Speaking at a leadership summit last week, Prime Minister Narendra Modi was tentative about his government’s economic performance. He said there is no one right way to make economic progress. Results could come in many ways: some of which may not be conventional but no less effective.
He was much more forthright in his claims while addressing the Asean Business and Investment Summit in Malaysia in November 2015. He told the Asean business leaders that since he had assumed office, “GDP growth is up and inflation is down, foreign investment is up and the current account deficit is down, tax revenues are up and interest rates are down, the fiscal deficit is down and the rupee is stable.” These are at best colourful interpretations of data.
Fiscal deficit and low inflation are directly related to a collapse in oil and commodity prices around the world. The fall in imports has brought down the current account deficit (the difference between imports and exports) and a lower oil bill has enabled the government to save almost '90,000 crore by raising excise duties on petroleum products. Lower inflation has also been imported. The cost of energy would have been much higher.
The high growth in the official GDP is also very controversial and considered to be an over estimate. Its methodology has been questioned. R. Nagaraj, a reputed economist, said in an article in the Economic & Political Weekly that the bloating of financial services may be on account of the inclusion of bogus companies in calculating GDP and called upon the Central Statistics Office to reveal its database for public scrutiny. Other critics complain that the robust picture of the economy shown by GDP figures is not matched by other macro-economic indicators such as bank credit growth, rural demand and factory output.
Foreign investment has also gone down. The Reserve Bank of India bulletin reveals that though foreign direct investment (FDI) has increased by 8 per cent to $17.1 billion during six months from April to September, 2015, over the previous year, foreign institutional investment has turned negative — $8.8 billion compared to an inflow of $22.2 billion for the previous year. This leaves a net inflow this year of just $8.3 billion compared to $38 billion last year.
Perhaps, this is why the government eased FDI norms in 15 sectors to attract investment. But these are unlikely to have yield the desired result. Foreign investment is being attracted into areas where it is not needed and it will do nothing to spur manufacturing growth, unlike what was announced. The measures announced so far rely on marketing hype rather than a well-thought out industrial policy.
The changes announced seem to be aimed at satisfying the demands of foreign investors rather than being tailored to our needs. The areas of concern include broadcasting, construction, air transport and plantations. In broadcasting, the government proposals imply that our existing TV channels, especially news channels, are allowed to sell out to foreign networks.
Construction is a little more complicated. Prices of property rose nearly five times since foreign investment began to flow into the sector in 2005. But the builders are in a fix since at these prices they can no longer sell. The easier entry and exit norms for foreign investors have been introduced to provide developers who are stuck with unsold stocks of built up space a way out of bad investment. Nor do we need foreign investment for plantations. Foreign investment would however be used to buy land on which these stand.
Naturally, the question arises whether we really need the FDI that the government’s new announcement advocates, because there is nothing about investments in infrastructure or industry: the two priority areas if the country is to create a manufacturing base and jobs. So, it seems that the new policy is not geared towards what is needed by the country, but towards the easy money that foreign investors want.
An important reason for dependence on FDI is that there just hasn’t been enough Indian investment. Domestic investment has consistently declined since it peaked at '17.4 trillion in 2010, after the Congress-led United Progressive Alliance began its second term. Since then, domestic investment has declined every year. Despite Modi government’s promise to revive the economy, domestic investment fell further to '4 trillion in 2014 and, still further, in the first eight months of this year, the reason being that corporate profits were down, there was plenty of idle capacity and infrastructural boost did not take place.
One way out would be to revive public sector investment especially in coal, mining and power, but this is was not a priority for the government.
Mr Modi’s slogan “Make in India” seems like an empty boast. It seems the idea was to hand over attractive sectors of the economy to foreign investors rather than build an industrial base that could at least serve the Indian consumer. There is no reason why electronic and consumer goods cannot be made here for the Indian market and for export. We are already one of the world’s leading producers in cars and pharmaceuticals. Other sectors where this success can be replicated need to be identified and we have to build around that.
Public sector banks are in a mess mainly because they have to give loans to politically connected businessmen who then don’t repay them. This is the main reason for these banks being saddled with bad debts. It would have been much more useful to apply pressure on the defaulters to clean up the public banks’ books, rather than encourage more FDI in private banks which have no such constraints.
The writer is a Mumbai-based freelance journalist
