The BJP, which once blustered about the negative aspects of globalisation, has embraced it wholeheartedly.
THE Bharatiya Janata Party-led Government's apparent capitulation to foreign capital, so soon into its tenure and in so blatant a fashion, must have come as a surprise even to those who had doubted its claims to swadeshi earlier. The party that blustered about the negative aspects of globalisation while in Opposition has embraced it wholeheartedly in government, and has gone so far as to push policies that dramatically increase the country's external vulnerability and reduce its economic bargaining strength.
Several recent policy announcements of the Government have revealed this predilection to placate international capital even at the expense of domestic interests, and the few moves in the opposite direction - such as the 8 per cent import cess proposed in the Budget (which was subsequently lowered to 4 per cent) - do little to reverse the general orientation of policy. Thus, the Exim Policy announced in April by Commerce Minister Ramakrishna Hegde accelerated the pace of import liberalisation by moving 340 items from the restricted list to the open general licence (OGL) category. The items freed from import control cover a whole range of consumer goods, which will directly replace domestic production. The goal of that exercise was clearly to extend import liberalisation, which was hitherto restricted to capital and intermediate goods, to the consumer goods sector.
Similarly, just after the nuclear explosions at Pokhran, the Government announced a series of approvals and concessions designed to satisfy foreign investors. These included the granting of counter-guarantees to three power projects of State governments involving multinational power companies, which will imply a huge revenue outgo in future unless power tariffs to consumers can be raised substantially. In addition, the mineral resources of the country have also been offered to multinational mining companies through the granting of 18 oil exploration contracts and 34 offshore mining concessions.
The Budget speech, too, contained its share of carrots to foreign investors, in ways that may have gone largely unnoticed in the Indian media but must certainly have been received with satisfaction in New York and other places. Thus, the proposal to open the insurance sector to domestic private companies is disconcertingly vague about what constitutes an Indian company. Finance Ministry officials have conceded in briefings to the press that this could include Indian joint ventures with foreign companies, and since the insurance business requires huge initial financial outlays, it is likely that only such companies will actually enter the market. This amounts to opening up this crucial, highly profitable and potentially scam-ridden sector to international capital through the back door.
The other area that was deliberately left vague in the Finance Minister's speech relates to the proposed privatisation. The cream of public sector assets has been proposed to be sold off, in a privatisation drive that is expected to yield only Rs.5,000 crores despite the hugely profitable nature of the companies on offer. It has not been made clear whether foreign investors will be allowed to participate in this free sale, but at least two of the representatives of international finance who were interviewed after the Budget presentation were seen to be rubbing their hands at the prospect.
Since the Finance Ministry has also set an ambitious target for foreign direct investment inflows in the next two years, this sale of public assets to foreigners may be the only way to achieve the declared target.
The irony is that all these sops and incentives so far have done precious little to increase or even restore confidence in the currency and stock markets. The rupee has plummeted in the past month, in a continuous fall which has amounted to a 20 per cent depreciation against the dollar since March 1997. The ineptitude and confusion in government circles about how to respond to the continued decline of the rupee raises fears of a free fall, which are certainly not dispelled by the Finance Minister's public statements. The Government may be hoping that the rupee will depreciate to a level (say around Rs.44 or 45 to the dollar) which will be good for exports, and then stay at that level. But there are no guarantees that the rupee will stabilise at that level, and the renewed turmoil in East Asian stock markets suggests that once such a process is begun, it becomes very difficult to stop.
Nor have these efforts to placate international capital been sufficient to prevent the imposision of painful economic sanctions, as indicated by the decision of the Group of 8 industrialised nations to suspend bilateral and multilateral credit to India and Pakistan. All these means that the budgetary calculations, which have already been considerably weakened by the Government's own backtracking on a number of proposals, are now completely out of gear.
In fact, the Government has done nothing to address the real problems in the external sector, such as the deceleration in exports. The Exim policy actually worked against the interests of small exporters, who account for the majority of Indian exports, and there is no evidence so far that simply relying on currency devaluation will do the trick for export growth.
Moreover, the hikes in excise and customs duties in the Budget, along with the fact that the excise duties collected are to be more than customs tariffs, are also likely to have a similar negative effect on small exporters.
In fact, the customs duties that have been imposed favour only the established large monopoly houses and are likely to cause many small businesses which rely on imported inputs to close down because they are now disadvantaged against direct competitive imports of the final goods that they produce. Indeed, the irony with regard to these duties, which are about the only thing even vaguely swadeshi in the Budget, is that they are so badly designed that as a result many foreign players are now likely to stop local assembly from CKD (completely knocked down) parts, but only because it is now more profitable to resort to pure trading of fully assembled imports; this will only push up the import bill further and reduce employment.
The Budget speech appealed to non-resident Indians to come to the country's aid and promised them much, but the appeal was to the well-heeled migrants in the West who have repeatedly failed the country. As in the past, not much was said about the working class migrants to West Asia and elsewhere, remittances from whom soared to more than $11 billion in 1996-97.
Implicitly, the Government continues to rely on these flows for the generation of foreign exchange. But these inflows are likely to taper off, and they cannot be a substitute for increased exports. Indeed, unless the domestic recession and low international oil prices continue to keep the total import bill under control, a large trade deficit may become the last straw for foreign institutional investors who are already pulling out in large numbers.
The Finance Minister is to be both pitied and censured. Yashwant Sinha's previous tenure in this job was marked by both bad luck and bad judgment; and the current round seems to be going the same way. To take an analogy from the sporting event of the month, the Finance Minister's Budget may be just one of the many "own goals" in the economic policy of the BJP-led Government.
The tragedy is that in this game, it is not just this particular team that will lose as a result, but the whole country.
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