Archive for April, 2013

In our articles on the Budget and related questions of the economy, we have talked about questions such as the ‘fiscal deficit’, ‘demand’, ‘stimulus’, and so on. Since the whole world today is afflicted by recession or stagnation, to one extent or another, these are common topics of discussion in the world today. So what we say inevitably echoes some aspects of such discussion going on around the world.

There are broadly two sides in the public debate about the world economy today. A third perspective, though much needed, is today conspicuous by its absence.
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Kirit Parikh, well-known for having headed an official committee whose recommendations on pricing petroleum products were “bad for the country and worse for the aam aadmi,[1] says in a Times of India opinion piece titled “A Crisis Too Good to Waste”[2]:

The country is in an economic crisis. The growth rate is coming down. The current account deficit (CAD) has reached 6.7%. A crisis provides an opportunity to take much-needed decisions that one could not otherwise take.

Parikh’s candour is refreshing. (Indeed, he seems to have taken Naomi Klein’s Disaster Capitalism[3] as a how-to manual.) He notes that the finance minister has identified the imports of coal, oil and gold as the main reasons for the high CAD. Parikh’s solution? “The sensible response to the CAD and coal crises would be to denationalise coal completely and let coal price be market determined. Only then can we expect the private sector to come in in a substantial way and introduce new technology. That is the only way we can avoid the import of 185 million tonnes [of coal] in 2016-17 as envisaged by the 12th Plan.” This is more or less along the lines of his recommendations for the petroleum sector too. In January this year, the Government set itself on a course of hiking diesel prices every month for 18 months. This in a country where access to modern commercial energy is among the lowest in the world, lower than many sub-Saharan countries, and where, in terms of purchasing power parity, the Indian prices of petroleum products are among the highest in the world.

Since coal and petroleum are inputs into virtually all goods and services, the impact of such measures on prices, and thereby on real incomes, would be devastating. Most governments, even those particularly attached to private investors in the energy sector, would hesitate to carry out two such inflationary and anti-people measures in the year before general elections. Leaving aside the prime minister and the finance minister, most Congress leaders must hardly be relishing the prospect. This is where the CAD crisis comes in: it provides a cover to private interests in oil and coal, including foreign capital, to press their agendas even in the face of widespread opposition.

While recommending measures on the coal and oil fronts that will cause mass distress, Parikh does not see the CAD crisis as an “opportunity” to place serious restraints on the huge gold imports being made by the rich, either in the form of outright restrictions or even higher customs duties. (In 2011-12, net gold imports, at 3 per cent of GDP, accounted for most of the CAD of 4.2 per cent of GDP.) Instead, he recommends feather-touch measures to attempt to lure the rich away from gold imports (for example, through the issue of bonds denominated in the international gold price and tradable on exchanges at the prevailing gold price).

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The Budget has in the main two explicit aims, as stated in Chidambaram’s Budget speech. The first is to attract foreign capital at all costs:

I have been at pains to state over and over again that India, at the present juncture, does not have the choice between welcoming and spurning foreign investment. If I may be frank, foreign investment is an imperative. What we can do is to encourage foreign investment that is consistent with our economic objectives.

The second is to revive growth by getting private investors to invest:

Growth is a necessary condition and we must unhesitatingly embrace growth as the highest goal. It is growth that will lead to inclusive development, without growth there will be neither development nor inclusiveness…. The growth rate of an economy is correlated with the investment rate. The key to restart the growth engine is to attract more investment, both from domestic investors and foreign investors.

The key to understanding the Budget as well as the entire range of economic policies being pursued by the Government lies in these two statements. The language of these statements subtly makes clear the hierarchy of priorities. Foreign investment is “an imperative”, i.e., it must be obeyed; whereas growth is the “highest goal”.

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The Finance Minister says he has no choice but to heed the direction of the foreign institutional investors (FIIs), since the economy is desperately dependent on foreign capital inflows. Given the alarming condition of the current account deficit (which soared from 1.3 per cent of GDP in 2007-08 to an unprecedented 4.2 per cent in 2011-12, and seems certain to be well over 5 per cent in 2012-13 – the third quarter figure touched 6.7 per cent), this appears at first a candid admission of the reality.

In truth, however, the rulers’ prostration before foreign capital is not contingent on the precariousness of the present balance of payments. It was amply in evidence in 2001-04, when there was a current account surplus.[1] It was equally in evidence in 2007-08, when foreign capital inflows (8.6 per cent of GDP that year) were vastly in excess of the current account deficit (1.3 per cent of GDP), and the inflows thus had to be added to the foreign exchange reserves, burdening and distorting the economy in multiple ways. The subordination before foreign capital is not a response to a particular situation, but has deep historical roots in the very process of the formation of the present ruling classes of India.

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Last October, the credit rating agency Standard and Poor (S&P) threatened to downgrade the status of India’s debt to “junk” grade if “fiscal reforms slow”. The Finance Minister keeps citing such warnings to justify his spending cuts. Why do foreign institutional investors (FIIs) put such pressure on the Indian government to curb spending? Why do credit rating agencies issue dire warnings of a rating downgrade if the Government fails to bring down the fiscal deficit at the pace they demand? Is it because they are worried that the Government will not be able to service its debts?

As we point out in “The Fiscal Deficit Bogeyman and His Uses”, they can hardly be under such an impression: IMF projections show that India’s Government debt/GDP ratio and interest payments/GDP ratio are going down, and will continue to do so in the next few years. However, this has not deterred S&P and the FIIs from raising repeated alarms about the ‘sustainability’ of India’s government debt.

The credit rating agencies and the FIIs also claim that they want the fiscal deficit reduced because it fuels “excess demand”, leading to a worsening current account deficit.[1] The implication is that the resulting scarcity of foreign exchange will make it difficult for the Government to service its foreign borrowings; hence the threatened downgrade of India’s international credit rating.

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