2012: Another Annus Horribilis

In this year of horrors and crony capitalism, ‘industrialists’ prospered who managed huge acquisition of State-owned natural resources, long-term concessions and huge lines of credit from State-owned banks

Mohan Guruswamy Delhi 

A year ago, at about this time, India’s GDP was expected to grow at 8.2 per cent. Instead, it is growing at 5.3 per cent. A shortfall of 2.9 per cent — between hope and reality. In money terms, that shortfall translates into approximately $53 billion in nominal terms or $131 billion in Public-Private Partnership (PPP) terms. In terms of Indian rupees, a denomination we seldom use in the rarefied circles of high office, this means a shortfall of around Rs 2.86 lakh crore in nominal terms or Rs 7 lakh crore in PPP. That is the “presumptive loss” to the GDP, if you want to use a CAG term made famous. If that is what the people lost, the central government’s nominal loss in terms of taxes foregone would be about Rs 29,000 crore.

This year, the Centre was hoping to collect Rs 6.64 lakh crore as taxes. (The states would have collected almost a similar sum.) This means the presumptive loss of tax revenue is 4.5 per cent of the Budget estimates. However small the percentages may appear, these are not small sums of money and India cannot afford to forego them. Add to this the shortfall due to the expected 2G spectrum sale, the failure of the ONGC stock issue, and much lower collections from PSU disinvestment, and you are looking at a really huge shortfall in central government collections.

Since interest, salaries and defence allocations are inviolable, the hit is borne by deep cuts in social spending and capital expenditures. Our capital expenditure to budget ratio is an abysmally low 9 per cent. Social welfare spending, however little may trickle down, impacts the poor. Despite what the World Bank and IMF trained gnomes in North Block, South Block and Yojana Bhavan say, the numbers of the poor are rising alarmingly. At the time of independence, India had about 320 million people. It has that many poor people now.

We can see the tide in the massive influx of economic migrants into other parts of India from Assam, Bengal, Bihar, Odisha, eastern UP and the tribal regions. Over three -quarters of our tribal people still live below the poverty line, giving them stark choices. Either migrate to the cities or revolt against the iniquitous system. They do both. Yet, our middle and upper classes seem to be only focused on the migration of Bangladeshis into India. The establishment can take credit for successfully putting blinkers on us to look in only one direction.

Growth in India is led by government spends and investments. When that drops, growth drops. Little wonder there is so much gloom and pessimism. This mood is universal now, from the biggest captains of industry (Ratan Tata, $100 billion) to the smallest of farmers (the average size of a farm holding has now fallen to 0.63 acres).

When PV Narasimha Rao jettisoned the Nehruvian model of economic development with its emphasis on rigid central planning, State control over all resources, and bureaucratic control over all allocations, one would have thought that it was the only other model available then and now, one that combines liberal economics, vigorous political debate and decentralised government; what we got was one just shorn of industrial licensing. Craftily, it was passed off as liberalisation when it was actually imposing a crony capitalistic model so ‘successful’ in the Asian ‘tiger economies’ of South Korea, Thailand, Singapore, Taiwan and Malaysia. And, of course, China!

This model was essentially that of the State patronising industries with public resources to benefit a few while national accounting totted up GDP gains. While this model did transform these countries and China into industrial powerhouses deriving the major part of their GDP from industry, with some very spectacular transformations, like in China where a hugely expanded manufacturing base now accounts for almost 52 per cent of GDP, in India it resulted in industry stagnating, agriculture contracting and services hugely expanding.

People like Ratan Tata make no bones about what they feel of the ‘silly taxes’ that make investment so problematic in India. And do you think this CII/FICCI friendly prime minister has done anything about it? No. He dithers, like he does over everything

Today, the GDP profile of India resembles that of a post-industrial society — the irony being that India never really even began industrialising. But ‘industrialists’ who managed huge acquisition of State- owned natural resources, long-term concessions and huge lines of credit from State-owned banks, prospered. We don’t say it officially, but income inequality is now estimated to be closer to 0.50 than the official 0.32.

The ultimate irony is that instead of India becoming the destination of foreign capital, foreign financial capitals became the destination of Indian capital. While the cumulative FDI from 2000-12 was about $170 billion, rising to as high as $34 billion in 2011, it has almost halved on a month-to-month basis in 2012. In the last five years, India has also seen an outflow of about $97 billion.

Consider this. Mauritius alone accounted for 44 per cent of India’s FDI, and Singapore a further 9 per cent, suggesting that much of this FDI was actually not foreign; it was just some money being round-tripped back to India.