India’s crisis has been in the making for a very long time now. Our GDP has acquired the profile of a post-industrial economy, which is excessively skewed towards the services 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. It just 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 DGTD, little happened. Everything else, including the “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 largely funded by accumulating NPAs at home. According to a recent report released by UK Trade and Industry (UKTI), the United States remained the largest source of inward investment, 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 FDI, 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 the primitiveness of the economy. China’s economy is thrice as big as India’s and it is twice as integrated into the world economy than us. 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 headloads and on bicycle pillions. So bombing a bridge or a railway 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. The NPA people would have wanted relief and when they are breaking biscuit 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 longer-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 the private sector 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 public sector undertakings 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 a huge Rs 330,626 crores, with an additional Rs 881,774 crores as long-term loans, almost all of it from government financial institutions and from the Central government directly.
These companies together have a market capitalisation of Rs 1,106,657 crores. Of these CPSUs, 202 were profitable, registering a cumulative profit of Rs 153,907 crores, and 124 had losses amounting to Rs 49,612 crores. They also employ 15.59 lakh workers and managers. This investment generates a turnover of Rs 14,13,992 crores, or about 10 per cent of our GDP.
The 41 PSUs in three sectors — oil, coal and power — together provided Rs 100,369 crores, or 65.22 per cent, of PSUs’ profits. If you keep these three sectors aside, the rest of the PSUs together earned about Rs 1,000 crores. This is a sorry state of affairs.
Soon after he assumed office, Prime Minister Narendra Modi indicated plans to do more with state-controlled companies than use them as piggy banks to break into 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 that 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. Whatever he has been discussing with himself, one thing he has not really applied his mind to. This is the flight of capital from India. According to Global Financial Integrity, a Washington DC-based research organisation, the total illicit financial outflows from India between 2003 and 2012 were $439 billion — $94.8 billion of that in 2012 alone. There is no sign of this abating. Since he is constantly hobnobbing with the very people who tend to stash their money overseas, he must persuade them to invest more in India. As the overseas Chinese and resident Chinese with overseas stashes have done in that country. For without substantially industrialising and even exporting, India will languish with a vast majority of underemployed, undernourished and underskilled, and a huge burden on the nation.
The first task for our leadership now is to attract capital, domestic and overseas, to invest in India. To attract this capital in significant numbers, we might have to revisit some distorted and hence abandoned ideas like special economic and export zones. We must also rethink arbitrary and ill-conceived limitations on foreign capital in all sectors. We must learn a lesson from our automobile sector. Just as we must revisit some new happenings such as the furtive entry of giant retailers like Amazon and Walmart with brick and mortar formats along with e-commerce, that will drive out millions in day-to-day small retail.
Foreigners come to India with their agendas and immediate interests. While encouraging them, we also have to look after our own interests. That requires a clear head, which seems to be the problem these days....