister says, “A corrective strategy must be based on a correct analysis of the problem”.  The problem here is the economic slowdown.  But the corrective strategy is based on a wrong analysis of reversing the trend of declining investment.  The PM says, “The growth rate of the economy is strongly correlated with investment rate” and adds “Both public and private investment declined in 2011-12 as a share of our GDP.  This decline in investment must be reversed”.  This, the PM says, will be done through a series of reforms, such as the ones outlined above that are designed to provide greater incentives (read subsidies) for foreign and domestic capital. 

The moot question is why did investments decline in the first place? Massive concessions were given in the past three years yet industrial, manufacturing, in fact, the overall growth rate declined.  The reason lies in the reality that unless there is purchasing power in the economy, investments by themselves can never produce growth.  After all, what is produced needs to be sold, both for profits and growth.  This, in turn, requires the adequate purchasing power in the economy.  With the global economic slowdown and the consequent sharp fall in global trade, the produce of domestic investment cannot be sold abroad.  Domestically with the sharp cut in subsidies, administrative hikes in the prices of fuel and the overall galloping inflation rate is squeezing the purchasing power amongst the vast majority of the Indian people.  Thus, with a global and domestic decline in the purchasing capacity, a reversal of the slowdown of the Indian economy can only happen by increasing the purchasing power of the Indian people.  This, in turn, can only happen if the UPA government stops doling out the massive tax concessions and, instead, employs these resources to fund massive public investments.  These would build our much needed infrastructure and create significant employment opportunities.  The consequent expansion of the domestic demand would  provide the stimulus for increased investments putting India on a more sustainable growth strategy. 

Rather than be lulled into the complacency of optimism that the PM attempts to infuse, India Inc., even for its own interests, apart from the larger interests of the Indian people and the economy, must urge this government to vastly expand public investments and stop seeking greater concessions.  This course, Mr Prime Minister, is the “corrective strategy” based on a “correct analysis of the problem”.

(April 3, 2013)