What went wrong with Indian economy

Addressing the UN General assembly in Sept 2011, Prime Minister Manmohan Singh had said: “Till a few years ago the world had taken for granted the benefits of globalisation and global interdependence. Today, we are being called upon to cope with the negative dimensions of those very phenomena.”

“The shoots of recovery which were visible after the economic crisis of 2008 have yet to blossom,” he said, adding:” In many respects the crisis has deepened further.” If the Prime Minister knew what was coming, the question that needs to be asked is then why did he allow the Indian economy to take the same route towards self-destruction? The rupee has been on a free fall, the current account deficit – the difference between export and imports – have surged to the pre-1991 levels, and the fiscal deficit shows no visible signs of reduction.

Prime Minister should have known it much better. Even at the peak of the economic growth period, between 2005 and 2009 when economy grew at 8 to 9 per cent, the high economic growth did not result in job creation. According to a Planning Commission study, 14 million people were pushed out of agriculture, and another 5.3 million jobs were lost in the manufacturing sector in the same period. If growth was not translating into additional jobs, and instead was leading to increased joblessness, there was something going wrong.

In the 9 years since Manmohan Singh took over, India has been flooded with cheaper manufactured goods, the imports touching $ 50 billion (Rs 3 lakh crore). Nearly 54 of the imports have come in from China alone. Much of the imports were of consumer goods that could have been easily manufactured within the country. As if this is not enough, India is now having talks with China to sign a free trade agreement. In any case, India has been on a fast-track mode to sign bilateral trade agreements with some 34 countries. The result: imports have far exceeded the exports from India, which means the trade agreements had not benefited the country. 

Prime Minister cannot blame anyone. He himself has been pushing for bilateral trade agreements despite the warnings that the imports are surging.

Take the case of the proposed India-European Union trade agreement in the offing. The EU is insisting that India opens up by reducing import duties on wines and spirits, and also drastically cut back import tariffs on milk imports, from the present level of 60 per cent to 10 per cent. This will bring a flood of milk imports into India which ironically is the biggest producer of milk in the world. Importing cheap and highly subsidised agricultural commodities as well as manufactured goods is like importing unemployment. Because of the reduction in import duties of edible oil from 300 per cent to zero percent, for instance, India is now importing edible oils worth Rs 60,000-crores every year.

While economists are hammering the Rs 1.25-lakh-crore food security bill saying that such massive public outgo will add on to the fiscal deficit, no mention is ever made of the Rs 30-lakh-crore that has been doled out the industry since 2005-06 in the form of tax concessions. But despite the huge subsidy, the industrial output had been steadily on a decline. In May 2013 it stood at minus 1.6 per cent, exports have remained subdued, manufacturing has been almost killed. So wasn’t the tax exemptions a wasteful expenditure? If recovered, the tax exemption alone could have wiped out the country’s entire fiscal deficit.

Had the massive tax concessions to India Inc., which is clubbed under the category of ‘revenue foregone’, were instead invested within the country, it could have created millions of jobs. While industrial production remained dipped, equally shocking is the massive hoarding of cash that the private sector has been stacking. By Mar 2012, India Inc was sitting over cash reserves of Rs 10-lakh-crore. There is no need for India to bend backwards to attract foreign direct investments when its own corporate were sitting over a mountain of cash. Forking it out could have created investor’s confidence and improved the business sentiments.

On top of it, a Credit Swiss report shows that the top ten big corporate groups in India have shown a six-fold increase in external commercial borrowings to reach a staggering Rs 6,30,000-crore. But these massive borrowings did not result in adequate returns thereby increasing the external debt. With so much of external borrowings and with cash reserves growing, what prompted the Govt to provide hefty tax concessions year after year needs to be investigated. In the last two years alone, Rs 11-lakh-crore has been doled out. 

  

Sadly, all this was allowed to happen when the Prime Minster knew that free market policies and deregulation were behind the economic woes. Instead of taking appropriate corrective steps he allowed the Indian economy to dither and slide. This is where he faltered. In fact, the solutions that are being proposed to prop up the ailing economy are the same that initially led to the economic downturn. More of the same, will only add to the crisis.