July 1998 Edition
Since 1991, the Indian economy has been running under the mantra of "liberalization". While there has been almost unanimous approval amongst the more affluent sections of the population for liberating the consumer goods sector from the "License Raj" of the previous decades, external liberalization has been subject to far more scrutiny, and has generated considerable controversy and debate. The extent to which the economy should be decontrolled with respect to the international sector is not only of economic relevance but goes to the whole issue of national sovereignty and security.
External Liberalization
Whereas domestic industrialists and investors come under the purview of national laws - and are therefore subject to a modicum of democratic control - that can rarely be said of foriegn investors. Numerous case studies from the experience of other developing countries show that the dependance on foriegn capital has invariably led to sacrificing national policy goals in favor of the demands and conditions of international lending agencies and other powerful agents of international finance coporations like credit rating companies, analysts for banks and mutual funds, and representatives of insurance companies. The examples from Mexico, and now from South East Asia all show that even before rapid economic growth can begin to trickle down to the poorest sections of the economy - the economies end up in debt traps, and then even those sections of the population that had benefitted from the process of external liberalization go through increasing hardship.
External "Conditionalities", Cutting Import Tarriffs
As already mentioned, international lenders rarely lend without conditions. Pivotal to the issue of external liberalization has been the demand to lower import duties and this was one of the veiled "conditions" that the Congress Government of Mr Narasimha Rao accepted in 1991 when the IMF negotiated it's loan package for India. Although this step was taken under "duress", it was rationalized by the wealthiest sections of the Indian population as being necessary to introduce "competition" and "improve quality". The spurt in the range and availability of consumer goods that followed seemed to justify this measure.
But the masses whose incomes were being squeezed by limited employment opportunities and inflation were unimpressed by the new cars and refrigerators that were now available for purchase. And the increasing trade deficit also had it's detractors. Responding to this pressure in 1996, sections of the UF campaigned vigorously against the negative effects of such unbridled external liberalization.
But contrary to the UF's pre-election pledges, the UF Finance Minister, Mr Chidambaram showed no compunctions in accelerating the process of external liberalization by drastically lowering import barriers. Whereas Mr Manmohan Singh of the Congress had pleaded that he was lowering customs duties as he was bound by WTO conditions - Mr Chidambaram made no such apologies and went far beyond even what was required under the WTO regimen.
What had changed in a matter of five years is that a whole new class of businesses had emerged who had a vested interest in keeping import duties low. From international lobbyists for the big multi-nationals to their domestic partners and agents - there was a chorus of voices in favor of cheap imports. Once the import of capital goods and raw materials had been eased in 1991, several Indian manufacturers slowly became dependant on either imported parts or machinery. Others were importing kits and assembling them for domestic sale. And some were importing finished goods for resale in the domestic market. Paying high salaries to financial officers and managerial staff , and to advertising and marketing specialists - they could count on the support of Indian professionals fluent in English looking for upward mobility. This made up the new "Import Lobby".
For several years, local manufacturers had been complaining that the inverted duty structure favored imports over domestic value-addition because duties on finished goods were often less than duties on raw materials and components. Mr Chidambaram made things worse by lowering customs duties to the point where domestic excise duties and sales taxes exceeded corresponding import tarriffs. Thrilled by this unexpected windfall, the "Import Lobby" described the Chidambaram budget as a "dream budget". Unsurprisingly, this lead to a surge in imports that squeezed domestic producers and led to an industrial recession. Unmatched by a proportionate increase in exports, India's trade balance has steadily worsened. Unlike Mr Chidambaram's generosity towards foreign manufacturers - the richest trading nations have offered no such one-sided concessions to India's manufacturers, and Indian exporters continue to face all manner of tarriff and non-tarriff barriers that prevent even high quality exports from India recording any significant gains.
Squeezing the Public Sector, Reducing Social Spending
Another condition that international lenders often impose on developing nations is that they must stop supporting their public sector enterprises and allow private and external participation in key sectors of the economy. They also call for a reduction in social spending. These conditions are usually disguised as a matter of improved "efficiency" and controlling "unnecessary budget deficits". This means that budgetary support for investment in key areas such as mining, power generation, railways and telecommunication has to be drastically curtailed. Spending on affordable housing, health and education is also reduced. The "Import Lobby" is usually unperturbed by these cuts because they view these cuts as an opportunity to increase their imports. But the consequences for the rest of the population as a whole can be quite disastrous.
With the government refusing to invest in these critical areas, crippling shortages develop in vital aspects of the infrastructure. In India, even as sections of the upper middle class have relished the rapid growth in the consumer goods industry, all sections of the population have been highly frustrated with the state of the infrastructure in the country. Unaware of the naunces surounding the situation, many think that it is a problem of public sector inefficiency and join in the demands for delicensing and private participation in key sectors of the economy. And so the international dictum of "letting the private sector step in" is accepted at face value. But belying expectations, very little private investment actually materializes in these areas, and when it does, it comes at a heavy price.
International companies insist on all manner of tax breaks like extended tax holidays, subsidized land, and "counter-guarantees" before they invest. Even though such concessions go against the spirit of "free market economics" that the international lending agencies trumpet, these concessions are treated as inevitable. Costs escalate in spite of all these hidden concessions. For instance, all the power projects that are demanding counter guarantees will generate electricity at almost double the cost of a BHEL built plant in spite of various concessions that should have reduced the cost-basis of these projects.
Another borrowing condition is "open" and "transparent" bidding for infrastructure projects. On the surface, these terms do not seem at all objectionable. But in the implementation, it can turn out that these are just more code words favoring the MNCs. For instance, in the name of "openness" and "transparency", India's telecom sector was opened to international bidding. But the tender requirements were framed in a manner that no domestic company could ever win a contract without tying up with an international telecom giant. With the public clamoring for faster telephone connections - this crafty move drew little attention. But even after winning the licenses to provide new phone connections - most international companies stayed away. So the vast majority of the public's telephone requirements continue to be met by the Public Sector companies that are under-funded on the assumption that private industry will be picking up the slack.
In 1996, it appeared as if the UF was becoming aware of this situation, and some critics of the Congress rallied around it, hoping for change. In their 1996 election campaigns, sections of the UF argued vigorously for the re-invigoration of the public sector and pointed to how internationally successful public sector enterprises like BHEL and ONGC had been deliberately prevented from making new investments and bidding on new contracts. They exposed how public sector companies were being privatized at a fraction of their market value - and that the auctions were being deliberately rigged.
But, after taking office - the UF, rather than correct these policies, further aggravated the situation by cutting plan expenditures and squeezing social spending to the bone.
Liberalization, the BJP, and the Swadeshi Factor
The betrayal of the UF - the complicity of the UF with the Imports Lobby and powerful foreign commercial interests, set the ground for the emergence of the BJP as the leading party in the new Lok Sabha. One of the BJP's popular slogans was "Swadeshi". While some may argue that the BJP's popularity is solely based on it's Hindutva support base, in actual practice this also reflects the hope many Indians have placed in the Swadeshi Jagran Manch. This is especially true in the South where Hindutva does not cut much ice. Yet, the BJP has also promised to continue and accelerate the "liberalization" process.
Those who have watched the BJP's performance in Maharashtra and believe that "liberalization" and "Swadeshi" are inherently incompatible are naturally skeptical about the Swadeshi component of BJP's policies. As an example of their thinking, they point to the Enron case, where the Shiv-Sena/BJP government did a complete about-face by approving the project even after the Swadeshi Jagran Manch had strenuosly campaigned against it. Could the BJP be any different at the centre?
Since taking office, the BJP-led coalition has sent several mixed messages suggesting that there are different factions within the BJP who represent different interests. On the one hand, there are liberalizers who wish to continue the process set in motion by the previous governments, and on the other, there are those who either wish to give liberalization a nationalist face, or reverse it altogether.
Criticized by the Swadeshi Jagran Manch, one of the earlist decisions taken on behalf of the BJP-led coalition was a decision to further liberalize imports. Although, Commerce Minister Mr Hegde had been making brave noises about negotiating a better deal for India at WTO, his first step was to move 340 items (covering a whole range of consumer goods) from the restricted list to the open general licence (OGL) category. Previously, only capital and intermediate goods were in the OGL category, and the import of consumer goods required aditional licenses. Mr Hegde has argued that the effect of this change will be minimal since these items are already being produced in India at very competitive prices. But there remains a serious problem with such a decision. Contrary to Mr Hegde's clearly stated goal, such unilateral concessions on the external front cannot strengthen the bargaining position of India with respect to the WTO, and the rich trading nations have not reciprocated with any concessions of their own. Clearly, this step cannot be viewed as enhancing "Swadeshi".
Another aspect of the BJP programme is to continue with the process of privatization, delicensing and counter-guarantees for power projects. Privatization of "non-strategic" public enterprises has been presented as a pragmatic revenue-raising step that will preserve "Swadeshi" interests. But it should be noted that there is a limit to this process. Once all the viable public enterprises are hived off to private interests, this mode of raising revenues will come to an end. Moreover, once a public enterprise is privatized - it is much harder to control it's ownership. As long as Foreign Institutional Investors are welcomed in the country - it will be very difficult to prevent private shareholders from selling their shares in public enterprises to foreigners.
Similiarly - as oil exploration and mining leases are granted to multi-national interests, the profits that would have normally accumulated to the public enterprises, and would have been re-invested in the local economy by the public enterprises may now be taken out of the country to meet the obligations of foreign share-holders.
A public deeply frustrated with the power situation may at present tolerate counter-guarantees to the fast track multi-national power projects. But when they have to pay the high tarriffs that these projects entail - they may feel very angry and betrayed. What may not appear to be a "Swadeshi" issue today could become one 5 years down the road.
Regionalism and Anarchism vs. Swadeshi
While liberalizers try to argue the case for private enterprise on the basis of efficiency and productivity - they often fail to cite the benefits of well-run public enterprises. Unlike private industry, which due to share-holder pressure needs to generate quick profits - public enterprises can take on vital projects that have long gestation periods where several years may go by without the company registering a profit. Public Sector enterprises can also take on projects with low profit potential that have highly redeeeming social benefits. And most importantly, public enterprises can invest in rural areas and spread their investments throughout the country in a fair and balanced way. This is crucial in a diverse country like India where lack of development can easily translate into demands for separation and disunity.
Private industry, particularly MNCs tend to focus on the major metropolitan areas, concentrating growth in some areas and completely ignoring others. Take the boom in car manufacturing - (something encouraged by all the political parties): it is concentrated in just a few major metropolitan areas. The demand is also restricted to a very narrow elite. (And so far, it has also caused a huge drain in the nation's foreign exchange reserves.) Consider also how the Software Industry is booming in a few towns, while the overwhelming majority of Indians have never seen a computer, let alone learnt to programme one!
Uneven development seems to be an uncontrollable side effect of liberalization. One of the consequences of this is that employment opportunities become concentrated in the few booming regions. This attracts migrants from under-developed regions. However, none of the booming regions are really capable of handling the housing, water and electricity needs of this migrant population. The result is unplanned urbanization and sprawling slums.
For these and other reasons, a planned economy and the public sector can be important tools for correcting regional imbalances and addressing problems of uneven development, but the path of "liberalization" makes it difficult to utilize such tools.
And when this connection is not well understood, uneven development can have unexpected political consequences that do little to mitigate the problem. When the benefits of industrialization and development are not experienced throughout the nation, regionalism becomes a powerful motive force uniting underdeveloped areas of the country. To some extent - the fragmented nature of India's parliament is already a reflection of these contrary pulls and pressures. The demand for new states and new districts is also a symptom of growing regionalism.
Regionalism can thus counterpose "Swadeshi", since "Swadeshi" will naturally seem like a hollow slogan to those who lose out in the race for investment in their regions. Regionalism when expressed as a desire for greater equity and local democratic control is not necessarily a hindrance to social progress and may in fact hasten social progress. The danger comes from regional movements who turn to foreign agents for support - (who may in turn advocate even greater liberalization and concessions to trans-national interests).
Conversely, in the urban areas where migration overpowers the city's infrastructure - there can develop a hatred for all development, and cynicism about the entire political process. Mushrooming NGOs and anarchist "peoples movements" that argue against all development become pitted against any "Swadeshi" agenda - since they view all attempts at national unity as "statist" and "oppressive".
The Railway Budget
An area almost incidental to the "Swadeshi" agenda has been the modernization and expansion of the railways. In the wake of liberalization, like previous railway ministers, Mr Nitish Kumar found himself in a situation where there was inadequate support for all the projects that the railways has wished to implement.
All over India - manual rail crossings and manual signalling slow down trains and cause accidents during inclement weather. Even though there has been considerable progress in the areas of telecommunications and electronics - the railways network is still dependant on archaic methods of signalling and security. Not only does this lead to unnecesssary delays and accidents - it also means that trains and train tracks cannot be used as efficiently as they could.
While Mr Nitish Kumar has promised to address this concern, it is not clear if the allocations will be adequate. In any case, they will come at the expense of other development needs. In fact, the failure to expand the railway budget came as a big disappointment to some, and there was a near rebellion amongst the BJP's allies in West Bengal and Orissa because very little money was allocated to improve the rail network in these highly neglected states.
All over India, the railways has failed to press enough local and short/medium distance day trains into service. This means that commuters must rely on unreliable private minibus operators to meet their travel needs. What is particularly ironic is that many of these buses operate from one train station to another. For hours in the day - the tracks between these stations remain idle because they cater almost exclusively to long distance trains that connect the major metros. So local passengers must endure endless waiting while the private bus operators hussle more fares - and then travel cramped like sardines. They must subject themselves to endless traffic jams and noxious pollution, even when paying higher fares to compensate the bus owners for their increased petrol expenses.
A truly effective and "Swadeshi" solution to this problem, and to the growing oil import bill would be to ply more inter-city trains so that the already laid tracks are used more frequently during the day and buses are freed up to operate feeder routes from local towns and villages and develop alternative routes that complement the nation's rail network.
But the railways continues to be treated like a step-child in any discussion of transportation alternatives. While the inadequacy of the nation's road network has begun to draw attention, so far, no party has mounted an effective campaign around expanding the railways. In a densely populated nation like India, it will be impossible to procure enough land to build a network of highways that criss-cross nations like the US and Canada. It is therefore imperative that this difference is well understood and rail transportation is given the importance it deserves.
Any genuinely "Swadeshi" program must budget adequately for the continued development of our railways, addressing the concerns of not only well-heeled travellers but also budget travellers.
"Swadeshi" elements in the General Budget
In spite of these weaknesses in the BJP's Swadeshi platform, there are some aspects of "Swadeshi" that are discernible in the BJP's budget. First, there is a perceptible shift in allocations for social spending. Unlike his predecessors who kept cutting allocations for the social sector - Mr Yashwant Sinha has increased budgetary support for Education, Rural Development, Roads, Power, Science and Technology and Food Subsidies.
Second, there is an increase in of 6-7% in effective customs duties for most parts and raw materials. This has been welcomed by the National Manufacturers Association and other Indian industrialists whose dependance on such imports are minimal.
But since this additional duty does not apply to finished goods, Mr Yashwant Sinha has disappointed those manufacturers who import parts or raw materials and face unfair competition in their finished goods from foreign manufacturers whose costs may be lower due to subsidies or improved economies of scale arising from their monopoly control of the international market. As mentioned earlier, this has been a lingering problem. Ideally, import duties should be carefully graduated to encourage the highest levels of local manufacturing.
Pressures from the Import Lobby
But to some extent - some of these manufacturers have only themselves to blame since they have chosen to ally with the Import Lobby who wants import duties to be cut to bare minimal levels and even kept below excise duties - something that is completely unfair to other local manufacturers who have no choice but to pay the local excise duties. It would therefore behoove those manufacturers who are partial importers to ally with all other local manufacturers and call for calibrated duties on imports - with finished goods attracting the highest rates. But this would require standing up to the Import Lobby, something that not enough manufacturers have chosen to do as yet.
Even the Import Lobby must understand that driving Indian manufacturers to bankcruptcy is not in their long-term interest. When domestic manufacturing is unable to expand - employment stagnates or shrinks, and purchasing power also stagnates and shrinks in proportion. This means that in the end, the market for all goods shrinks - even imported goods - and then, even importers begin to feel the crunch. This is evident from the recent experience of South East Asia. Those who suggest that the South East Asian crisis occurred only due to fiscal mismanagement and not due to demand saturation are missing a valuable lesson that is there for all to see. In a demand recession, even the best fiscal and technical management of the economy have little impact. Those who argue that India could somehow circumvent the S.E.Asian plight by prudent fiscal and technical management alone are engaging in an element of economic fantasy.
Even those familiar with only the rudiments of macro-economic theory must know that in the end - demand must drive supply. And demand cannot grow in a situation of weak purchasing power. Demand growth requires employment and wage growth to exceed the cost of essentials like food and medicine. Only then can there be a sustained demand for consumer goods and related goods . Expanding the nation's purchasing power must be a concern not only of domestic producers but importers as well. Unless liberalization causes an across-the-board sustained rise in purchasing power, the process of unfettered liberalization will not be without it's serious critics.
Ultimately, policy decisions must be evaluated not from the point of view of the theorizers and partisan proponents, but from the perspective of whether such decisions improve the quality of life of the vast majority of the Indian people. To the extent that several pressing problems remain to be solved inspite of a decade of liberalization, it would only be wise not to consider "liberalization" as a magic wand that will bring only good, or as an inevitable and only solution to socio-economic growth and development. Political forces that have treated "liberalization" in that way have been strongly rejected at the polls and that should be a lesson for all to ponder.
(Last revised: August 2000)
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