False promises

Print edition : August 09, 1997

Economic liberalisers have grown into the habit of parading assumptions as facts.

THOSE who swear by economic liberalisation have grown into the habit of parading assumptions as facts. With foreign creditors closing in, the nation, they claim, was on the verge of bankruptcy in 1991 mid-summer; it would have been altogether futile at that juncture to keep resisting World Bank-IMF pressure and not accept the conditionalities of the structural adjustment programme recommended by the two international financial institutions. But was not the decision more an outcome of the psychological crisis the minority regime in New Delhi was experiencing? No clear-cut strategy illuminated its choice. Even at this distance of time, one therefore cannot desist from ex post speculation. Had the regime not misplaced its vertebrae, negotiations with the Fund-Bank, who knows, might well have taken a different route and short- and medium-term credit could have flowed from these agencies on much less onerous terms than were agreed to; the dismantling of industrial and exchange controls could have been phased out over a longer stretch.

It was in a way to our advantage that we had emerged as the third largest borrower of foreign funds among the developing nations. This status had its demeaning aspects; in a world dominated by cynicism, a parlous state of balance of payments nonetheless provided an extra bargaining counter; even an oblique threat to repudiate external obligations might have forced foreign creditors to climb down from their high horses. Precedents, after all, were not lacking in this regard; quite a few Latin American governments had mastered the art of turning the misfortunes visiting their external accounts into an excellent pretext for persuading foreign financial agencies to lower the scale of their demands. Our decision-makers unfortunately lacked both the moral fibre and the practical skill that that kind of bargaining across the counter called for. The reluctance to explore alternative negotiating positions became the basis of the plea that no alternative framework of policy was either conceivable or feasible.

THE practice of substituting facts with fables continues. Consider the official data, periodically doled out, on the performance of the national economy in the half a dozen years since the commencement of the liberalisation phase. Indian economic growth, the latest Economic Survey as well as the Finance Minister's budget speech have gone on record, has already climbed the dizzy height of 7 per cent per annum and is poised to conquer even more impressive peaks. The ground reality is substantially different though. Growth in agriculture and allied services has been barely one per cent per annum in the post-liberalisation period, which is less than the annual rate of growth of population; in other words, per capita availability of both foodgrain and raw materials in the country is lower today than it was prior to 1991-92. For industry, the situation is hardly any better, despite the impression created by official verbiage. In as many as four of the six years since controls were relaxed, the rate of growth of industrial production has lagged behind the rate of growth in the preceding year; the average annual rate of industrial growth between 1991-92 and 1996-97 is unlikely to be much above 4.5 per cent, almost 50 per cent lower than the rate of industrial expansion registered in the 1980s.

One or two oddities feature the official data on industrial production. In the first couple of post-liberalisation years, infrastructural industries, such as mining and electricity generation, performed better than the manufacturing sector proper; in the more recent years, the trends have been reversed and manufacturing growth has outstripped the rate of growth in electricity and mining. The overall situation, however, remains distinctly uncomfortable. A great deal of faith was earlier reposed in the proposition that industrial growth would zoom on the back of continuously rising demand for consumer durables and non-durables. That kind of optimism has now evaporated; latest reports suggest heavy accumulation of inventories in both these areas. Liberalisation of credit and lowering of interest rates have been of little avail too; domestic demand has failed to pick up.

A further point is worth noting. The index of industrial production, as officially computed, subsumes data for the small-scale sector, where the annual rate of growth is assumed to have been around 15 per cent in the post-liberalisation years. The empirical basis for this assumption is thin, as is that for the other assumption that the high tide of performance in the small-scale sector has created millions of extra employment opportunities in the economy.

If agriculture has grown by barely one per cent per annum and industry by not more than 4.5 per cent in the years since 1991-92, the average annual rate of increase in the material production sector as a whole between 1991-92 and 1996-97 could not have exceeded three per cent. The prospects for 1997-98 are no better; were the rains normal for the tenth successive year, farming activities would continue to be adversely affected by the lack of capital formation: public investment is taboo as per the Fund-Bank formula and private investment has dried up. In industry too, no ground exists for the assumption that the cloud of demand recession would lift soon; the data for the first couple of months of the current fiscal year are uniformly bleak.

HOW does then one reconcile the claim of a seven per cent rate of growth in the economy with the actual developments in agriculture and industry, the two sectors that are together responsible for roughly two-thirds of national income and four-fifths of national employment? Attention will perhaps be drawn to the fantastic boom in the services sector, including in the financial sub-sector, where foreign presence has increased spectacularly since 1991-92. Financial transactions, including activities by mutual funds and merchant banks, have proliferated; so have telecommunications and telecasts boosted by the arrival of foreign television channels; hotels and tourism too have expanded at a fast rate, as have luxury food and drinks establishments, mostly set up by foreign entities. Emoluments in each of these areas of activity have skyrocketed, sometimes by as much as 1,000 per cent or more in the course of the past decade. But this enhanced flow of income has not percolated beyond a very thin layer of the urban population. It has perhaps also resulted in some net displacement of labour following the intrusion of foreign entrepreneurship in activities that were in the past reserved for the small and 'tiny' sectors.

Official circles nonetheless have reasons to feel satisfied over the overall rate of growth in the services sector, 10 per cent or thereabouts, in the 1990s. This high rate of growth may well persist. Even should both industry and agriculture near-stagnate, it is still possible for income originating in the services sector to continue to soar: affluent sections and foreign parties who control the services sector are in a position to decide autonomously how much emoluments they are to grant for themselves; liberalisation has accorded them that freedom. Salary scales in selected service activities have already reached international standards, thereby ensuring that estimates of national income growth touch the neighbourhood of seven per cent per annum. For a nation where close to one-half of the people are denied the barest of basic needs, including food and nutrition, this explosion in services earnings, catering to a small fraction of the population, is a truly extraordinary example of lopsided growth.

It will be not altogether irrelevant to refer to the emerging trends in the country's external economic accounts. A large part of the official claim of success in the so-called 'reforms' hinges on the achievements in this area: in June 1991, the country's foreign exchange balances could barely cover one month's imports, the present kitty of $23 billion, equivalent to as much as six months' imports, marks a vast transformation; if that is not progress, the enthusiasts for liberalisation would croak, what is? Two caveats are nonetheless in order. At least one-half of the current holdings of foreign balances consists of 'hot money', parked in India, for the present and temporarily, by foreign speculators and non-resident Indians. Financial transactions by parties engaged in speculative activities are subject to wild destinational swings. Should there be a sudden run on foreign balances, the effectiveness of these balances to stem the tide would be subject to a question mark. The same kind of doubt can be raised apropos Global Depository Receipts (GDRs), which Indian corporate entities have been permitted to accept in international capital markets. The yield from GDRs is of late being shown as an integral part of the country's foreign balances. The claim is hardly tenable, for the authorities have no control over these funds. Nor can the fact be easily ignored that the country has to grapple with an overhang of nearly $100 billion of external debt.

Even more disconcerting is the haziness in export performance. With the progressive dismantling of import controls, including quantitative restrictions, and the scaling down of tariff barriers, imports have, not unexpectedly, soared in the recent period. Exports have not. Such theories as of export-led or import-led growth have fallen by the wayside. Given the protectionist mood the Western countries are currently in, the prospects of our exports taking off do not seem terribly exciting. Were inflation to resume following an across-the-board increase in petroleum prices, the rate of growth of exports, already negative in the first month of the new fiscal year, could in fact dip further. And the notion that the import of state-of-the-art technology and equipment would transform the quality of our goods and thereby boost our exports seems to be equally far-fetched.

MOST of the post-liberalisation enthusiasm in official quarters has focussed on a single issue: would foreigners come and invest in productive ventures on a large enough scale? The Ministry of Finance has projected an inflow of $10 billion annually in the course of the coming decade. The Finance Minister has gone on record entreating Western powers such as the British to return to India along with their capital resources, take charge of India for another 200 years and squeeze as much monopoly profit from their activities in the country as they are capable of squeezing and by whatever means.

Not even one-fifth of the Government's expectations with regard to direct foreign investment is getting fulfilled. Besides, the flow of funds till the beginning of the current fiscal year has been heavily biased towards the luxury consumption sector. Since, meanwhile, public investment has been cut back substantially and government policy is to encourage consumption through lowering direct taxes, savings have levelled off, and so has investment; employment too has shrivelled, compounded by the decision to deny working capital and reconstruction funds to public sector units that are in difficulty. Economics has obviously been transformed into an idiosyncratic science: attempts to derive output and employment from productive capacity already installed in the economy through the nation's own efforts in the past are frowned upon because that would be tantamount to betraying the dogma that underlies liberalisation. Meanwhile, waiting will continue for the Godot of foreign capital to arrive. None in the neighbourhood is capable of answering the query whether Godot would arrive at all even if the terms are made extraordinarily more attractive.

This nation, the impression gets strengthened with every day, has been taken for a huge ride.

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