Fragile growth

Print edition : January 15, 2010

The neoliberal TRIO-

INDIAS economic development over the past 25 years has been a long journey down the road to a more market-driven and globally integrated neoliberal regime. By dismantling controls on investment (domestic and foreign), production, prices and trade; by deregulating financial sector operations; and by privileging private sector activity; the nature of the development trajectory India pursues has been fundamentally altered when compared with the first three decades after Independence. Advocates of this transition say the journey is still incomplete though none can deny that a regime change has already occurred.

The beginnings of the transition can be traced to the Indian governments decision in 1981 to approach the International Monetary Fund (IMF) for an SDR 5 billion (roughly $5.8 billion) Extended Financing Facility loan, quoting among other reasons the need to restructure the economy in response to the oil shocks and earn the foreign exchange needed to pay for the countrys oil imports. In practice, it turned out that India did not really need that foreign exchange, with the government even choosing to forgo the last instalment of the line of credit equal to about $1.1 billion. The Bombay High oil and gas bonanza, which the government exploited in full, and remittances from and exports to West Asia steadied the balance of payments (BoP). What the loan did achieve, intentionally or otherwise, was that it whetted the appetite of the government and the elite of the country for borrowed foreign exchange to import the intermediates and capital goods required to produce commodities hitherto considered non-essential and, therefore, not easily available under the protectionist regime with state intervention instituted after Independence.

Credit without COLLATERAL-

It was this appetite that was unleashed through the liberalisation of trade in the 1985 Budget under Prime Minister Rajiv Gandhi. Combined with deficit-financed spending, this release of the pent-up demand for import-intensive manufactures not only raised the rate of growth of the system but widened the current account deficit. This deficit, which earlier was financed with borrowing from the IMF, was now financed with external commercial borrowing that India, like many other emerging markets, had gained access to. Among the consequences was not only the burgeoning of Indias stock of external debt and a rise in its debt service ratio but a rise in the share of short-term debt in the total. Unfortunately, by this time international banks overexposed to emerging markets had burned their fingers many times since the Mexican debt crisis of 1982. Not surprisingly, even when Indias debt-to-gross domestic product ratio was much lower than in many other developing countries, the fact that debt service costs were a rising proportion of current receipts of foreign exchange provided the basis for a growing reluctance on the part of lenders to extend new debt and rollover past short-term debt. The result, in an increasingly open economy, was a sharp decline in reserves, leading to a BoP crisis when those reserves fell to levels equal to a few weeks imports.

It was at this point in time that the Indian government chose to take another IMF loan of around $2.5 billion (besides borrowing against its gold reserves) and accepted conditionalities that served as the spur for an engineered shift in the direction and content of Indias development strategy. That shift is still under way despite having traversed much distance. Advocates of this shift, within and outside the government, point to the remarkable improvement in Indias GDP growth performance since the 1980s (when creeping liberalisation began), from a 3 per cent-plus rate of growth to 5 per cent-plus initially and, subsequently, to close to 9 per cent over a five-year period preceding the recent slowdown. That growth has occurred in what is seen as a virtuous context in which there are some limited signs of fiscal correction in the form of a reduction in deficit-financed government spending and no signs of a return to the BoP difficulties of the 1980s and earlier. Combined with the obvious opulence visible in metropolitan and urban India, evidence of a more generalised revolution in access to communications as epitomised by the ubiquitous cellphone, and a services boom that has absorbed a significant number of educated middle- class Indians, this growth is presented as proof of the success of neoliberal reform.

Conspicuous CONSUMPTION-

There are, however, four features of this growth performance that are disturbing. The first is its rather uneven and imbalanced sectoral distribution. Growth has only marginally touched agriculture, with evidence that over a prolonged period starting in the early 1990s, the per capita output of foodgrains was on the decline for the first time in the countrys post-Independence history. Around 55 per cent of the increment in GDP over the last decade has come from the services sector, with less than half of that contribution being due to an expansion of organised services, public administration and defence. Since unorganised services consist largely of low-paid work accepted for lack of alternative employment opportunities, the burgeoning of this sector as evidenced by the statistics should be an indicator of growing distress rather than progress and development. And organised manufacturing growth has been volatile, with an increasingly small number of sectors accounting for a very high share of the growth occurring in this sector. In the case of 52 three-digit industries, the top three in terms of rates of growth during the period 1993-94 to 2003-04 accounted for 38 per cent of the growth in all industries, with the figure for the top five rising close to 55 per cent and for the top 10 to almost 75 per cent.

The second feature is that unlike the case of China, Indias large foreign exchange reserves, which are seen as a sign of economic strength, are not owing to current account surpluses earned through exports or garnered from remittances but because of large inflows of capital in the form of portfolio investments and external commercial borrowing by the private corporate sector. This kind of accumulation of reserves is not only expensive (as measured by the difference between the rate of return paid by residents to foreign investors in the Indian economy and the interest earned from the investment of reserves by the Reserve Bank of India) but is also unstable and prone to rapid depletion through capital outflows.

Services BOOM-

A third feature of this growth is that it rests on tenuous stimuli. Fiscal reform has meant that the role of public expenditures as a stimulus for growth is on the wane, excepting for the most recent period when the implementation of the Sixth Pay Commissions recommendations combined with post-crisis initiatives to generate a spike in expenditures. Further, though there has been some improvement in Indias export performance, exports are not large enough to constitute the basis for manufacturing growth. If there is a new stimulus to growth it appears to come from credit-financed investments in housing, credit-financed purchases of automobiles and credit-financed consumption.

One consequence of financial liberalisation and the excess liquidity in the system created by the inflow of foreign capital has been the growing importance of credit provided to individuals for specific purposes such as purchases of property, automobiles and consumer durables of various kinds. Not only has credit expanded at a scorching pace, resulting in a sharp increase in the bank credit-to-GDP ratio (it increased from 27 per cent at the end of March 1997 to about 60 per cent by the end of March 2008), but the share of personal loans in total non-food credit has risen from a small magnitude in the early 1980s to around a quarter in 2008.

Ubiquitous CELLPHONE-

This implies a degree of dissaving on the part of individuals and households. It also implies that financial institutions, which are willing to provide such credit without any collateral, are betting on the inter-temporal income profile of these individuals, since they are seen as being in a position to meet their interest payment and amortisation commitments on the basis of speculative projections of their earnings profile. These projections are speculative because with banks and other financial institutions competing with each other in the housing and consumer finance markets, individuals can easily take on excess debt from multiple sources without revealing to any individual creditor their possible overexposure to debt.

Since there is a strong speculative element involved in lenders providing credit and borrowers increasing their indebtedness, the state of confidence of both parties matters. When such confidence is good, we can experience growth or even a mini-boom. When such confidence is low, we can experience recessionary conditions. The evidence increasingly is that such confidence is on the decline. Not only has the RBI cautioned banks against increasing their retail loan exposure, but according to Financial Times (November 23, 2009), Moodys rating agency has issued a report flagging deteriorating credit conditions and rising problem loans in Indias banking sector. During the fiscal year ending March 2009, the level of gross non-performing loans for commercial banks rose by 22.5 per cent, almost double the 11.9 per cent recorded during the previous year. This could lead to an end of the credit-financed boom.

Miracle economy does not work for the deprived.-S. THANTHONI

Finally, a fourth feature of the process of growth is that it has bypassed large sections of the population. Even the official estimates of the government of the proportion of the population below the poverty line, which currently stands at around 28 per cent, is to be revised upwards to 37 per cent on the basis of a more appropriate measure of the poverty line. And the National Commission on Enterprises in the Unorganised Sector has estimated that those earning less than Rs.20 a day per capita amount to 77 per cent of the total. This is, of course, the range in which income poverty lies. Combine it with deprivation in the form of hunger and inadequate access to drinking water, sanitation, health facilities and education and the picture is indeed appalling.

The persistence of deprivation of this magnitude in a country that has seen a creditable rate of growth over three decades has two implications. One is that significant increases in inequality must have accompanied this growth to ensure such marginalisation. The other is that the cumulative increment of GDP delivered through this growth over a quarter of a century has been inadequate to help overcome underdevelopment, let alone move closer to developed country status. These outcomes are disturbing given the evidence that this growth is fragile. We should not forget that even among those that were accorded miracle economy status for a time, there have been very few developing countries (such as South Korea) that have indeed graduated to becoming a developed country. Most of them have lost their miracle status. Indias moderate-miracle phase, too, may come to an end before the vast majority of its population tastes the benefits of growth.

Growth has only marginally touched agriculture.-K.K. MUSTAFAH

In the midst of this otherwise disappointing scenario, there have, however, been some grounds for optimism. Most importantly, the fact that parliamentary democracy has survived in India with all its warts has kept in place some checks and balances that have prevented a small elite from stealing the country from it own people. One indication of that is the dissatisfaction visible among the advocates of reform at the failure to push it to completion even after 25 years. The other is that though they militate against the fiscal conservatism of the neoliberal elite, programmes such as the National Rural Employment Guarantee Scheme have had to be put in place in an attempt, however feeble, to appease the politically enfranchised poor. But when measured against the losses suffered by the majority over these two and a half decades, the gains are near negligible.

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