A Matter Of Economics
By Dr R. Balashankar
People who spoke of India as a first rate emerging economic power are now downgrading us. Jim O’Neill of the Goldman Sachs, who coined the term BRIC, a decade ago, and acclaimed India’s fascinating growth trajectory, noted in late December, 2011 that the greatest disappointment among those emerging stars has been India. India’s growth rate, for the first time in the last ten years is declining from a high of 10 plus to around seven per cent.
Indian currency is the worst performer in Asia, the Indian stock market in a free fall is one of the worst globally for investors. The Prime Minister Manmohan Singh last fortnight chided the captains of industry for spreading the gloom story.
It’s no use blaming others. Manmohan Singh has to own up responsibility, if he has to be taken seriously as the person leading the country. Who created this mess? In 2011, the outward foreign investment from India totalled a whopping $ 29 billion. The inward foreign direct investment during the year was only $23 billion. Capital does not flow out of a country that is viewed as an attractive investment destination. Now, the government cannot convince anybody blaming the Euro zone or US recession for India’s woes.
It is often said that the economy is not performing because of halted second generation reforms. Here, Indian reformers and financial journals try to sell the idea that opening up the retail sector for the foreign investors, allowing higher FDI stakes in pension, banking and insurance sector are the most urgent aspects of reform. We often confuse between liberalisation and reform. Opening up newer areas for foreigners is liberalisation whereas systemic renewal and strengthening and speeding delivery mechanism is reform. In that sense, except for limited areas like telecom, transportation and industrial licencing most other areas remain unreformed after two decades of liberalisation. India’s problem today is less about FDI and FII and more about internal reforms on which the government has dithered in the last seven years.
The NDA government made some bold initiatives in downsizing and involving private sector initiatives.
Joseph A Schumpeter who celebrated the power of the entrepreneur as a force for social change in his famous Theory of Economic Development wrote, the entrepreneur sets in motion a wave of change and imitation that renders existing plants and methods of production obsolete. It replaces them with something much superior. Progress in capitalism, he said, proceeds, in a “gale of creative destruction”. It is generally believed, that no other economist in the last century articulated the case for capitalism as effectively as Schumpeter. But he was also a prophet of inevitable collapse of capitalism. He asked, “Can capitalism survive?” and replied, “No, I do not think it can.”
Today the scene, in Europe and the US, tells us, perhaps Schumpeter was right. He prophesied the capitalist over reach in the unbridled pursuit of insatiable greed for money and profit. He was a don at Harvard, which in the last decade or two prided itself for inventing the most exotic financial instruments that took the world financial market on a tailspin. At the height of its success in the middle of last decade, more than 17 per cent of the GDP of the US came from financial sector.
Who learns from experience? Nobody in India perhaps. We think, with us it will be a different story. So we push the finance sector liberalisation, though we have in front of us the tyranny it has wreaked in the US and Europe. If unbridled capitalism has all the solutions why are these economies which had experimented with all these free market economics now wailing about zero growth?
We have to realise, India is fundamentally different from the west. Only eight per cent of India’s investment comes from FDI and FII put together. And 90 per cent of Indian investment comes from domestic savings. People who think, FDI is the road to India’s recovery, do not understand anything about India. Let statistics speak.
Indian economy is just the reverse of the US economy. There farmers are given subsidy not to cultivate, to avoid a market crash in food prices because of over production. Here Indian farmer is crying for low interest loans, access to market, farm and fertiliser subsidy, concessional seed and fertiliser, power and irrigation to grow more, which the government is denying them. In India almost 65 per cent of its GDP comes from non-corporate sector. Whereas in the US 70 per cent of its GDP comes from corporate activities alone. Corporate India on the other hand accounts only for 15 per cent of India’s GDP. But all reforms and liberalisation and subsidy in India are focused on the corporate. In manufacturing activities, 50 per cent of the share of value addition in India is from unorganised sector. More than 80 per cent of Indian service sector is controlled by individual or partnership firms and it is growing at eight per cent annually. But this sector, like agriculture and unorganised sector has not found much reform in the last two decades. Another tale of misplaced priorities.
In the west, the concept of domestic saving is only catching up. In India, the financing of growth is because of domestic saving. This is 38 per cent of India’s national income. And majority of this comes from household savings. It is this the votaries of consumerism want to kill.
Equally important in the context of the talk on retail FDI is that 90 per cent of Indian economy is self employed. The retail sector alone employs 160 million. In the US this is just the reverse. Almost 90 per cent are salary employed.
India instead of chasing the mirage of FDI should concentrate on helping the Indian entrepreneur class, retail, cottage and small sector by taking reforms to their door step. Our system today is designed to harass, stymie and finish the native initiative and transplant everything foreign as if we are under enemy occupation What worth is sovereignty if we cannot fashion our economy on a solemn, sovereign, nationalist plank?