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Over-Reliance on foreign investment

Beyond the maze of numbers, four features of Finance Minister P Chidambaram’s Budget stand out. First, thanks to its obsession with reducing the fiscal deficit, the budget fails to raise social sector expenditure – just when that’s badly needed, especially for the sake of the poor. Second, the budget doesn’t strongly stimulate growth. Third, it makes relative economic stagnation and high inflation (stagflation) highly likely. And finally, the government’s bias towards foreign capital has become more brazen.

Chidambaram has mocked at the idea of food security by raising the food subsidy by a laughable Rs 5,000 crores over last year’s revised estimate of Rs 85,000 crores – when a quantum spending leap is needed to make foodgrains available at affordable prices through a universalised Public Distribution System. The new target won’t keep pace with inflation, but will ensure that half of India’s children remain malnourished.

Equally important, the budget for the Mahatma Gandhi National Rural Employment Guarantee Act, once considered the United Progressive Alliance’s flagship pro-poor programme, has been frozen at last year’s level (Rs 33,000 crores), well below its peak allocation of Rs 40,000 crores, and marginally above last year’s Rs 29,387-crore expenditure – a decrease in real terms.

Even more significant is Chidambaram’s betrayal of the promise to raise public health spending substantially in keeping with the 12th Plan target of tripling it as a proportion of the GDP. The allocation to health and family welfare has been raised by a paltry eight per cent, less than the inflation rate. Starving the public healthcare sector will result in the poor being driven to private health providers, whom they cannot afford – and hence to impoverishment, ill-health and misery.

This approach is also evident in other schemes such as the Pradhan Mantri Gram Sadak Yojana, whose budget has been halved. The only exceptions are schemes such as scholarships and monetary assistance to pregnant women, which can be brought under the cash transfer project called Direct Benefit Transfers, based on the Aadhaar number generated by the Unique Identification Authority. The Authority’s budget has been raised by a hefty 40 per cent.

Overall, Chidambaram has embraced fiscal conservatism just when slowing growth, rising inflation, and a widening current account deficit all demand greater public spending which both draws in private investment and stimulates the economy. Thus, he projects the GDP to rise in 2013-2014 in current rupees by 13.4 per cent, but total expenditure by just 11.7 per cent. Given that allocations to some sectors have been raised – like defence, by 14 per cent over last year’s spending –this relative reduction in total spending is to be achieved through indiscriminate cuts.

For instance, the petroleum subsidy will be cut from Rs 96,880 crores to Rs 65,000 crores. This will raise transportation costs across the board and powerfully stoke inflation, thus adding to the adverse effects of cuts in food and fertiliser subsidies. The approach will also continue the recent trend of reducing Plan spending, which benefits irrigation, flood control, road construction, rural development, education, industry, science and technology, by about one-fifth. This fiscal fundamentalism is not accidental, but is dictated by the conservative view prevalent among credit rating agencies, multinational companies and Indian big business. It is driven by an urge to attract private, in particular foreign, investment at any cost, coupled with a reluctance to spread the tax net wider and raise the tax-GDP ratio, which has fallen to a low of 10 percent, ‘one of the lowest for any large developing country’ and well below the 2007-2008 peak (11.9 per cent).

India’s upper crust are among the lowest-taxed people anywhere, with a top income-tax rate of just 30 per cent, and an average of under 20 per cent—compared to 50 per cent-plus in the UK, Spain, Belgium or Sweden. Only three per cent of Indians pay the income tax; and there’s no inheritance tax or death duty in this severely skewed society, marked by grossly unequal opportunities. Chidambaram wasted another chance to correct this imbalance. He falsely claimed to be promoting equality by levying a 10 per cent surcharge on incomes above Rs 1 crore. But there are just 42,800 individuals in this class, according to him. The surcharge will only yield an estimated Rs 15,000 crores – less than a paltry one per cent of the projected total revenue increase. So much for ‘soaking the rich’!

The official pro-rich bias is revealed in forgoing Rs 5,73,630 crores in revenue in 2012-2013 through various tax write-offs and exemptions – a sum 130 per cent higher than in 2006-2007. The amount is larger than the entire fiscal deficit. Which means the deficit is primarily attributable to concessions made to the rich; but the poor must bear the burden from reduced social spending and higher indirect taxes on mass-consumption commodities like kerosene, clothing and footwear.

However, the budget shockingly reveals an even more perverse feature of the Indian economy and official policy: pathological dependence on foreign investment. Regarding the current account deficit (CAD), Chidambaram said, ‘This year, and perhaps next year too, we have to find over $75 billion to finance the CAD. There are only three ways before us: Foreign Direct Investment (FDI), Foreign Institutional Investment (FII) or External Commercial Borrowing… I have been at pains to state over and over again that India… does not have the choice between welcoming and spurning foreign investment. If I may be frank, foreign investment is an imperative.’

That this should be the case for a large, poor developing country is itself cause for worry. Equally disturbing is the underlying premise that India cannot aggressively promote exports or reduce imports to cut the CAD. In any sensible scheme of things, foreign capital must be one of many subsidiary sources of investment, the overwhelmingly great source being domestic savings.

Making foreign investment an ‘imperative’, and attracting it regardless of costs, means capitulating to the insistence of potential investors on ‘fiscal prudence’ (read, austerity and minuscule public borrowing), and for a never-ending set of ‘reforms’ to favour investors by liberalising and deregulating sectors of economic activity, relaxing environmental, labour and social standards, and guaranteeing super-profits to corporations.

India has been doing just that – witness the opening up of multi-brand retail, aviation and Direct-To-Home services to FDI, in addition to petroleum, power and real estate. But for super-greedy capital, this isn’t enough. It always wants more. Chidambaram has pampered foreign capital and invited suspect investment through tax havens or double taxation avoidance treaty centres like Mauritius, which are used to launder and recycle money spirited abroad by Indian businessmen.

In the latest budget speech, Mr Chidambaram had said it wouldn’t be enough for foreign investors from a contracting state to present Tax Residency Certificates to claim treaty benefits. Indian tax authorities would demand proof that the investor actually earned the income. This ‘spooked’ the markets. The Sensex lost 291 points. The very next day, the government caved in by ‘clarifying’ that a TRC would be enough, no questions would be asked!  However, relying on foreign investment would be especially foolhardy in today’s circumstances. FDI flows are ebbing rapidly as a result of the post-2007 Great Recession. The McKinsey Global Institute has just released a report Financial globalisation: Retreat or reset?, which says the global financial crisis has ‘upended many of the world’s assumptions about the inevitability of growth and globalisation.’

In 2012, the report estimated, global capital flows were 13 per cent lower than in 2011. And while they were higher than during the depths of the credit crisis, they are still 61 per cent below the peak of 2007. Global financial assets have grown by just 1.9 per cent annually since the crisis.

To bank on FDI in this situation would be suicidal. But the UPA seems blind to this reality. (IPA)
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