F E A T U R E S

Poverty Haunts as Corporate India goes Global
Gobind Thukral

Economists for years prescribed a good repeated doze of foreign direct investments [FDI], both in industry and capital market. This was considered a panacea for the economic ills. It would take care of poverty, they stated in unison. Those who warned against uncontrolled FDI flows were termed as routine gloomy theorists and even anti national. As 35 per cent of world’s poor or 28 per cent of India’s own population struggle to survive, we are told by the same set of economists that Indians are investing abroad almost at the level what the country is receiving as FDI.

India's foreign currency reserves now exceed 160 billion US dollars or Rs 8,000 billion and with a pro-liberalisation United Progressive Alliance government relaxing norms for Indian companies acquiring hard currency for investments abroad, the quantum of money that is expected to be invested by India corporate sector world over is expected to exceed 8 billion dollars or nearly Rs 400 billion during 2006 alone. A little more than the same amount is estimated to flow to India during the same period as investments in stocks and shares by foreign institutional investors.  And yet there are dangers if India liberalised its capital markets rapidly, it could expose itself to the kind of volatility, which led to downturn and instability in Latin America. Much of the volatility in the 1990s in Latin America was related to capital markets instability. The poor took the brunt of the meltdown. It is, therefore, necessary India avoids the kind of extremes.

It is also considered signs of the times as India drives to the status of a major economic power. For the first time since independence, Indian economy is growing at an average of 8 percent a year and four years in a row, making it one of the fastest in the world. If we are able to boost the sluggish growth of agriculture though a booster doze of public and private investment in the farm sector, India could cross 10 per cent. At present annual growth in agriculture does not go beyond 2 per cent. Manufacturing industry and the services sector have been annually expanding at 10 percent or faster.

It is taken as guaranteed that no major foreign investor can afford to ignore India. It is a tax heaven and profits soar here compared to many other countries, besides rate of interests available to foreign money is many times more than in the west and North America. Yet as many economists assert that investment flows from foreign as well as Indian firms would have gone up considerably if India had improved infra structure like roads, railways, airports and added modern well equipped sea ports and quality supply of electricity. Closer home in Punjab and Haryana we know for sure that erratic supply of electricity has not only impeded industrial growth, but also hampered agriculture production in a big way. If electricity shortages come down, if power utilities are good at their job and if the overall quality of public services is improved, much more progress is indeed possible.

Over the coming decade or so, India needs to invest at least 150 billion dollars for improving its infrastructure and a similar amount on retail ventures if the economy is to continue to grow at 8 percent each year. There has been much talk about railway freight corridors connecting metropolitan cities, mega power plants, six-lane highways and modern airports, but India has a long way to go before these projects get suitably implemented.

Some economic analysts assert that Indian firms are investing more outside the country than ever before as their competitive entrepreneurship is being recognised internationally. For instance, the Tata group recently put in a bid to acquire the Anglo-Dutch steel major Corus. And liquor baron Vijay Mallya has ambitions of controlling 10 percent of the world's alcohol business. Indian entrepreneurs today have global strategies to choose most favourable manufacturing locations in order to decrease costs and integrate technologies.

India's IT industry is now internationally recognised.  United Nations Conference on Trade and Development has estimated that India's share in world trade in IT products and services had grown impressively from almost nothing in 1995 to around 16 percent in 2004. This trend is expected to grow fast. Indian IT with more surpluses in their kitty is now investing in the West as well as in China and Japan.

Another reason for this outward movement is that 60 percent of world trade is intra-firm trade and it is necessary that Indian companies wishing to ensure their exports grow needs to acquire firms abroad. Through mergers and acquisitions, exporters ensure access to distribution channels as well as the latest technologies. This explains why companies in industries like steel, automotive components, pharmaceuticals and information technology are moving abroad.  They wish take advantage of globalisation and the growth opportunities. There are funds available in the international money market at reasonable rates to fund this outward movement.

Agricultural productivity is a major constraint for the Indian economy.  As one study points out the top half of the Indian population own 92 percent of the country's wealth while the bottom half own only 8 per cent.  The comparable figures for China are 86 percent and 14 percent respectively. The top 10 percent of India's population own 53 percent of national wealth against 41 percent in the case of China.  Economic growth has not resulted in the reduction in inequality or regional imbalances. More than one out of four people in India live below the international-defined poverty line of earning Rs 50 per day.

Nobel-prize winning US economist Professor Joseph Stiglitz feels that the external liberalisation has exposed India to inequalities of the global trading system. The large number of debt-ridden cotton farmers taking their lives across India is clearly related to the American agricultural subsidies that depress prices and make cotton farmers elsewhere worse off, India could face an economic meltdown of the kind experienced by Brazil and Argentina in the past leading to political and social instability, as dangers posed by "excessive" liberalisation of capital markets.

We all know the disturbing part of India's growth story. It has increased regional imbalance and poverty. Much of the northern and the eastern parts have been lagging behind the west and the south. This is already causing serious political problems.

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Forthcoming Budget and the Fiscal Deficit
Vinod Anand

IT is customary to wish everyone a very happy and prosperous New Year, but what about wishing India a very happy and prosperous Financial New Year 2007-08? Let us do so not only through wishes, but also with a few practical suggestions, which, if implemented effectively and with vigour, will surely bring in a new era of an economic and social development.

What India needs today is a strong will power, firstly in short listing a variety of so-called ‘non-friendly’ barriers that hamper the smooth functioning of the government machinery and its channels, and then in finding out the optimal ways to eliminate them, keeping in mind, of course, the various exogenous variables and assumptions which have taken strong roots.  Once this is done, there will be a genesis of growth and equity- oriented annual budgets in the country.

Let us focus on the Fiscal Deficit. In a recent media report, the Finance Minister has given an assurance that the Fiscal Deficit will be contained within the limit of 3 percent of the GDP. This is an encouraging assurance, but then how exactly it will be done has not yet been elaborated. If we recapitulate the Fiscal Deficit scenario in the recent past, it has been not been encouraging. The major factors leading to high Fiscal Deficit are increasing budget deficits, increasing borrowings and public debt, and also accumulated liabilities. In order to restrict the Fiscal Deficit to the desirable limits, the Government of India had passed the Fiscal Regulation and Budgetary Management (FR& BM) Act 2003. The Kelkar Task Force was also constituted to find out ways and means to maintain Fiscal Discipline and manage the Fiscal Deficit within the given limits. In fact, the Finance Ministry is required to submit three statements every year. These are:

• Macroeconomic Framework

• Medium Term Fiscal Policy

• Fiscal Policy Strategy

Whether these statements are regularly submitted or not, is not absolutely transparent!

Then how can Fiscal Discipline be maintained?

A few years back, the Kelkar Task Force had recommended that

• tax revenues have to be increased essentially via service taxes;

• non-plan expenditure has to be restricted; and

• income tax slabs have to be compacted and exemptions to be removed.

To what extent these recommendations have been met is once again not very clear to the general public!

Forgetting about these government mechanisms to bring about Fiscal Discipline, let us suggest a number of ways, which can possibly help the Finance Minister to live up to our expectations in terms of ‘optimal budgets’:

1. Budget deficits have to be reduced essentially by a) reducing non-plan and ‘unwanted’ government expenditure, b) increasing the tax-GDP ratio, and c) eliminating/ doing away with subsidies which get lost in the system, and do not in fact reach the people for whom they are meant. Non-plan and ‘unwanted’ government expenditure does not always contribute to GDP. There is no dearth of examples to substantiate this statement. In India the tax-GDP ratio varies between 9 to 10 per cent as compared to around 18 per cent in China, 11 per cent in Pakistan, 26 per cent in the United States, and 37 per cent in Britain. In order to push up this ratio, we have to see that

• the so called ‘undeserving’ super rich people are heavily taxed;

• the income tax net has to widened to include the large/rich households falling within the agricultural sector;

• income tax regulations should be efficiently implemented so that tax evasion is completely eliminated.

2. Public debt has to be reduced. In fact, public debt is the result of actions undertaken with other intents by more than one person.

3. There should be severe ban on the creation of ‘unearned’ income resulting essentially from ‘rent-seeking’ and ‘directly unproductive profit-seeking’ [DUPE} activities, and are essentially initiated by those who wield money or muscle power, of course with the support and connivance of the so called political entrepreneurs and their allies called the bureaucrats. It is really amazing to see that around 40 per cent of the GDP gets lost because of such ‘nefarious’ activities.

4. Public sector should act like a venture capitalist and not as an inefficient and loss-making sector. It should start a project, take it to optimal heights, hand it over to the private sector, and go on to other projects. It should support the private sector, and should positively intervene when the market system fails, and should in no way depend on it. It should act like a protector rather than a predator. It is pertinent here to mention that a large number of public sector undertakings in the country have been sold to the private sector basically to amass huge reserves. One may ask, where exactly this sum has gone?

These suggestions are subject to certain basic assumptions, which are briefly mentioned below:

1. The Government Sector, the Public Sector, and the Political Sector in the country have to be completely delinked from each other. They have their own independent identities, and should not be inter-mixed or inter-mingled, as they have been for long time. We must know that their roles are entirely different from each other, and hence, they have to separate from each other.

2. We have an abundance of a large number of politicians (both ruling and non-ruling) in the country who just think of their own ‘survival’ and mostly talk of the next election. In fact, we should have as many ‘statesmen’ as possible that think of the country’s survival and talk of the next generation.

3. Budgetary Policy should be treated as a continuum to meet both the short run and the long run objectives of economic and social stability. It should not be taken as a political gimmick of the ruling parties to meet their political motives, or to strengthen their vote banks.

The Last Word

Majority of the household (even the poor) in India effectively manage their households basically because they a) live within their means with self respect, b) manage their expenditures as per their basic requirements, c) do their best to avoid non-plan expenditure, d) take family decisions that are ‘Pareto Optimal’ for the well being of the family as a whole. We know that there are some basic differences between the Household Budgets and the Government Budgets, but the basics are the same. If the households can manage their daily/monthly/ annual budgets, why can’t the Government do it? Let us hope that apart from having an optimal budget, the Finance Minister will be able to effectively check income and expenditure against the given budgets so that progress towards the set of objectives are measured and remedial action taken if necessary.

The author is presently placed at the National University of Lesotho (Southern Africa):
E-mail: vinodkanand2002@yahoo.co.uk

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