People's Democracy

EDITORIAL

Indian Economy: Back to Square One

TWO years ago, when the cheer leaders of the liberalization process were celebrating the completion of twenty years of economic reforms, through these columns, we had warned that the slowing down of the Indian economy which began then could well lead up to a situation similar to that India found itself in 1991. As usual, we were the target of a concentrated attack by India Inc. and their drum beaters who charged us of not seeing the shining neon Gods of globalised capitalism Indias entry as a global player; an emerging economy where our prime minister rubs shoulders with the high and mighty on the G-20 high table etc. When we pointed out that while this may be true for a small section of India, for the vast majority, misery and malnutrition continues to abound, it was rubbished. It continues to be rubbished even now despite the fact that the creation of two Indias, with the gap between them widening exponentially, is a reality that stares at us every moment.

Today, two years later, indeed, the Indian economy appears to have come back to square one. Attempting to negate the chilling similarities with the situation in 1991 that was used by Dr Manmohan Singh as the finance minister then to launch the liberalization process, he recently said, “There is no question of going back to 1991. At that time foreign exchange in India was a fixed rate. Now it is linked to market. We only correct the volatility of the rupee.”

What he left unsaid was the fact that in July 1991, there was a two-stage devaluation of the rupee by over 20 per cent. This came in the background of a rupee depreciation of 13 per cent in 1988, 10 per cent in 1989 and 8 per cent in 1990. Is this any different from the free fall of the rupee that we are witnessing today?

Justifying the reform process in his budget speech of 1991-92 saying that, “There is no time to lose”, he churned out the precarious financial position of the government then. A current account deficit (CAD) of 2.5 per cent of the GDP in 1990-91 was unacceptable then. Today the CAD is 4.8 per cent of our GDP. He then said, “The debt service burden is estimated at about 21 per cent of the current account receipts.” According to the 2013-14 budget papers, the comparable figure is 35.09 per cent. The foreign exchange reserves at that point of time were estimated to be sufficient to cover imports for a period of six weeks. Today it is slightly better when our reserves can fund imports for around six months, but the lowest among BRIC countries where others have reserves sufficient for nearly two years. Another concern in 1991 was runaway inflation. He then said, “The major worrisome feature of the inflation in 1990-91 was that it was concentrated in essential commodities.” Is there any difference today?

The so-called `corrective’ then applied by Dr Manmohan Singh of taking IMF loans with strict conditionalities and opening up various sectors for foreign investments - decided to liberalise the policy regime for direct foreign investment came with a warning, There can be no adjustment without paying a price. The people must be prepared to make necessary sacrifice to preserve our economic independence and restore the health of our economy. Does this not sound very similar today?

Is the government preparing the ground for seeking a bailout package again now from the IMF with the accompanying conditionalities? We have seen the impact of such bailout packages in the countries of the European Union where the complement of `austerity measures are imposing unbearable burdens on an already suffering people leading to large-scale protests.

But then is there any alternative policy trajectory? Yes, there is. The Economic Survey 2012-13 informs that the final consumption in the economy declined from an average annual growth of 8 per cent between 2009 and 2012 to around 4.4 per cent. This, in a large measure, contributed to the current economic slowdown. Clearly, there is a contraction of domestic demand in the economy. This is not surprising given the relentless rate of inflation and the substantial cuts in subsidies meant for the poor in the name of fiscal consolidation.

Thus the current strategy of concentrating on increasing investment, primarily by foreign capital cannot turbo-start the economy. Recollect that despite the recent urging by the PM and FM, they could not persuade the CEOs of the public sector enterprises to invest their over a lakh of crores of rupees of cash surpluses. Where is the market that can consume what they produce from such investments? Global trade is shrinking, consequently Indian exports are tumbling. Domestically, the purchasing power in the hands of the Indian people is drastically declining, shrinking the domestic demand as a consequence.

By merely making available funds or opening up further avenues for foreign investment without increasing domestic demand will only channel these funds into speculative activities rather than productive investments. This is evident from the recent experience of astronomically high prices of real estate and gold in our country. The rich are parking their money in such avenues that are called `valuables, which according to Survey, include works of art, precious metals and jewellery carved out of such metals and stones. At current prices, investment in the form of valuables registered nearly a 4.5 fold increase between 2007-12. Even at constant prices, the share of valuables increased from 2.9 to 6.2 per cent of the total investment in the country between 2007-12. Additionally, they expend their monies in obnoxious conspicuous consumption like lavish wedding celebrations.

Such a tendency of parking surpluses in unproductive valuables is also responsible for the surge in the demand for the US dollar and foreign currencies. The rich have begun to save in foreign currencies rather than the Indian rupee given the current economic slowdown, uncertainties and sharply diminishing avenues for profit maximization. The current high rates of inflation and relatively lower rates of interest makes little sense for the rich to save in Indian rupees. This surge in the demand for the US dollar is a major factor in driving up the price of foreign currencies and making the rupee value tumble.

The prime minister has recently said, We seem to be investing a lot in unproductive assets. Yet, instead of correcting the factors contributing to this, he pursues a strategy of greater FDI inflows. This will only give greater access to foreign and domestic capital to maximise profits, in a situation of global economic slowdown, in our country enriching the rich and impoverishing the poor a strategy that will further shrink domestic demand in our economy and further widen the hiatus between the two Indias. The finance minister, in his latest budget speech has, in fact, said, “If I may be frank, foreign investment is an imperative.”

During the last three years at least, the tax concessions provided to the corporates and the rich amount, according to budget papers, to over Rs 5 lakh crores every year. Despite such `incentives’, the overall growth of industrial production was minus 1.6 per cent in May. If, instead, these legitimate taxes were collected and used for public investments to build our much-needed infrastructure, this would have generated large-scale employment. This, in turn, would increase the purchasing power of the people and vastly enlarge domestic demand. This would lay the basis for a turn around in manufacturing and industrial production and put the economy on a more sustainable and relatively pro-people growth trajectory. This is the alternative.

On this score of economic policy trajectory, there is little difference between the Congress and the BJP. However, with little signs of reversal of our current domestic economic slowdown and with the global economy continuing to falter, the yearning of India Inc. for profit maximization needs a messiah. There is much historical evidence of how the global big business, particularly US corporate giants, had played an important role in the rise of Hitler and fascism in the fallout of the Great Depression of the 1930s.

Indian corporate worlds cries for profit maximization reach a crescendo in periods of intense economic crisis. They seek a `strong’ leader who is `decisive to take actions that can facilitate their interests even at the expense of forsaking democracy, human rights and civil liberties. Thus, given the BJPs commitment to international finance capital led globalisation and its neo-liberal economic reforms, sections of corporate India seem to be hoping that their fortunes will improve under the BJPs current poster boy.

Such illusions entertained by sections of the Indian corporate media notwithstanding, relief for the vast mass of the Indian people through an alternative policy trajectory discussed above cannot be delivered either by the Congress or the BJP. What the country needs is not alternative political leaders. What the country needs is alternative pro-people policies. It is such an alternative that will have to be brought about through the intensification of popular peoples struggles in the coming months.

(August 21, 2013)