Twenty-two years after Manmohan Singh announced his liberalisation policy , the Indian economy appears to have come back to square one. Attempting to negate the chilling similarities with the situation in 1991, he recently said, “There is no question of going back to 1991. At that time foreign exchange in India was a fixed rate. Now it is linked to market. We only correct the volatility of the rupee.”
What he left unsaid was the fact that in July 1991 there was a two-stage devaluation of the rupee by over 20%. This came in the background of a rupee depreciation of 13% in 1988, 10% in 1989 and 8% in 1990. Is this any different from the free fall of the rupee that we are witnessing today?
Justifying the reform process in his budget speech of 1991-92 saying that, “There is no time to lose”, he churned out the precarious financial position of the government then. A current account deficit (CAD) of 2.5% of the GDP in 1990-91 was unacceptable then. Today the CAD is 4.8% of our GDP. He then said, “The debt service burden is estimated at about 21% of the current account receipts”. According to the 2013-14 budget papers, the comparable figure is 35.09%. The foreign exchange reserves, at that point of time, were estimated to be sufficient to cover imports for a period of six weeks. Today it is slightly better with our reserves able to fund imports for around six months, the lowest among BRIC countries, where others have reserves sufficient for nearly two years. Another concern in 1991 was runaway inflation. He then said, “The major worrisome feature of the inflation in 1990-91 was that it was concentrated in essential commodities”. Is there any difference today?
The so-called ‘corrective’ then applied by Manmohan Singh of taking IMF loans with strict conditionalities and opening up various sectors for foreign investments — “decided to liberalise the policy regime for direct foreign investment” — came with a warning, “There can be no adjustment without paying a price. The people must be prepared to make necessary sacrifices to preserve our economic independence and restore the health of our economy”. Does this not sound very similar to today?
Is the government preparing the ground for seeking a bailout package from the IMF with the accompanying conditionalities? We have seen the impact of such bailout packages in the countries of the European Union where the complement of ‘austerity measures’ are imposing unbearable burdens on an already suffering people leading to large-scale protests.
But then is there any alternative policy trajectory? Yes, there is. The Economic Survey 2012-13 informs that the final consumption in the economy declined from an average annual growth of 8% between 2009 and 2012 to around 4.4%. This, in a large measure, contributed to the current economic slowdown. Clearly, there is a contraction of domestic demand in the economy. This is not surprising given the relentless rate of inflation and the substantial cuts in subsidies meant for the poor in the name of fiscal consolidation.
Thus the current strategy of concentrating on increasing investment, primarily by foreign capital cannot turbo-start the economy. Recollect that despite the recent urging by the PM and finance minister, they could not persuade the CEOs of the public sector enterprises to invest their over a lakh of crores of rupees of cash surpluses. Where is the market that can consume what they produce from such investments? Global trade is shrinking, consequently Indian exports are tumbling.
By merely making available funds or opening up further avenues for foreign investment without increasing domestic demand will only channel these funds into speculative activities rather than productive investments. This is evident from the recent experience of astronomically high prices of real estate and gold in our country. The rich are parking their money in such avenues that are called ‘valuables’, which according to the Economic Survey 2012-13 , “include works of art, precious metals and jewellery carved out of such metals and stones”. At current prices, “investment in the form of valuables registered nearly a 4.5 fold increase between 2007-12…”. “Even at constant prices, the share of valuables increased from 2.9 to 6.2% of the total investment in the country between 2007-12”.
The prime minister has recently said, “We seem to be investing a lot in unproductive assets”. Yet, instead of correcting the factors contributing to this, he pursues a strategy of greater FDI inflows. This will only give greater access to foreign and domestic capital to maximise profits, in a situation of global economic slowdown, in our country enriching the rich and impoverishing the poor — a strategy that will further shrink domestic demand in our economy and further widen the hiatus between the two Indias. The finance minister, in his latest budget speech has, in fact, said, “If I may be frank, foreign investment is an imperative.”
During the last three years at least, the tax concessions provided to the corporates and the rich amount, according to budget papers, to over R5 lakh crore every year. Despite such ‘incentives’, the overall growth of industrial production was minus 1.6% in May. If, instead, this legitimate tax had been collected and used for public investments to build our much-needed infrastructure, it would have generated large-scale employment. This, in turn, would increase the purchasing power of the people and vastly enlarge domestic demand. This would lay the basis for a turnaround in manufacturing and industrial production and put the economy on a more sustainable and relatively pro-people growth trajectory. This is the alternative.
Sitaram Yechury is CPI(M) Politburo member and Rajya Sabha MP
The views expressed by the author are personal