Business analysts and economic experts, who
not so long ago convinced themselves and the rest of the world that India would
soon be an economic superpower, are now busy overturning their hypothesis. The global
chill that started with the hint by America’s Federal Reserve in May of this
year that it would soon start reducing its vast purchases of treasury bonds (thus
signaling the end of ultra-cheap money) has shaken up the Indian economy more
than any other emerging market economy.
The responses of the Indian government to a speedily depreciating Rupee,
be it curbs on consumption of gold or restrictions on overseas investments by
Indians and Indian entities, have only led to concerns about the fickleness of foreign investments
and potential capital controls reminding one of the 1991 balance-of-payments
crisis.
There is no doubt that Indian economy and the
Indian business are a victim of global economic travails marked by years of
flat growth in the US and near-bankruptcies in certain European countries. However,
Indian governance has also been a victim of its complacency that followed the
confidence with which it handled the 2008 global meltdown, especially in terms
of the robustness of the banking system. Lack of expansion in manufacturing
output and increase in exports together with stalling of infrastructure
projects on one hand and high inflation together with spiraling imports of gold
and oil have resulted in a burgeoning current account deficit (CAD) that needs
greater (rather than lower foreign
capital as now) flow of foreign capital. The Economist (August 24th-30th
2013) estimates that India needs to attract USD 250 billion of foreign
investment next year to support management of CAD and debt servicing, more than
any other vulnerable emerging economy.
External prescriptions
External experts attribute the current state
in India to the slackened pace of reforms and the obstacles to growth such as
power shortages and labor issues affecting industrial productivity, red tape
and graft affecting governance, and bad debts and subsidies affecting capital
efficiency. The external prescription is
on familiar lines; complete the full float of the Rupee even if it breaks the
viability of a few firms and industries, remove all subsidies, fuel and food,
even if it affects vulnerable sections of the society, remove sector caps on foreign
direct investments even if it affects domestic competitiveness, and stress-test
and recapitalize banks and financial institutions even if it means that some
such institutions have to break up or such capital injection would widen the
deficit.
External experts would also suggest breaking
of public monopolies, in coal, power, metals and capital goods, for example and
encourage private enterprise in all sectors of the economy including
agriculture and retail, and aerospace and defense, for example. They would also suggest sweeping tax reforms,
including GST, to unify and simplify tax regime across the country. The other
focus would be on easier exits, including liberalized labor laws. While some,
if not all, of the external prescriptions do have economic logic, all of them
may not be easily introduced or extended in India. Economic policy has to be
not a mere global replica but more importantly a socially sensitive platform. Each
country would need to evolve its own economic prescription that meets the
country’s social needs.
Indian perspectives
Experts are prone to downplaying the
continuing scourge of poverty in India, in the context of the islands of
prosperity that are getting built up. They believe that it is not hunger that is
the issue but it is nutrition that is the issue in India. They believe that rather
than grains which provide calories, which according to them are available in
villages, children need nutrients, including proteins, fibers and vitamins. Apparently,
this is a misplaced perspective of economic journalism that traverses India in
air-conditioned comfort. In reality, both hunger and nutrition continue to be
the central issues in India. And the only way in which both the issues can be
tackled is through inclusive growth that enables a minimum wage level that
enables a reasonable quality of life supported by an accessible and affordable
educational and healthcare infrastructure. Neither GM foods nor packaged foods,
which would be an outcome of privatization and globalization of agriculture,
would meet the superior delivery of inclusive employment.
The other critical issue for India relates to
the millions of young people who will enter the employable age group over the
next several issues. Apart from the fact that there must be millions of jobs
that need to be generated through enhanced economic and industrial activity,
there is also a responsibility on the educational institutions and young people
for the job seekers to be truly employable. It is enigmatic that each year
thousands of seats in various engineering colleges go unfilled even as Indian
industry struggles to keep updating the skill levels of its young entrants. There
are mismatches between economic needs and job creation, job requirements and
skill availability, and skill requirements and educational opportunities. A holistic
paradigm is required to expand and upgrade educational infrastructure while
expanding and diversifying industrial infrastructure.
Inclusive growth
The incomes in rural areas are made in part
by traditional agricultural activities and in part by incomes earned through work
in industrial and urban areas. Potential farm workers are not getting displaced
in the modern India by industries replacing agriculture but by the workers
themselves going in search of more assured wages as migrant labor elsewhere. Clearly,
this needs to be reversed by insulating agriculture from the vagaries of nature
and uncertainties of earnings, and reestablishing its economic attractiveness. Each
rural economy needs to be made self-sufficient by a three tier strategy. The first
component must focus on modernizing agriculture through better harvest
technologies and implements. The second component must focus on creating
cooperatives that take agricultural produce to food processing sector and other
consumption points, and eventually engage in value addition themselves, like
Amul so successfully did. The third component must focus on developing the infrastructure
of roads, electricity, water and sanitation and educational institutions in the
rural areas.
An integrated rural development strategy will
by itself reduce the pressures on urban settlements. That said, an integrated
urban settlement strategy is also equally required. This would potentially
require expansion of skills to cater to a wide range of industrial and economic
activities. Factory production needs to be supplemented by several supportive
activities such as logistics, distribution, sales, service, wholesaling, retailing,
safety management, employee centricity and customer connectivity in the
overall. Policies of industrial parks and SEZs are now independent of civic and
connectivity development strategies. Making industrial and civil development
interlinked and simultaneous is a much needed change that needs to be
implemented. The loss of productivity that is experienced because of the lag in
non-industrial development is enormous. The paradigm needs to be changed from
focused industrialization to broader socio-economic development.
Capital imports or product exports?
To a large extent in the urban inclusion
strategy and to a smaller and important extent in the rural inclusion strategy
require three inputs capital, technology and skills. If the points discussed
above are taken note of the skills gaps would be addressed. That would leave
capital and technology to be addressed. The external prescriptions, supported
by a section of Indian policy makers and analysts, require that India should
depend increasingly on overseas capital and technology. The policy preoccupation
in the current situation seems to be on getting more foreign direct investments
as a panacea. While foreign investments, especially in equity route, are
welcome and would be effective to address external economic stability, the real
impetus would arise from product push into the export space. What has been the
export mantra of the 1970s and 1980s must be revived to lead a new export wave
from out of India. That would ensure that the country is not disparately
dependent on foreign investments which may come with their own conditions, and
in layered preferences amongst various economies.
The need to focus on product exports is
relevant because foreign investments would flow in only when products made out
of India are quality-compliant and cost-competitive, and are produced in a safe
and efficient manner. India has established a major industrial and retailing
infrastructure and rather than re-discover the wheel, it would make eminent
economic logic to build upon it to achieve higher levels of performance. It would
be appropriate to import technologies and pay royalties rather than import
capital, whether through equity or debt, and have long term service
obligations. In other words, foreign capital must flow into India on its own
merits of producing export-worthy products or to participate in a slice of the
huge Indian market. Policies that enhance product competitiveness must be given
priority over policies that are aimed at attracting foreign capital only by
opening up of the caps of overseas investments in certain sectors. The former
would automatically enable the latter, and would be quicker.
There are indeed clouds over the Indian
economic landscape. Whether these are passing monsoon clouds or gathering storm
clouds depends on our own policy prescriptions, and the level of customization to
the Indian context.
Posted by Dr CB Rao on August 25, 2013