People's Democracy

Editorial

CAD Crisis:

Big Corporates are Main Culprits

RECENTLY in parliament, the prime minister made a statement on the falling rupee and the current economic crisis that the country finds itself in. He once again asserted that today’s situation cannot be compared to the 1991 crisis of the Indian economy.  He said this on the basis of the fact that while the rupee then was on a fixed rate with foreign currencies, it is now flexible and linked to the market.  In other words, what he meant was that since this is the case, the market will automatically correct imbalances.  Therefore, the tumbling rupee is the result of such a market correction.  Hence, it should be accepted as a factor of the liberalised economy. Its consequences for the people as a result of all imported capital equipment costing more and, hence, negative industrialisation and consequent rising unemployment was, of course, not his concern. 

The PM further went on to add that since the economic fundamentals remain  strong, India shall bounce back.  In this context, let us recapitulate what we said in these columns recently.  In 1991, India’s current account deficit (CAD – the difference between the total value of imports and exports) was 2.5 percent of the GDP. This was considered unacceptable then.  Today the CAD stands at 4.8 percent of the GDP.  In 1991, the debt service burden  was around 21 percent of the current account receipts.  Today this figure stands at 35.09 percent.  India’s foreign exchange reserves were a record low in 1991 sufficient to finance imports for a few weeks.  Today our foreign exchange reserves are slightly better, but no more than being sufficient to cover imports for six months.  In 1991, there was a runaway inflation led by the rise in the prices of essential commodities.  Today the situation is similar, if not worse.

The 1991 situation was used to usher in the era of economic reforms under neo-liberalisation.  It is precisely the course of such reforms that has brought about the state of affairs today.  In the process, the real nature of the capitalist State in India is revealed in all its naked glory of promoting  unbridled `crony’ capitalism.  This can be understood  by the nature of the high CAD today.  The pundits of reform would have the country and the people believe that the cause for high deficits and fiscal imbalances  are due to the fiscal profligacy of the government and the indulgence in populism.  This explains the recent cry of anger against the Food Bill passed by the parliament.  This, we are told, will worsen the fiscal imbalances of the country. For the neo-liberalisers, the people can continue to die of hunger but the government’s priority should remain to serve the interests of Capital.  In pursuance of such an understanding, the Manmohan Singh government  has significantly hiked the prices of petroleum products the day after the parliament passed the Food Bill and thus signaling a further cut in the meagre subsidies  being provided for the poor.  Of course, the subsidies for the rich in the name of `incentives’ for growth not merely continue but are likely to be increased using the current (-)1.6 percent growth in industrial production as the excuse. 

There is a crucial difference between the 1991 crisis and the current one that reveals this nature of the Indian State and the trajectory of economic reforms.  The major cause for 1991 fiscal imbalances was on government account.  For example, nearly 60 percent of the CAD then was due to the government debt.  The solution proposed by Dr Manmohan Singh as the finance minister then was to reduce government expenditures and, thus, impose greater burdens on the people and, at the same time, open up the economy for foreign capital inflows. 

Today’s situation is entirely different.  Unlike in 1991, the government account contributes only around 20 percent of the country’s outstanding external debt. Worse is the fact that unlike in 1991 when 45 percent of India’s debts were owed to international multilateral and bilateral agencies, today this component has come down to just around 20 percent.  The largest component of external debt today comes from external commercial borrowings (ECBs) whose share has risen from 12 to 31 percent since 1991.  Hence, the main culprit for today’s CAD crisis is not excessive government spending (which is ironically used as the excuse to further reduce subsidies) but India Inc, mostly big corporates. 

A report in the Business Line (posted on its website on September 2, 2013) shows that just ten large corporate groups  have registered a six-fold increase in their total outstanding borrowings during the last six years.  Worse, five of these ten big corporates’ operational earnings annually are not adequate to even pay the interest on the borrowings. It is India Inc that is caught in a debt trap.  True to its character, the capitalist State in India comes to its rescue by further opening up the economy, thus, permitting them to access greater foreign borrowings.

This is the outcome of what the PM had called the unleashing of the “animal spirit” of the corporates.  The reform policies allowed the corporates to access upto $ 500 million under the automatic approval route every year that was recently increased to $ 750 million.  The current trajectory being followed by the government of asking the people to tighten their belts, on the one hand, and opening up almost every sector including defence production, insurance, banking, pension funds etc  to greater  foreign capital inflows will only make our economy more vulnerable to the uncertainties of international finance capital markets while imposing even greater pains of existence for the people.

It is, by now, clear that slogans like `shining’ India, `feel good’ factor, were the sweet coating of a bitter pill that the people were forced to and continue to be forced to swallow. 

The true pro-people alternative to the current reform trajectory is what has been argued in these columns repeatedly.  Instead of cutting subsidies for the poor, eliminate subsidies for the rich and use those resources for significant increases in public investments to build our much-needed socio-economic infrastructure.  This would generate a large number of new jobs which, in turn, will increase the purchasing power in the hands of the people boosting domestic demand, thus, providing the impetus for manufacturing and industrial growth and put the country on a sustainable growth trajectory.  It is this alternative path that needs to be embraced for creating a better India.  

(September 4, 2013)