Millennium Post

The dark side of economic reform

India’s two decade-old economic reform policy is finally exposing its weaknesses. Initially, the reform was all about phased liberalisation of the economy, selectively ending the licence-permit regime, embracing globalisation of trade and commerce in keeping with WTO protocols, easing sectoral restrictions on foreign direct investments (FDI), lifting curbs on foreign institutional investment (FII) in company stocks and domestic fund management, financial deregulation, easier corporate mergers and acquisitions (M&A), transparency in business and government deals, etc. Some of the main purposes were to attract foreign investment to move the economy (GDP) on a high-growth path and to grow infrastructure, improve services, raise global competitiveness of Indian economy, set up a strong financial foundation and ensure high international credit worthiness for the country and its corporate entities.

How did India fare after all these years? Rather ‘poorly’. During the decade immediately preceding the neo-capitalist economic reform era, or through the 1980s, India’s gross domestic product (GDP) grew by an average 5.5 per cent as against the five per cent economic growth projected for 2012-2013, the 21st year of economic reform. India’s trade deficit averaged Rs 6,500 crore through the 1980s before it jumped to Rs 10,664 crore in 1990-1991. At the end of 2011-2012, India’s trade deficit was Rs 1,05,000 crore ($185 billion) or 9.9 per cent of India’s GDP. The trade deficit for April-January, 2012-2013 was estimated at $167.17 billion, which was higher than the deficit of $155 billion during April-January, 2011-2012. Going by the trend, the final trade deficit figure may exceed $200 billion in 2012-2013. Oil imports soared 46.9 per cent to $155.6 bn. Gold and silver came in next, accounting for $61.5bn of imports, up 44.4 per cent from the previous fiscal year. Coal imports rose 80.3 per cent, to $17.6 bn. The previous year’s trade deficit was $118.7bn, or 7.1 per cent of GDP.

What about FDI and FII, which were expected to be a game changer in India’s economic development acting as a major catalyst for GDP growth and financial stability? Hardly impressive. Barring four ‘hi-flow’ years between 2006-2007 and 2009-2010, the annual FDI inflow ranged between $129 million in 1991-1992 and $8.961 billion in 2005-2006. The combined FDI inflow in the last two decades of economic liberalisation is of the order of only $160 billion, including $130 billion coming through those four ‘hi-flow’ years. Ironically, the total FDI inflow since 1991-1992 is almost $40 billion short of India’s international trade deficit in one single year, 2012-2013. Did FDI grow the economy? Yes, but only to a limited extent. In fact, the liberal FDI policy helped foreign investors to gobble up mostly what Indians had earlier built for themselves and their economy. FDI hardly created its own space in the economy. It contributed little to the growth of India’s economy, providing it a new direction by setting up green-field enterprises in high technology areas making the country an industrial hub for production of quality goods at competitive prices for the global market as FDI had done in China. Pitifully, FDI was allowed to mainly to chew up cheaply some of India’s largest industrial enterprises painstaking built over decades by their local promoters. FDI has swallowed India’s largest auto maker, joint venture Maruti Udyog Limited, soft drinks maker Parle, largest drug manufacturer Ranbaxy, second largest telecom firm Essar, edible oil and cosmetic giant Tomco, domestic appliances giants like Kelvinator and Alwyn, readymade garments maker Benetton, one after another cement plants, automotive tyre plants, non-ferrous metal units, pharmaceutical companies, alcoholic beverage business, and a host of other on-going pre-reform era enterprises where overseas promoters had minority holdings, such as Bata, Philips, Nestle, Reckitt, Avery, Leyland, Ennore Foundry and Organon, to name a few. Today, most of these FDIs are creating more wealth for foreign investors than for this country. They have also become a drain on India’s foreign exchange reserves through import of machinery, raw materials, accessories, expensive expat managers and technicians, annual repatriation of profits, royalty, technical fees and head office expenses. The practice of transfer pricing often tainted import-export figures of FDI-led enterprises. Not all FDIs came directly from abroad. Reinvestments of surpluses into businesses by foreign-held local companies are also regarded as FDI. On the other hand, the FII inflows since 1991-1992, which is almost of the same order as FDI, are in total control of the country’s stock market, PE funds, mutual funds and to some extent some of India’s top private banks and financial institutions such as HDFC and ICICI. The majority stocks of even the country’s top telecom enterprise, Bharti Airtel, are believed to be held abroad.

The root cause of the current economic slowdown is the reform’s wrong policy focus. The policy is aimed at import-led expansion of domestic economy. The import of capital (FDI and FII), capital goods, raw materials and services are meant to expand and exploit the domestic market. The policy pathetically ignored the basic question: how to pay for all these import luxuries in the absence of a strong and viable export industry? There is no urgency to make India a global economy by raising its share of the global market, especially for manufactured goods. It has been constantly borrowing overseas funds to pay for trade and current account deficits. It is not just a coincidence that India’s external debt at the end of March 2012 at $345.8 billion ate up the so-called advantage of the combined FDI and FII inflow since the 1991-1992 economic reform. The external debt to the GDP ratio in 2011-2012 was over 20 per cent. India’s trade deficit during 2011-2012 at $185 billion represented 9.9 per cent of its GDP. Import substitution and export expansion being out of the policy focus, India is constantly pushed to go for commercial borrowings to cover its growing trade and current account imbalances and also service foreign debt. According to the Global Development Finance, 2012, of the World Bank, India was fifth in terms of absolute debt stock among the top twenty developing debtor countries.

The union finance ministry agrees that ‘the country’s external vulnerability indicators are showing signs of stress’ but wrongly blames it on external factor. The real culprit is the government’s import focus to grow the economy. No viable economy in the world is so heavily import dependent as India. From safety pins to lethal ammunitions for national security everything is imported, largely with borrowed foreign funds. Such policies can’t sustain any economy in the long run. At this rate, it is feared that India’s FDI and FII policies may not take long to lead the country to a financial catastrophe. Only this time, its impact could be much worse than those experienced in 1990-1991. (IPA)
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