The flurry of initiatives announced by the government this week suggests that it is more concerned about foreign capital inflows that anything else.
Whether it is the Reserve Bank’s decision to allow foreigners to invest more in government bonds ($5 billion more), or allowing Indian companies to borrow more from abroad to retire costly rupee debts ($10 billion), or Thursday’s initiatives on GAAR and the Vodafone retrospective tax, Manmohan Singh’s presumption seems to be that external perceptions about India are more important than internal ones.
This prioritisation of action assumes three things:
One, that pushing the value of the rupee back up is the first priority. Actually no, for a weak rupee helps exports, and brings in foreign investment on its own.
Two, market sentiment is more important than overall domestic business confidence. Wrong again. If business confidence and corporate profitability improve, the market will revive anyway.
Three, fixing the external deficit (current account deficit) is more important than fixing the internal one (the fiscal deficit). Not quite. If the government consumes less, imports will automatically come down.
To be sure, all these external goals are important, but they are not the primary challenges. The PMO’s actions run counter to what the PM himself confessed on-board his flight from the G-20 summit in Brazil back to Delhi earlier this week.
He said: “I think the events of the last couple of days convince me more than ever before that there are no international solutions to the problems of a country of India’s size, of India’s diversity. So it is obligatory on us…. to restore the momentum of growth that this country is capable of and which this country needs.” (Read the full transcript here)
What is common to the recent decisions is that they have no political price to pay. Put another way, these are the easy decisions to take. The same goes for the petrol price cut. The UPA missed another political opportunity to time the diesel price increases with a petrol price cut, to take the sting out of the decision.
Maybe, in the coming days the PM and his bureaucrats will start taking the bigger, and more important, decisions, but so far they have shown no political savvy in what they have done.
To get back on track, the PM needs to recall his words spoken on-board, that there are “no international solutions” to our problems. In 1991, when we had our last major crisis, capitalism was triumphant and the US was about to become the world’s only superpower. We could get external help.
In 2012, the entire world order has been up-ended. No one can really help us – except in self-interest. We have had to offer the IMF $10 billion to help Europe.
The world’s major powers are all consumed by their own problems. The top three democratic economies (the US, the European Union and Japan) are overloaded with debt and living well beyond their means. They have to cut down consumption to emerge stronger from all this. This means a slowdown for everybody.
The countries that are overloaded with dollars – China and the oil exporting nations – will also have to slow down. China will have to slow down because it is factory to the world, and the oil-exporters have to go easy because the global recession and the Chinese deceleration are reducing commodity demand worldwide.
This situation is tailor-made for a country like India – which is overly dependent on imported oil.
However, to benefit from it, we have to get other parts of our act right. The first thing we need to acknowledge is this: we are the primary cause of our own problems, not Europe or America. We have failed to carry forward the reforms of 1991-2004, with the UPA interpreting its 2004 and 2009 mandates are being anti-reform.
Our focus, as the PM himself agrees, has thus to be internal. As we mentioned before, these are some of the areas to start.
1) Quick implementation of the goods and services tax and a more radical direct taxes code.
2)Creation of a single agricultural market in India by abolishing all inter-state barriers to movement
3) A radical reshaping of the Centre-state fiscal relationship, with more resources and policy-making powers being shifted to the states
4) More flexible labour laws. No need to rush into a hire and fire policy, but we can begin by allowing industry to make more temporary hires and contractual employees
5) Complete abolition and detoxification of inspector-raj and unnecessary regulation that only increases corruption
6) Transparent land acquisition, mining and environment laws – laws that won’t make land and other costs prohibitive even while safeguarding the interests of farmers and the poor. Each state must be free to make its own modifications of such laws.
7) A strong push to urbanisation, including large investments in public services, and especially public transport financed by higher taxation of private vehicles.
8) A robust and radical disinvestment and privatisation programme to raise resources for investment in infrastructure and pay for subsidies to the poor.
9) Allowing domestic pension and provident funds to invest in stocks. This will make up for any shortfall in FII investments.
10) Last, we could do with a more liberalised foreign direct investment regime in sectors like insurance, banking, telecom, media, aviation, and retailing, among other sectors.
Note: we need to liberalise long-term direct investment in Indian projects first; portfolio investments are not a priority. We need hard money, not hot money.
India can escape the worst effects of the coming global slowdown if it fixes its internal problems rather than focusing on enticing foreigners to invest here. Reforms are important for us, not foreigners. Sure, foreign investment is nice to have, but it’s not a must-have for us.