Millennium Post

What happened to Chidu magic?

The Chidambaram magic is no longer working. When P Chidambaram took over as the finance minister last year, with Pranab Mukherjee heading for Rashtrapati Bhavan, it was thought his replacement would work wonders. He withdrew the controversial tax measures like retrospective taxation of corporate income and the general rules for tax avoidance by multinational corporations operating in India. It has given some temporary boost to the markets. But then nemesis appears to have taken over.

When the fundamentals of an economy go wrong, the tinkering does not matter. The tinkering introduced by the new finance minister gave some temporary relief, but then the underlying fault lines started showing up. Now, it looks the India story is getting nowhere. The finance minister Chidambaram had to airdash to the United States to explain that India is doing fine and these are only some temporary problems. Not only he, even the commerce minister, Anand Sharma, went off to the USA to reassure investors that India was a desirable investment destination.

What is the provocation for two senior cabinet ministers to spend over four days each meeting businessmen and investors in the USA? Is it that our policies are determined in that country? Do we have to appease the moneybags in the USA to run the Indian economy? The Left and the critics will jump to these conclusions straightaway. But the truth is far from that. The haste for going and talking to US businessmen is to try to attract some immediate funds inflow in to India.  The trigger for this is the apparently unstoppable downward drift of the Indian rupee’s exchange rate vis-à-vis the US dollar and other major currencies like the Euro. If funds do not flow in, the rupee will lose ground. The rupee slipped from around Rs 55 to a dollar to past Rs 61 in a matter of a few weeks since the talk of the tapering off of US bond purchase programme was unveiled by the outgoing Federal Reserve chief Ben Bernanke.

The information about unwinding its monthly bonds purchase programme immediately began a flutter among global investors of short-term funds. As was mentioned at the beginning of the US bonds purchase programme, the huge injection of liquidity by US would result in inflow of hot money in emerging economies. That is what had happened. Now with talk of its discontinuance, the excess liquidity is going back into USA.  Primarily, that was the reason for the rapid slide in the rupee’s external value. Now, Chidambaram and company are trying to influence fund managers and others to bring some of the funds taken away from India. But with a difference. The efforts this time are to attract not short-term funds, but long-term foreign direct investment. That is, not just the FII investment into Indian secondary equity and debt markets, but also in industrial investment, in Indian infrastructure projects and in manufacturing industries, specifically.  But what reception the Indian ministers received? They were faced with a volley of criticisms. The US business chambers said straight in the face that Indian patent regimes do not protect intellectual property rights, that FDI caps in various sector do not allow entry of foreign majors, that the tax laws and tax administration are hostile.

These are criticism not just of US chambers of commerce and industry. These are the complaints of Indian business and industry as well. Of course, there are some variations. Indian business and industry will not complain about patent regime, they are complaining about the difficulties of making any investments in the country. Who does not know the pitfalls associated with acquisition of land in India, the difficulties of getting environmental and other clearances or the harassment handed out by Indian tax administration?

It is these and other disabilities of the system that discouraged even Indian companies to invest in India, let alone foreigners. After all if any one should invest in this country, it would be the domestic investors and companies first rather than some overseas industries. The sheer lack of investment in the Indian economy is now showing up.

Instead of industrial production growing, the data released by the Central Statistical Office (CSO) shows these are contracting. In fact, the market sentiment about India has turned so nervous, with the stock markets jittery and FIIs withdrawing their funds, the government yesterday released the monthly industrial data well after markets closed yesterday. The data revealed fall in capital goods production, in minerals and metals production. In the absence of growth of upstream industries, including coal mining, the downstream industries get affected. So far, the requirements were sought to be met from imports. The process can go on for a while but it is adding to trade deficit. The persistent trade deficit is in turn resulting in a pressure on the rupee, which is now seeing a free fall.
Chidambaram and Sharma are hoping that if their efforts in US should result in some additional funds flow, then the situation could be saved for the time being and the rupee will improve. Current account deficit should also look somewhat less threatening. Investment rate should also increase. But that is a wrong-ended approach. What we are doing is borrowing from overseas to spend our way through. In the end, such an approach should culminate in a bigger crisis.

India’s salvation lies within the country. Not outside. The best things to do should be to address the domestic shortfalls and rigidities before we can hope to see India growing again. IPA
Next Story
Share it