With the global economy showing no signs of recovery and with the Chinese economy turning out to be weaker than previously expected, Prime Minister Narendra Modi had a well-publicised meeting of the usual suspects to discuss lifting the economy out of the morass it finds itself in. He had a bevy of top private sector honchos, some sarkari economists, some finance ministry bureaucrats and a handful of public sector undertaking bosses and the Reserve Bank of India governor. From what has been reported, the meeting went the usual way.
Such meetings usually end up seeking magic wand solutions and the magic wand most in demand was an interest rate cut. To be sure, some didn’t just want tax cuts, but more exemptions as well, ostensibly to make them more competitive. With some big holders of non-performing assets (NPAs) in attendance, this rate cut demand will soon be translated into reducing the debt burden by applying the reduced rates with retrospective effect. Businessmen will be businessmen and success to them comes by not passing up any opportunity for a little gain. But there are no magic wand solutions to our predicament.
India’s crisis has been in the making for a very long time now. Our gross domestic product has acquired the profile of a post-industrial economy, which is excessively skewed towards the service sector, in turn giving our economy a post-industrial look despite not having industrialised in any significant way. Fifty-two per cent of China’s GDP comes from industry, while it is exactly half that for India. Agriculture employs 58 per cent of our workforce and now contributes about 15 per cent of our GDP.
In absolute terms, the number of people in agriculture has doubled since the advent of reforms in 1991. This means that in relative terms more people got poorer. In other words, as the supply of labour kept increasing, the rise in wages did not keep pace with the cost of living, and hence a critical and most essential expansion of the market did not take place.
This is not to suggest that the reform process was wrong. On the other hand, the reform process never really got underway, as beyond scrapping the Industrial Licensing Act of 1951 and dismantling the Directorate General of Trade and Development (DGTD), little happened. Everything else, including “social control” of banking, remained as it is. Instead of patronage being sold at Udyog Bhavan, the place where it is dispensed is now in North Block, which is closer to South Block than Udyog Bhavan ever was.
All those who became spectacularly rich after 1991 mostly became so due to public assets, whether under the ground or in the skies, being allocated to them at ridiculously low rates. The logic that these surpluses will be invested back in the economy didn’t work, because capital flows to where it is easier deployed, meaning abroad. With a few exceptions, these overseas expansions have been funded largely by accumulating NPAs at home. According to a recent report released by the UK Trade & Investment (UKTI), the US remained the largest source of inward investment into the UK, with a total of 564 projects in 2014-15, followed by France (124 projects) and India (122 projects). That year the UK attracted over £1 billion as foreign direct investment, giving you some idea about the scale of investment from India.
That India was not significantly buffeted by the crisis of 2008 and seems equally well insulated from the current crisis does not suggest strength, but primitiveness of the economy. China’s economy is thrice as big as India’s and is twice as integrated into the world economy than ours. China’s foreign trade to GDP ratio is now over 70 per cent and twice as much as ours. Then again China has a much higher value addition factor, and hence when the sea rolls harder it needs to absorb more shock. So we need not be sanguine about our situation.
When the Americans were bombing Vietnam’s logistical system, they found that it had little effect as most of the war supplies from the north to the south went by head loads and on bicycle pillions. So bombing a bridge or a railroad junction didn’t do much to stop the Vietnamese war effort. Our economy is in a similar situation. If we were as dependent as China is on exports, we too would have been buffeted by the outside world. But these macro issues would not have been discussed at the meeting. The NPA people would have wanted relief and when they are breaking biscuits with the Prime Minister in his premises, the bankers present would have registered the signals.
Not surprisingly, India doesn’t face anywhere as near an immediate crisis as China does. Our crises are more systemic in nature and need a long-term perspective. Our first great challenge is to create 12 million new jobs each year to make the demographic dividend an economic dividend. We are nowhere near that. To be able to create millions of more jobs, we need to make huge capital investments. This can only come from the state. Private capital is locked into an April 1 to March 31 perspective and so to expect them to take a long-term view of investment is unreasonable. The question now is whether there was any advice forthcoming from the participants on how the government should go about improving its investment to GDP ratio, which in turn depends on the savings to GDP ratio?
The state of the Central government’s PSUs is pathetic. The private sector manages to hold its head above water by better management of the environment and its resources, and also by constantly rolling over debt. But it is the public sector that is a bigger part of our economy. In 2014, the total capital employed in the 383 CPSUs was Rs 330,626 crore, with an additional Rs 881,774 crore as long-term loans, almost all of it from government financial institutions and the Central government directly.
These companies together have a market capitalisation of Rs 1,106,657 crore. Of these CPSUs, 202 were profitable, registering a cumulative profit of Rs 153,907 crore, and 124 had losses amounting to Rs 49,612 crore. They also employ 15.59 lakh workers and managers. This investment generates a turnover of Rs 14,13,992 crore or about 10 per cent of our GDP. The 41 PSUs in the oil, coal and power sectors provided Rs 100,369 crore or 65.22 per cent of PSU profits. If you keep these three sectors aside, the rest of the PSUs earned about Rs 1,000 crore. This is a sorry state of affairs.
Soon after he assumed office, Mr Modi indicated plans to do more with state-controlled companies than use them as piggy banks whenever the government needed a revenue boost. He said he had plans to sell off the traditional laggards and to fix the ones with potential. He also signalled the government had plans to privatise state-run firms and unfetter them from the clutches of the middle bureaucracy of deputy and joint secretaries. There is no sign of any of this happening.
One thing I am fairly certain they would not have discussed is the flight of capital from India. According to Global Financial Integrity, a Washington DC-based research organisation, the total illicit financial outflow from India between 2003 and 2012 was $439 billion — $94.8 billion of that in 2012 alone. There is no sign of this abating. Since so many of the players in this game had come together under his tent, this would have been a good time for the PM to broach the subject of reinvesting some of that capital in India.
The writer, a policy analyst studying economic and security issues, held senior positions in government and industry.
He also specialises in the Chinese economy.
