People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 32

August 11 , 2013


Yet Another Match-Fixing

On Economic Reforms

AS we go to press, there are reports that the leadership of the Congress party and the UPA-2 government are meeting the leaders of principal opposition party � BJP � to evolve a common approach, if not a consensus, amongst many things, on crucial economic reforms. Thus, a fresh round of match-fixing seems to have begun.

The government has repeatedly expressed its impatience over not being able to take the neo-liberal economic reform process forward. It has been arguing that the sharp increase in the current account deficit (CAD) (ie, the difference between the value of imports and the value of exports � trade deficit) is unmanageable and needs to be immediately reduced if the growth rate is to see an upward trend. The GDP growth rate in 2012-13 declined to 5 per cent as against 6.2 per cent in 2011-12. The CAD in 2012-13 was $ 88.2 billion or a record 4.8 per cent of the GDP. In other words, the entire growth of the GDP in 2012-13 will have to be used up to meet this deficit.

Now, since the CAD is measured in foreign exchange, it needs to be bridged in foreign exchange alone. This would require either a sharp increase in exports or a sharp decline in imports. Given the global economic slowdown (having entered its sixth consecutive year), the possibility of growth of exports, notwithstanding the sharp depreciation of the rupee (making Indian goods cheaper abroad) is virtually non-existent. While exports have sharply contracted in the last quarter of 2012-13, imports grew by a significant 6 per cent. Hence, the government argues that the only way to bridge this gap is by attracting greater inflow of foreign investments into the country. This means specifically a higher flow of foreign direct investment (FDI) and not foreign institutional investment (FIIs) as these come into the volatile portfolio and stock markets and are considered as `hot money� that can flow out faster than it comes in. The net FDI, however, declined from $ 15.7 billion in 2011-12 to $12.8 billion in 2012-13.

Under these circumstances, this UPA-2 government has embarked on a course to attract larger inflows of FDI. They are now seeking to raise the ceiling of FDI in the insurance sector from the current 26 per cent to 49 per cent; similarly hike FDI proportion in defence production (ignoring the consequent risks to our country�s security) in public sector banks to 26 per cent and other areas. In order to facilitate such a policy direction, they have now appointed an NRI economist of some repute as the governor of the Reserve Bank of India (RBI).

It is further argued that greater inflow of FDI would increase the levels of investment in the economy, generate employment and lead to a higher growth rate. This is a flawed logic. Most of the FDI in sectors like insurance, banking etc, are not investments directly in production and, hence, their employment generation capacity is low. Further, investments in production can yield higher growth rates and employment only when there is sufficient domestic demand to absorb such production. Given the state of the Indian economy today with the falling growth rate leading to greater unemployment, the relentless rise in the prices of all essential commodities (leaving much lower levels of purchasing power for manufactured goods amongst the people) is contracting the already existing low levels of domestic demand. Hence, a higher inflow of FDI will not automatically lead to a revival of India�s manufacturing and industrial growth. On the contrary, it only would provide to international finance capital newer avenues for its profit maximisation during this period of global economic contractions, at the expense of the Indian economy and our people.

The constraint for the revival of India�s growth story is not the shortage of capital or resources. It is the contraction of domestic demand. Instead of addressing the latter, the government continues to provide unprecedented tax and non-tax concessions to the corporates, both foreign and domestic, as incentives for growth. Instead, if these legitimate amounts of tax revenue were collected and utilised to increase the levels of public investments to build our much-needed infrastructure, this would have generated significant growth of employment and, hence, enlarged domestic demand.

In the phase of a shrinking domestic demand, resources are finding their way into speculative activities in search of higher levels of profit. This is reflected in the sharp rise in the prices of gold and real estate. India accounts for nearly 27 per cent of the world�s gold consumption. India�s domestic gold production can meet a mere 0.3 per cent of this demand. The RBI has reported that the demand for gold in recent years has been investment demand with over 40 per cent of India�s total gold consumption constituting net retail investment. This only proves the point that investment in gold rather than production is more lucrative for capital. Gold imports are the second major item after petroleum imports. 30 per cent of India�s CAD is due to gold imports. Rather than taking measures to increase the FDI flows in order to tackle the CAD problem, India would do well to restrict these gold imports which would also help in controlling speculative profit generation.

Likewise, a study has shown that India has witnessed the sharpest appreciation in real estate prices in the whole world during the last year. Delhi saw property prices rising the steepest in the world � nearly 20 percentage points higher than the second fastest rising international property market, Brazil�s Sao Paulo. Once again, we find the diversion of existing capital resources into speculation and not into production in pursuit of higher profits.

Notwithstanding all this, the UPA-2 government seems hell bent on vigorously pursuing the neo-liberal reform agenda. In the process, they seem to have found an ally in the BJP confirming the fact that on the score of economic reforms, there is little difference between the two. The impact on the people, however, will be devastating. Instead of curbing, say the imports of gold, the prices of all petroleum products are hiked in the name of meeting the rising costs of oil imports to contain the CAD. Non essential imports that feed speculative profits are not discouraged, but people are burdened to meet the costs of essential imports. This is the logic of the neo-liberal trajectory of economic reforms. In the interests of India and its people, it is this trajectory that needs to be defeated.

(August 7, 2013)