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Published: December 11, 2013 - 15:07 Updated: February 3, 2014 - 00:42

Escalated fiscal troubles make 2013 a year best left behind

Mohan Guruswamy Delhi 

When our economic history is written, 2013 might be called the year of the great chill. The GDP slowed again, but the rupee dropped by almost a fifth of its value—the biggest devaluation since 1967. In 1967, it had happened in one fell swoop, when the government realized the gross overvaluation of the rupee and slashed it down to a more realistic figure. But this year’s devaluation came like Chinese torture: drip by drip, day by day. The rupee had been in a freefall for over three months; an inert government sat and watched. The government lost control of the Reserve Bank of India (RBI). The RBI twiddled its thumbs, unsure what to do. Mercifully, the drama ended when the RBI Governor retired. Still, the macroeconomic situation, by and large, remains the same: a massive trade deficit ($203.6 billion); an impossible current account deficit (4.8 per cent of GDP); an unrequitable fiscal deficit (4.9 per cent of GDP)—all coupled with wholesale price index inflation (WPI) of 7.4 per cent, flagging savings and investments. India has been dealt a big double-whammy. Our sense of national well-being is now left to the capricious whims of foreign institutional capital swarming through the economy, and on Non-Resident Indian (NRI) deposits purchased at high interest.

Two years ago, India’s GDP grew at 9.3 per cent. This time last year, the GDP was expected to grow at 6.5 per cent. Instead, it is growing at 4.7 per cent. A shortfall of 1.8 per cent between hope and reality. Monetarily, that shortfall translates into approximately $70.20 billion in purchasing power parity (PPP) terms. In Indian rupees, this means a PPP shortfall of around Rs 4.42 lakh crore. True, it’s lower than the previous year’s Rs 7 lakh crore, but it is still imposing. Coupled with the ‘presumptive loss’—Comptroller and Auditor General’s (CAG) phrase—to the GDP last year, we are looking at a hole of about Rs 11.40 lakh crore for the last two years. If that’s what the people lost, the central government’s nominal loss in taxes foregone from falling growth is nearly Rs 30,000 crore. This year, the Government of India hoped to collect Rs 8.84 lakh crore in taxes. (The states would have collected a similar sum.) This means the presumptive loss of tax revenue is four per cent of budget estimates. However small the percentages may appear, these are not small sums of money, and India cannot do without them. Added to the drop due to the expected 2G spectrum sale, the failure of the Oil and Natural Gas Corporation (ONGC) stock issue and much lower collections from Public Sector Undertaking (PSU) disinvestment, there’s a serious lacuna in central government collections.

Since interest, salaries and—to some extent—defence allocations are inviolable, the hit manifests as deep cuts in social spending and capital expenditures. Already our capital-expenditure-to-budget ratio is an abysmally low nine per cent. Social welfare spending (however little may trickle down) impacts the poor and needy. Despite what the World Bank and International Monetary Fund (IMF)-trained gnomes in North Block, South Block and Yojana Bhavan say, the numbers of the poor are rising alarmingly. At Independence, India had about 320 million people; it now has that many poor alone. BPL estimates of 30 or 25 per cent matter little. In absolute terms, the number of poor people is on the rise, and governments have shown no inclination to stem the tide—a tide evident in massive economic migrations from Assam, Bengal, Bihar, Odisha, eastern UP and tribal regions. Over three-quarters of our tribal people still exist below the poverty line, giving them stark choices: either migrate to cities or revolt against the iniquitous system. They do both. Yet our middle and upper classes seem focused only on the migration of Bangladeshis into India: the establishment can take credit for successfully affixing us with blinders.

Growth in India is led by government spending and investments. When these drop, growth drops. Little wonder so much gloom and pessimism is enveloping the nation—this mood is universal now, from the biggest captains of industry (Ratan Tata, worth $100 billion) to the smallest of farmers (the average size of a farm holding has now fallen to 0.63 acres). The only one proclaiming messages of hope and improvement is the optimistic jack-in-the-box, Dr C Rangarajan, chairman of the PM’s council of economic advisers. Rangarajan’s optimism stems from the simple fact that he surveys numbers less than he does Chidambaram’s chair in North Block—particularly enticing with South Block just across the street. So close, yet so far!

BPL estimates of 30 or 25 per cent matter little. In absolute terms, the number of poor people is on the rise, and governments have shown no inclination to stem the tide

When PV Narasimha Rao jettisoned the Nehruvian model of economic development—with its emphasis on rigid central planning, state control over resources and bureaucratic control over allocations—one would expect a model that combines liberal economics, vigorous political debate and decentralized government. What we got was a programme shorn only of industrial licencing, craftily passed off as liberalization. The new policy imposed a crony capitalistic model, so ‘successful’ in the Asian tiger economies like South Korea, Thailand, Singapore, Taiwan and Malaysia—and of course China. The state essentially patronized industries with public resources, benefiting few, and national accounting racked up GDP gains. While this model transformed other countries, including China, into industrial powerhouses, deriving large portions of GDP from industry, with some very spectacular transformations—as in China, where a hugely expanded manufacturing base accounts for almost 52 per cent of GDP—results in India were industry stagnation, agriculture contraction and extreme growth in services.

Today the GDP profile of India resembles that of a post-industrial society—ironic in that India never really began industrializing. But ‘industrialists’, who managed broad acquisition of state-owned natural resources, long-term concessions and huge lines of credit from state-owned banks, prospered. It’s not said, but income inequality is now estimated closer to 0.50 than the official 0.32. The ultimate irony is that, instead of India becoming the destination of foreign capital, foreign financial capitals became the destination of Indian capital. While the cumulative foreign direct investment (FDI) from 2000 -12 was about $170 billion, rising as high as $34 billion in 2011, it almost halved month-to-month in 2012. Yet in the last five years, India has also seen an outflow of about $97 billion. So consider this: Mauritius alone accounted for 44 per cent of India’s FDI, and Singapore a further 9 per cent, suggesting that much of this FDI was actually not foreign, but just some money round-tripped back home.

Other round-tripping methods are even more ingenious. The Economic Times recently reported: ‘Despite a slowing world economy, India’s exports are booming. After growing 38 per cent in 2011, they are growing even faster this year—by 46.4 per cent in June, 81 per cent in July and 44 per cent in August. This beats even China hollow. Cynics say this is too good to be true. Earlier, crooked businessmen took black money abroad by under-invoicing exports. Could they be bringing back their black money as over-invoiced exports? Does this explain the export boom? Very possibly, according to a new report from three researchers at Kotak Securities. They looked at export data from company reports of the BSE 500 (the top 500 companies of the BSE) and compared these with official data for 2010–11. For engineering exports, official data showed a huge increase of $30 billion, but engineering companies of the BSE 500 showed an export increase of only $1.38 billion. Who accounted for the balance of over $28 billion? Minor companies? Ghost companies? Large private companies owned by big businessmen but not listed on the stock exchanges?’

The irony is instead of India becoming the destination of foreign capital, foreign financial capitals became the destination of Indian capital

Clearly, more money flows out than in, and sometimes it returns as tax-exempt imports and FDI routed from Mauritius. According to Global Financial Integrity (GFI), illicit capital exports from India amounted to $123 billion from 2001–2010: money earned through crime, corruption and tax evasion.

Add all this together—the illicit capital export, under-invoicing, fake purchases of overseas assets and companies, retention of export revenues and the purchase of gold ($69 billion last year)—and you get a pretty clear picture: India is now a major exporter of capital. The inability to attract a good part of this—or even some of it—back as FDI, as China does, hints the growing unattractiveness of the Indian economy to Indians themselves. It is a long-cherished myth that multinational corporations (MNCs) are the major sources of FDI. In fact, home supplies the bulk. Indian businessmen are voting with their feet, stashing their wealth overseas. People like Ratan Tata make no bones about disgust for “silly taxes”, which make investment so problematic in India.  And  do you think the PM, who favours the Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry (CII/FICCI), has done anything about it? No. He dithers, like he does.

As if this wasn’t bad enough, nationalized banks are piling up non-performing assets (NPA). The top 10 corporate debtors owe Rs 63,1024.7 crore—that is, `6 lakh crore plus. Narendra Modi’s favourite business houses, Adani, Essar and Reliance Anil Dhirubhai Ambani Group (ADAG) owe the banks Rs 81,122 crore, Rs 98,412.8 crore and Rs 113,545.9 crore, respectively. No wonder they root so loudly for him. The business houses close to the Congress are no slouches either: GMR, GVK, JSW and Lanco owe Rs 40,824.9 crore, Rs 25,264.0 crore, Rs 415,750 crore and Rs 39,034.0 crore, respectively; London-based Vedanta owes Rs 99,610.8 crore; Formula I sponsor and Mayawati friend Jaypee owes Rs 63,654.1 crore. If the past is the norm, this will only increase. The connections between these people and the sheer size of their debts ensure that they will not go under, just roll over. In simple words, more money will be lent so that old loans can be adjusted. This is the stuff successful entrepreneurship is made of in this country: what you make is not relevant; how much you make off with is what counts.

It is a truism that growth cannot happen without investment, but it might still do to dwell on some simple economic ratios. First, the gross-savings-to-GDP ratio—gross savings is the sum of voluntary and involuntary savings or, if an economist has to describe it, gross national income less total consumption, plus net transfers—has fallen from 37 per cent to 34 per cent in the past three years, seriously impairing our national ability to invest. China’s gross savings/GDP ratio has remained a steady 53 per cent.

The next ratio to watch is the tax-to-GDP ratio. The government’s main business is to collect revenues, mostly as taxes, to spend on people’s well-being. India’s tax/GDP ratio of 16 per cent is among the lowest for a major economy. Despite 2010-–11’s robust tax collection increase, central collection accounts for just about 10 per cent of GDP. Together with state collections, government tax revenues account for only 16 per cent of GDP. That compares very poorly with tax/GDP ratios of developed nations. For instance, UK’s tax/GDP ratio is 34.3 per cent, Germany’s 37 per cent, and about 24 per cent for US. China collects just over 21 per cent. India needs to urgently pursue taxation regime reforms by widening the net, to bring in more people and businesses and reduce evasions. Last year, the finance ministry actually sent out circulars seeking suggestions to reduce the incidence of taxes. I replied that the government should seek suggestions for how to increase tax collections. I never heard back. Tax evasion is a trend in illicit exports of capital. The government doesn’t seem to mind.

Third, and probably most important, is the investment/GDP ratio. The finance ministry’s self-extolling web page quotes 37.6 per cent. It neglects to mention that this is a full 11 per cent behind China’s ratio, and even less than Vietnam’s. In fact, the investment/GDP ratio for all developing Asia is 42.14 per cent. This has risen by just about one per cent in the past half-decade.

The relationships between these ratios are self-evident: without savings you cannot make investments; without more taxes you cannot increase savings, beyond a point; without more investments you cannot create enough jobs. At last count the Indian workforce is growing by 12 million persons each year. In 2000 India had jobs for 396.76 million in the formal and informal sectors. This rose to 457.46 in 2006—not an inconsiderable achievement. The catch is that the formal sector’s growth was 54.12–62.57 million, while the informal sector’s was 342.64–394.9 million. In other words, for every formal job, more than six were added to the informal sector. This clearly suggests that the informal sector, as the much bigger employer—--at least in the short- to medium-term—needs to be supported and protected.

The recommended definition of ‘the informal sector’ is: All unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than ten workers.

And ‘informal workers’:

[T]hose working in the informal sector or households, excluding regular workers with social security benefits provided by the employers and the workers in the formal sector without any employment and social security benefits provided by the employers.

In this informal sector, retail alone employs about 55 million. Most of these people would prefer jobs in the industrial sector, but are forced to work retail because India has refused to industrialize by preserving policy relics inimical to such development.

Now what does this government do? It touts FDI in retail as its major achievement. That neo-Luddites like Mayawati and Mulayam Singh could be co-opted to support a resolution favouring retail could be considered a major achievement, given that we are expected to believe the Central Bureau of Investigation (CBI) functions as an independent agency. But that is not the issue here. Manmohan Singh said ten years ago, when he was opposition leader in the Upper House, that he opposed FDI in retail, as it displaced more workers than it created jobs for. The BJP-led government was then for the entry of Walmart and others. Those of us who thought like Singh did and believed big box retail should only be allowed in gradually—as in China and other similarly-placed countries—applauded his sagacity and foresight. Typically, when the roles were reversed, the Congress and BJP exchanged positions.

Until midyear, India ran up a trade deficit of $104.65 billion. While much of this sum can be attributed to oil prices and US and EU slowdowns, along with general global frustration, the predicament with China is largely self-inflicted, with a huge imbalance in China’s favour. For every dollar’s worth of exports to China, India imports three, stacking a deficit of up to $38 billion as of March 2013, about two per cent of GDP. China now accounts for almost a quarter of India’s total trade deficit, and over half if oil is excluded. Another way to view the wound is to realize that this $38 billion trade imbalance is almost as large as a third of our fiscal deficit! Given this, the government’s big reform idea is to allow large monopsonic buyers and giant retailers like Walmart, Tesco and Carrefour in, without caveats to curb imports from China, when more than half their manufactured goods are sourced from Chinese sweatshops? Nick Robbins, referring to the East India Company, wrote: “By controlling both ends of the chain, the company could buy cheap and sell dear.” Here, it’s profits for Americans, jobs for Chinese.

The best thing we can say about 2013, from the nation’s point of view, is that it is ending. 



- The International Monetary Fund (IMF) has cut India’s growth outlook for 2013-14 to 5.6 per cent from 5.8 per cent.

- Accommodative RBI policy is what is needed over time to help support the growth.

- Despite a deficit of 8 per cent in south-west rainfall during 2012-13 compared to its long period average (LPA), agriculture’s contribution to GDP growth is likely to be around 1.8 per cent.

- If the country would like to come back on track to earlier growth rates, the expenditure on infrastructure—both from the government and private parties— should substantially increase in the coming years.

- For the last 10 years India has emerged as one of the most attractive destinations for American and European retailers despite FDI restrictions. The momentum is expected to grow in 2014.

Escalated fiscal troubles make 2013 a year best left behind
Mohan Guruswamy Delhi 

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This story is from print issue of HardNews