A question of political will

Print edition : January 15, 2010

Prabhat Patnaik. He is now a Professor at the Centre for Economic Studies and Planning, School of Social Sciences, JNU.-THE HINDU PHOTO LIBRARY

There has been a great deal of concern over the state of the Indian economy. The Prime Minister and the Finance Minister have spoken of this. What are the main aspects/features of what we may call the current economic crisis?

The main features are, of course, first the foreign exchange crisis which is extremely serious which is partly a reflection of the fiscal crisis of the government. The fiscal crisis manifests itself partly in terms of the inflationary pressures, and partly in terms of the balance of payments problem. Added, of course, to the fundamental balance of payments crisis, which consists in the fact of having an unsustainable level of current accounts deficit, there is the short-term problem of capital flight out of the country and that has given the immediate urgency to the balance of payments situation.

The Finance Minister has gone on record that there is no alternative in this context to the IMF loan. Now, how do you see this? Specifically a) Do we really need the IMF loan? b) If we do take it, what would be the consequences? Would it solve our problems?

Why is there this current balance of payments crisis? After all, why did we have to borrow so much? It is basically a result of the fact that the liberalisation policy was pursued for some years and that has resulted in a significant inflation of our import bill, mainly to meet the domestic consumption requirement. We have had a luxury consumption boom. It was claimed that we have been having high rates of industrial growth. These high rates of industrial growth made no difference to the employment scenario of the country, but at the same time the other side of it was the fact that we actually had a balance of payments problem. Now, at that time we had been told that if we liberalised the economy, then very soon we would be able to develop a viable economy, we would be able to export more, we would be able, in fact, to meet our payments requirements. Todays crisis is the result of a set of wrong policies pursued then.

In fact, the peculiar feature of the Indian import liberalisation measures is that they were not tied, in any way, to any export obligations.

Now, if we take an IMF loan today, the first thing that the IMF is going to demand is that we liberalise our imports further. If we liberalise imports further, we would find that notwithstanding a reduction in the Budget deficit, which of course would have severe recessionary consequences, you would not be able to balance your balance of payments at a sustainable level. The IMF loan would be used up in barely a years time and at the end of it, we would be back to square one except that the economy would be in an even more vulnerable position than now.

Once the economy is in a vulnerable position like this, then your whole effort is oriented towards maintaining the confidence of the international investors in the domestic economy. You will have to pursue economic policies which maintain their confidence, you in fact have to have a polity which maintains their confidence. That basically means that the sovereignty of the people their having a say on economic policies that affect their livelihood is going to be abridged, which I think is fundamentally undemocratic.

The Finance Minister has been saying that if we could go to the IMF and get an adequate loan in three years time, the economy will turn around and will in fact enhance our independence, and we would not have to resort to this kind of borrowing. Would you like to comment on this point?

The critical question is, if we go to the IMF, it is going to insist that we liberalise imports. The Finance Minister has also said that we are going to move towards an open economy. The argument that is sometimes put forward is that when we do that, we are going to become more efficient, and on the basis of becoming more efficient we would be able to export more, and our balance of payment will improve. But in fact precisely the opposite can happen, and has happened in far many more historical cases than the scenario that the Finance Minister has given.

If you look at any major historical episodes of export boom Germany in the late nineteenth century or Japan in the more recent years the kind of export boom they were or have been able to sustain is first of all not something that was generated under free market conditions. In fact, most of the export successes are of countries that did not follow free market policies. They may not have had quantitative restrictions or tariff protection but there are non-tariff barriers....

First, it must be kept in mind that to promote efficiency by opening up the economy is like cutting off your head to cure a headache. Secondly, it must be kept in mind that exporting depends on a variety of things and one very important component of this is the willingness of the advanced countries to accommodate you. The very fact that the United States is actually threatening to use Super 301 against India and how much is Indias exports to the U.S.? the fact that the U.S. treats Japan and India more or less on a par when it comes to the threat of Super 301, is indicative of their unwillingness to accommodate more of our exports.

So the Finance Minister is on completely unsound ground if he believes this is the means to promote efficiency or that efficiency alone will promote exports. Turning around in three years does not hold at all, and as far as I can see, the consequences will be just the opposite. Namely, we will soak up the loan and at the same time we will find ourselves in a position where we will have to keep on pleasing the international investors. This is, in fact, what has happened in several Latin American countries.

The point I am trying to make is an extremely significant observation concerning popular sovereignty. Look at Latin America. The loans, the huge borrowings, were done by military dictatorships, whether you look at Argentina or Brazil.... At the same time, when the democratic governments came... as you know Latin American per capita income has been declining in recent years the whole idea was that they would bring about a turnaround in peoples living standards. But the democratically elected governments have found themselves pursuing exactly the same kinds of economic policies as the military dictatorships. Why? Because their economic policies are tied, not to the will of the people but to the necessity to appease the international investors.

Let me take another aspect. The Finance Minister talked about building a modern, vibrant economy by allowing foreign technology and so on. What is not realised is that a modern, vibrant economy in the Indian context would also be an economy that will contain within itself severe social dualism. It is impossible, in Indian conditions, to move anywhere near full employment on the basis of imported technology, which will be highly capital-intensive across the board.

In the industrial sector, our objective should be, of course, to induct sophisticated, up-to-date technology in certain selected spheres, but at the same time to gear our development strategy to the requirements of our people where we move towards providing more employment to the people than our plans have hitherto been doing.

Given that the crisis exists, and recourse to the IMF loan does not, in your view, constitute a solution, how would you tackle the problem?

I would like to draw a distinction between the immediate short-run problem and the fundamental long-run ones... of course, any solution to the short-run problem must actually be built into an alternative trajectory of development of India in the long run. As far as the immediate short-run problem is concerned, we have to have the kind of import restrictions we have been having.

Together with this, we should make an effort to boost our exports on a short-term crash basis... and I would not exclude gold from this in order to improve our trade balance. At the same time, we have to have a reduction in government deficit, but the mode of reduction of the deficit would have to be very different from what the government typically thinks of in this respect.

The first thing the government has to do on the revenue side is to garner larger tax revenue through direct taxation which means not only larger taxation of individual and corporate income, and plugging of loopholes in order to ensure better tax compliance through punitive measures if necessary... we should at the same time go beyond income taxation, towards wealth taxation.... I dont see why the government cannot go in for tax on urban property. There have been periods in the past, for instance, when we had things like the compulsory deposit scheme...

Compulsory deposits not necessarily from salaries alone, but the whole cross section...

... The whole cross section, especially from the more affluent sections. The second point is that we should have a reduction in all kinds of inessential expenditure. The point is that there has been going on what I would like to call a carnival of the affluent at the expense of the public exchequer. This is visible in the smallest of things: the amount of travelling that is done, the number of seminars held, the number of meetings all these constitute an enormous national waste.

I think there is also scope for a cutback in defence expenditure and defence-related imports... the assumption that any reduction in the level of defence expenditure implies a reduction in the level of defence preparedness is not necessarily valid.

Coming now to the medium term, these immediate, emergency measures have to build into an alternative trajectory of development. Any such trajectory must be based on the assumption that the home market must constitute the main stimulus for our industrialisation. The growth of the home market is predicated most significantly on the growth of the agricultural sector, and this within a more egalitarian agrarian structure.

In other words, the medium-long term growth scenario in India must entail: first, land reforms and a more egalitarian agrarian structure; secondly, a high enough rate of agricultural growth so that purchasing power is put in the hands of the rural poor; thirdly, the provision of a minimum level of social services to the poor in the form of education (notably literacy), health, safe drinking water, provision of employment opportunity and so on; and fourthly, it must be based on a devolution and decentralisation of economic decision-making from the Centre to the States down to elected panchayats. That is the only way of ensuring that people have some control over their economic state.

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