This has been my conclusion and observation of
India’s Economic Policy and the consequential decline in Rupee value:
A brief related history, just for the record, is
that though Manmohan Singh (MMS) presented the overrated 1992 budged which was
hailed as saviour of India and secured economic-independence; it was Dr.
Subramanian Swamy who actually saved Indian economy. During Gulf War (Aug 1990
to Feb 1991), US was facing one hardship – a refuelling base. We had already
run a phenomenal bankruptcy inducing deficit. At that time Dr. Swamy convinced
then PM Chandrashekhar to briefly change India’s foreign policy – back then
India did not allow armed foreign missions any landing or refuelling base in
India and voting in favour of US Gulf War action – a departure from
non-aligned-movement principles. Dr. Swamy negotiated a deal with US securing $
2-billion no-conditions-attached loan from IMF in exchange for allowing US
aircrafts to land in Bombay for refuelling and voting in favour of resolution.
That saved India in first place. Ensuing negotiations in Davos and 1992 budget
is well known. [Please read the note
below my blog article.]
For long we have been following the model of deficit
financing. The problem is not the model or the method adopted but the deficit
in vision and ground action.
For that genesis of the policy, policy makers need
to be checked. Most planning commission members, finance ministry bureaucrats,
RBI Officers and MMS himself subscribe to superficial concept that stabilizing
rupee is key to fiscal management including inflation. Incidentally, most of
them share same brainwashing background - IMF and WB stints where developing
economy nominees are impressed up on to keep currency stable. This, they
impress, is easily achieve by FII and FDI foreign-exchange-currency (forex) inflows.
I will come back on FDI latter. But the easiest way
out, undisputedly, is FII inflows. It is nothing but 'Hot Money'. Every sane
economist and his dog will understand that.
Herein lies the problem. One of the main causes -
the gap between imports and exports, with imports dominating, leads to rupee
depreciation which upsets fiscal deficit as most developing nations are net
importing countries and it adds inflationary pressure.
The correct and harder way to address this 'net
import gap situation' is to strengthen manufacturing and services export
sector. This in medium to long term would ensure a rise in baseline of net
forex inflows, bringing down reliance on forex inflows from FII and FDI.
Infact, there could be a situation achieved where a range bound appreciation or
depreciation would be healthy for economy. This can only and only be achieved
only by country investing in road, rail, port, communication, water supply,
storage / warehousing and power infrastructure.
Even after the overrated 1992 budget, the country
remained clue-less till year 2000. Between 2000 and 2004 huge number of road,
rail, port, SEZ, storage and power projects were started. Communication
including internet penetration was well achieved. Dedicated rail and sea
freight corridor reduced the assets / goods delivery time and the consequential
reduction in demurrage charges entities had suffer. Road infrastructure was
started with intention to again reduce the movement time and reduce the
transport / fuel costs. The ten-lane north-south-east-west corridor and the
8-lane golden quadrilateral progressed at 11.5 kms per day! River interlinking
study was re-initiated. SEZ and power projects were started with all good
intentions. Point is all this was with focus to create a 'Real' economic growth
- an environment conducive to propel manufacturing and services export growth.
Though it happened along with related corruption, the net real benefit gave a
stable boost to the economy with forex reserves at record high since
independence.
Post 2004, all infrastructure projects came to stand
still and there was sudden influx of FII money. Large funds flew-in via P-Note
route. Markets – both stocks and bullion – scaled record heights, which was very
predictably not sustainable even without 2008 global crises. Sustainable or
not, as per prudent and rational economic assessment, it is generally contrary
- there is flight of money outwards when infra spend touches near zero in any
country.
Consequently and again repeating – predictably, has
lead to sustained and gradual withdrawal of FII money leading to continuous
rupee depreciation. Coupled with the recent downward trend in IIP growth rate
(though govt. keeps revising the past data by blaming error on some
random junior officers).
Blaming Vodafone tax change (which was step in right
direction and UK also followed the suit in charging Vodafone in other tax evasion
case there) and coalition alliance partners does not change the ground reality
that there has been almost a decade of absence in net infra spend.
My conclusion holds good as there is atleast one
state government i.e Gujarat, which has invested huge money in last decade in creating
infrastructure and arranging conducive industrial environment, that it beats
national averages on most economic parameters.
Coming to FDI, it is just one of the methods to
boost investments in manufacturing and services sector. Under fair investment
environment, both domestic and international investors / entrepreneurs would
grab every opportunity to join 'real growth' story. But as discussed above,
there has been downward growth in real economy. Then how come FDI is attracted?
That only indicates, FDI entities are given massive unreasonable concession to
invest in India further hurting domestic manufacturing and services sector as
it gives unfair advantage to FDI entities. Which again brings me back to my
conclusion that FDI is invited at regular intervals giving unfair benefits to
them only to ensure forex inflow to stabilise rupee in short term.
Under-achievement in creating adequate
infrastructure, rampant corruption in every government ventures (adventures),
gross mismanagement of economy, doling out sops/money via MNERGA, Direct Cash
Transfer, Loan Waivers, Food Security Bill, et al are all unproductive govt
spends and consistent devaluation of rupee (which greatly impacts India as it
is net importing country), has had a very negative impact at grassroot level -
spiralling production and labour costs. The most immediate impact and victim is
domestic industries – this is more of a policy deficit than industry cyclical phenomenon or on account of global-crisis .
To my mind, Rupee was doomed in 2004 itself when by
December that year, the road-layout (NS-EW Corridor & Golden Quadrilateral) progress dropped to 11 kms per year from 11 kms per day!
Rest is history - the decline in infra and illogical rise in stock & bullion markets.
To over-simplify, the short-term funds ie. the annual
revenue generated was used-up for long-term purposes like loan-waiver, defence
equipment purchases, scam-outflows, parking in offshore accounts, etc. And
funds raised for long-term projects purposes like infrastructure projects, etc where used-up for short-term purposes like subsidies, MNREGA, cash
transfers, 5th-6th pay-commission salary rise, etc.
Result is a mismatched messed-up economy, struggling to stay afloat by
committing a hara-kiri of sorts.
Ofcourse, in today’s world there are exotic monetary
products to manage economy like subscribing to T-Bills of US and other countries,
rate-cuts, reducing gold-imports, CRR, surrogate financing, blah blah, etc..
all of which can be justified or blamed…. but the raw fact remains that only export
of goods and services ensure steady forex flows and reduce reliance on these fancy-named
exotic fiscal management measures.
PS: I am reproducing extract from ‘My friend turned foe turned friend:
Chandrashekhar’ by Dr. Subramanian Swamy (Chapter V):
When we first met as a government in November 1991,
Chandrasekhar told the cabinet that there was a great economic crisis
particularly in petroleum and foreign exchange looming. After some discussion,
it was decided by the PM that I should, for controlling the crisis, explore
some informal steps to obtain crude oil on barter i.e., in exchange of sugar,
or engineering goods, and also get $ 2 billion (Rs.6000 crores) IMF loans (and
without conditions). That is, the PM wanted me to act as Finance Minister as well!
Chandrasekhar had denied me the Finance Ministership when the Cabinet was
formed because, he told me my free market philosophy would “embarrass” his
“socialist” image. But the real reason was (in my opinion) I, as Finance
Minister, would go after the Swiss bank accounts of politicians, and as a
consequence, many political leaders would go to jail. (There is Rs.3,20,000
crores deposited illegally by Indians in Swiss banks). Therefore when the
Cabinet was being formed, there was near hysteria at the prospect of my
becoming Finance Minister. Chandrasekhar was bombarded by these frightened
friends, saying “please bring the devil as Finance Minister, but not Swamy”.
When the Cabinet meeting was over, Chandrasekhar
asked me to come with him to the airport (he was going to Varanasi). In the
car, sitting next to him I taunted him: “you denied me the Finance Minister,
and now you want me to do the work of the Finance Minister as well?” “Arre
Baba!” he exclaimed in Hindi, the economy is on verge of collapse and you can
only think of your grievance”. “‘Why should I do this task?” I persisted. After
all, Commerce and Law, was my portfolio, and therefore why should I have to
work for another Minister? “Listen” said Chandrasekhar “No one else in the
Cabinet has your contacts abroad, in USA, Israel, China etc., so use it for the
nation’s sake”.
We sat quietly till the car reached the Special VVIP
airport, and out to the tarmac where the IAF Boeing reserved for the PM was
parked. As he climbed the stair case to alight the plane, I told him when he
returned, I would have a proposal on how to tackle the financial crisis. “To
hell with the Finance Ministership” I said to myself. “CCPA membership is more
prestigious”.
The foreign exchange crisis had been caused by the
large number of short term loans (3 -5 years repayment) taken from Europe by
the Rajiv Gandhi government (1985-89) mostly to pay for defence equipment
purchases abroad. These loans became due for repayment during V.P.Singh’s
tenure as PM (who as finance Minister sanctioned it) but he slept over it. So
when we came to power it coincided with non-payment, plotting to declare India
as a defaulter or bankrupt. It was a Mexican type situation. We needed $ 2
billion to tide over this, and save our reputation. We could, like Mexico,
straight away have applied to the IMF for a “crisis loan”, but then the IMF
would have strapped us, like Mexico, with humiliating conditions. When I spoke
to Rajiv Gandhi about this crisis, after returning from the airport, he said
flatly that the Congress party would not support any Mexican type
conditionality. So our government was in a fix: “No conditions, No loan from
IMF; no loan, no economy!”
But I knew of one possible escape route. The IMF is
dominated by the Americans, who control 87 percent of the voting power in the
Executive Board of the IMF. Despite popular impressions to the contrary,
Americans are very simple people if you have a deal with them on a give and
take basis. If you want something from an American, offer him something in
return which he needs. Then he will respond fully. Americans in the past were irritated
with us because we took their aid, and yet voted against them in the UN.
Americans are straight forward, contractual minded people, whereas we are
highly moralistic people who do not like to reveal our mind. Americans are much
like me in character: blunt and open in thought, but a typical Indian is more
like Narasimha Rao: soft in words, but covert in action. So when Chandrasekhar
returned to Delhi, I received him at the airport, and told him of Rajiv
Gandhi’s refusal to support an IMF conditions-prone loan. I then told him:
“There is one way out. Ask the Americans to help. They will help, if you offer
them something in return”. “What can be possibly given them that they do not
have already?” asked Chandrasekhar. I had no answer. I just kept quiet.
Chandrasekhar said “We are running out of time. Think of something”.
Soon after sometime, the opportunity came. The US
Ambassador came to my Commerce Ministry office to tell me that the US was
planning to support a UN declaration of war on Iraq, and US will conduct the
operations. He said that the Indian government should support the war effort of
the US.
With IMF on my mind, I asked the Ambassador: “What
will India get by doing so?” The Ambassador was taken back. He said it was a
moral imperative for the world, since Kuwait had been crushed by Iraq’s
invasion. I laughed at the US ambassador. I told him “Listen Excellency, ten
years in the US as a student and as a professor has made me more American than
you. You keep your moral imperative, but give me a deal”. I explained our
problem to him. He was very sympathetic. As I expected, he immediately
responded. Thereafter President Bush and Chandrasekhar were in touch with each
other. The $ 2 billion arrived without any conditions! We, of course allowed the
US to refuel their planes flying in from Philiphines to Saudi Arabia. Nowhere
will it be recorded as a “deal”, but the truth is this. In the history of the
IMF, such a large loan has never been given without conditions. Ours was the
exception.
(Source: www.wp.janataparty.org/?p=205)
[Reason for sharing this 1990 incident as narrated by Dr. Swamy is to prove that we need leaders who can raise above petty politics and work for the country. Solutions are always there, we need will and courage to implement them.]
