Economic Highlights

New Delhi, 19 July 2013

India’s Financial Mess

LIBERAL FDI NO PANACEA?

By Shivaji Sarkar

Is the UPA Government missing the woods for the trees? Its liberal foreign direct investment (FDI) policy is being projected as the panacea for shoring up the rupee, which is on a continuous roll, and a solution to the current account deficit (CAD).

However, looking for more FDI during the past few years has not helped the Indian economy. The Government with its superstitious belief has once again opened telecom sector to 100 per cent investment, insurance to 49 per cent up from 26 per cent, 49 per cent in petroleum and natural gas refining, in single brand retail one only needs permission beyond 49 per cent and the cap in the defence sector has virtually been removed – one only needs to approach the Cabinet Committee for Investment beyond 26 per cent.

India is allowing repatriation of forex on account of profits or technical fees almost to the level of $ 25 billion a year, while receiving about the same amount or less in terms of foreign currency investment. The FDI evidently cannot solve the CAD.

This apart, India, like the world is also awaiting the fifth anniversary of the collapse of the Lehman Brothers, the trigger for the biggest financial crisis in the last 100 years. After five years, the world has not grown any wiser. The crisis persists and countries such as India which bypassed the Asian crisis have got deeply entrenched in it.

Solutions are indeed. The faith in the financial system or what is called financialisation – looking to solve every problem with high doses of injection of money - still remains and a way out is sought in those parameters.

With obsession for looking at the West, India forgot how China is affecting its market by dumping cheap manufactured goods. A Nokia phone produced in China is sold at prices lower than a Nokia product made in India. India imports about $35 billion goods from China while it exports are at a mere $10 billion.

India has not learnt much from the global financial crisis. The financial sector is useful only to the extent it helps deliver stronger and more secure long term growth. Of late, the UN and other global organizations have also come down severely against financialisation. The recent global commodity price increases have been attributed to it.

But the world is still being guided by the financial wisdom of World Bank and IMF. The Euro was created as a result of that vision. Integration has caused problems not only for Portugal, Spain, Greece and Ireland but also for Poland, Hungary, Cyprus and Estonia.

Indian economy is significantly integrated with the euro area. The impact so far has been mainly through trade and finance channels. As a result of slowdown in euro area, the India’s merchandise exports to the region declined from $42.7 billion in 2011 to $37.8 billion in 2012. Consequently, its share in India’s total exports declined from 13.9 per cent to 12.8 per cent. In fact, euro area’s share in India’s exports was much higher at 16 per cent in 2008. Total exports fell to $ 300 billion from $ 306 billion in 2011-12.

So are the declining exports the only problem? Is the scarce foreign exchange the problem? These are to an extent. But is the rupee losing its purchasing power only for these external factors? To some extent it is so as it always happens with any currency. But largely it is due to the internal economic conditions and bad governance. The World Bank’s worldwide governance indicators 2006-11 place India below average on key parameters.

Commodity prices have been going through the roof. The producer –farmer – is not benefiting. Where are those benefits going? Inflation has been impoverishing a large section of the economy and is sending shock waves. The origin of the euro zone crisis is in the high level of fiscal deficit and debt. It is also due to high expenses on welfare measures. As long as Europe milched their colonies, Euro zone countries became the model States. But as these dried up, economies started sliding long before 2008, it had gone to unsustainable level.

India did not learn. It started following Europe in a different way – through MNREGA, food security bill and direct benefit transfers. It has all added to fiscal deficit – euphemism for large Government borrowings. Today the Government borrows almost Rs 6 lakh crore, to sustain a budget of Rs 14.9 lakh crore. Its interest payments are increasing every year. Forex related debt is around 6 per cent.

With fall in manufacturing and other industrial activities, tax accruals are not matching demands. The Government refuses to cut down its unnecessary expenses to sustain a large unproductive bureaucracy, increasing police force and enforcement branches are growing. Unemployment and contract labour is increasing.

India is becoming a police state, where discontent is growing and doing business is difficult. Policies are formulated in a way that the small entrepreneurship is shunned for large investments. Predator MNCs function the way Pepsi, Coca Cola and Unilever gulped their competitors. They dictate terms not only to the market but even directly interfere in governance to boost their individual profits at the cost of the small businesses, where costs are far less.

This has a reflection in the RBI’s Business Expectation Index (BEI) based on assessment moderated during the year and in Q2:2012-13 reached a level seen at the onset of financial crisis in Q3:2008-09. The BEI based on expectations has been declining since Q3:2010-11 and remained more or less flat during this year.

It affects the rupee further. The latest Moody’s assessment not only says so, it also warns that internal financial stability would be affected and as the country remains high on energy import, inflation would be a natural corollary. The currency fall of 9.2 per cent between May 15 and July 15 would increase debt repayment and input costs. It would also impact the firms taking large foreign commercial borrowings. It means profits of most Indian corporate would further come down.

A beginning has to be made with boosting manufacturing, industrial and agricultural activities. Allowing free cheap imports from China is not only tilting our balance of payment position (BOP) but is also affecting the economy adversely. India is losing out neither just because of falling merchandise exports to the west nor crude or gold imports. The threat from East is equally grave.

India needs to mull over how it would be able to counter the Chinese machinations not only at the borders but the core of its markets. India has to understand that FDI or allowing silly Chinese imports are not the solution.

The Rupee can be strengthened by a slew of measures starting with investment in agriculture, farm marketing, lowering of commodity costs, boost to industrial production, good governance and policies countering the threats emanating from both the East and the West. It is only that the Government has to have the will. -- INFA

(Copyright, India News and Feature Alliance)