Dr Bharat Jhunjhunwala
INTERNATIONAL rating agencies continue to indicate that India stands a chance of being downgraded to junk status despite the current spate of reforms. Reasons mentioned for this continued negativity are (1) investment and economic growth have slowed, (2) current account deficit has widened and (3) political environment is unfavourable. All these are actually a logical result of Manmohan Singh’s economic thinking. He has put his trust and faith in big companies—domestic and multinational. He expects them to make huge investments. This will, he thinks, lead to increase in investment.
The investment will be done in modern capital-intensive operations and inexpensive goods that are competitive in the global markets will be produced. This will lead to high growth rate. These goods will be exported leading to reduction in Current Account Deficit which will be further reduced by inward FDI. The big companies will make huge profits. The Government will garner larger tax revenues out of these profits. This will lead to reduction in fiscal deficit. Part of the revenues will be used for implementing pro-people programmes like loan waiver and Employment Guarantee Scheme. This will provide solace to the common man and help stabilise the political situation. In this way Manmohan Singh seeks to attain high levels of investment and economic growth, low current account deficit and political stability.
This model does not work. Reason is that the negative impact of capital-intensive production on the common man is ignored. A milkman was earning Rs 250 a day, 365 days a year. He bought milk in the village, loaded it on his motorcycle and delivered to the consumers in the city directly. A big company entered the scene and made available cheaper milk. The milkman was thrown out of his business. He now earns Rs 125 a day for 100 days a year in MNREGA. His standard of life has fallen. It must be admitted here that the conditions of the poorest people have improved courtesy MNREGA. However, that does not compensate for the loss of livelihood and decline in incomes of millions of weavers, milkmen and other sundry trade’s. A vendor used to sell home-made grubs on the cart at the bus stand of Rishikesh four years ago. At that time he told me that it was becoming difficult to face competition from Pepsico and Haldiram. Last month I did not find him there. Perhaps he too has gone in the protection of MNREGA.
Manmohan Singh has waived off loans and increased allocation under MNREGA to help alleviate the suffering of the common man; and he is unable to reduce outgo on food and fertilizer subsidies because the common man is already under stress and not able to bear more hardship. This is leading to increase in fiscal deficit. The increase in taxes paid by big companies is less than the increase in outgo on these programmes. The Government has to borrow more from the Reserve Bank of India, which has turned on its printing presses at full speed. This is leading to inflation. The companies are alarmed. They foresee that today’s deficit has to be recouped by imposing higher taxes tomorrow. Their future profits will be under pressure, they believe. They do not like this. They have put their investment plans on hold leading to less investment. Cheap goods that Manmohan Singh hoped for are not being produced. India’s exports are under pressure and Current Account Deficit is worsening leading to fall in the rupee. The common man is still not placated. He mourns his lost job. This is leading to political instability.
Manmohan Singh had thought that the big-company capital-intensive model implemented in the developed countries would be replicated in India and investment and economic growth will increase, current account deficit will reduce and political stability will ensue. But the opposite is happening. The key miscalculation done by Manmohan Singh is the capital-population ratio. The big-company model works if capital investment is large and people losing their livelihoods are few. That was the circumstance in the developed countries in their heyday of industrialisation. But the same model fails when capital investment is relatively small and affected population is very large as in India. In this case the expenditure on social security schemes has to be multiplied manifold in order to nullify the negative impact of capital-intensive production. Manmohan Singh’s Government is not able to make such huge expenditures leading to collapse of his model. In Indian circumstances, Manmohan Singh’s model is like giving subsidy to the landlord and hoping that it would lead to improvement in the conditions of the bonded labour; or giving water to the great Banyan tree in hope that small plants will grow in its shade; or providing a gun to the street hoodlum to establish peace in the neighbourhood. Similarly, Manmohan Singh is providing free play to big companies in hope that it will lead to the improvement in living standards of the common man.
Arrogance has not helped. Manmohan Singh chose not to consult Mamata Banerjee before announcing FDI in retail, sharing of Teesta waters with Bangladesh and increase in rail fares. Mamata did not budge because she was connected with the common man’s travails. FDI in retail would lead to loss of livelihood of many street corner stores. Diversion of more water from the Teesta would deprive farmers of North Bengal of life-sustaining water. Increase in rail fares would directly hit the common man. Mamata refused to sign on the dotted line. Thankfully so. And this has led to political instability.
The Government’s hype is that the difficulties are due to global recession. That is only very partially true. The recession is also an opportunity. Companies in developed countries are under greater pressure to outsource goods and services to reduce their costs. Investors are seeking venues to invest their wealth. Petrodollars are floating around not knowing where to settle. It was necessary to capture these dollars and convert the crisis into an opportunity.
The warnings issued by international rating agencies have to be understood in this background. These are a logical result of Manmohan Singh’s economic ideology which is predicated on growth coming from big companies. Knowledgeable sources indicate that big businessmen can easily get appointment to meet with the Prime Minister but not the slum dwellers of Mumbai who are affected by his economic policies. Sonia Gandhi must ponder on the situation and appoint a more sensitive person to the post of Prime Minister. BJP must also consider its economic paradigm. It lost power because it too did not consider the impact of its economic policies on the common man. It only tried to implement Manmohan Singh’s decrepit model more honestly than Manmohan Singh himself perhaps could. The BJP must come up with an alternative development model that is genuinely pro-people and in tune with the requirements of our large population.