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Alibi of the Need for FDI
The case for financial liberalization as a total package
is ultimately argued on the grounds of the presumed
need for FDI. Prime Minister Manmohan Singh pleaded
before a bunch of financiers in New York that unless
India got $150 billion FDI over a 15 year period to
improve her infrastructure, her economic prospects were
bleak. This cringing before metropolitan finance, though
it started with the NDA and hence predates the UPA,
certainly marks a enormous departure from the earlier
days, when Prashanta Chandra Mahalanobis had gone lecturing
all over America about how India was embarking on a
massive industrialization effort on her own and with
her own resources. The favourite ploy of our current
leaders of course is to cite the example of China which
these days gets around $50 billion FDI each year compared
to $3-4 billion of India: the suggestion is made that
without such heavy investment China could not achieve
her extraordinary growth rates, and that if India wanted
such high growth rates then she too would have to woo
FDI assiduously.
This argument is wrong on several counts. First, the
large influx of FDI is hardly necessary at present for
China"s remarkable growth performance. China, as
is well-known, has massive and growing foreign exchange
reserves which are built up out of her own earnings
in the form of current account surpluses, and not through
speculative financial inflows as in the case of India.
She is in other words maintaining an excess of savings
over non-FDI-financed investment. Her need for investible
resources from outside therefore is correspondingly
less. FDI in her case could be a useful means of bringing
in technology or of marketing her products, but for
these purposes technical collaboration or marketing
agreements could do as well. Her reasons for large FDI
inflows at present therefore remain obscure. At any
rate, inflows on this scale are certainly unnecessary
for the maintenance of her growth rate. Secondly, FDI
typically flows into those economies which already have
high domestic savings rates anyway. It does not constitute
a means of compensating for low domestic savings. Since
India has a savings rate much lower than in the East
and South East Asian countries, and since this rate
has not gone up at all during the period of "liberalization",
to pin hopes on FDI to provide a way out of this situation
is a chimera. Thirdly, in the case of India, as suggested
earlier, there is plenty of unutilized capacity, within
the public sector itself, which can be used with impunity
for boosting public investment through an enlarged fiscal
deficit, without even having to raise tax revenue.
In short, FDI is both unnecessary for boosting India"s
growth rate and unlikely to come in any significant
quantities, despite all the blandishments being offered.
But since these blandishments include financial liberalization,
which necessarily engenders deflation and cut backs
in public investment, that in turn have a discouraging
effect on private investment, all this wooing of FDI
in the name of stepping up the investment ratio is paradoxically
having the opposite effect of dampening the investment
ratio.
The blandishments include an increase in the foreign
equity cap in critical sectors. The first UPA budget,
for 2004-05, had identified telecom, civil aviation
and insurance sectors as the ones in which the level
of permissible foreign equity holdings would increase.
The FDI cap has already been lifted in the civil aviation
sector (from 40 to 49 percent), and on February 2 the
government cleared a proposal to raise the FDI limit
in telecom from 49 to 74 percent. But these precisely
are sectors where foreign investment is not only unnecessary
but positively harmful. In the case of telecom moreover
there are serious security considerations involved in
having majority foreign-owned companies. The idea seems
more to give foreign capital a finger in the profitable
pie that is the Indian market, at a time when metropolitan
capital in these sectors is desperately looking for
outlets elsewhere, than to bring any benefits to the
Indian economy. The Left has been fiercely resisting
these measures, but these unfortunately do not need
parliamentary approval.
Pension Funds
The latest move of the UPA government to let pension
funds be used in the stock-market and pensioners take
the risk of loss, is yet another "liberalization"
measure with serious consequences for an extremely vulnerable
section of the population. But it is not just a matter
of how these funds are used. The 2005-06 budget permits
the entry of FDI into the pension sector. In effect
therefore the government is planning to hand over pension
funds to MNCs for the purpose of speculating on the
stock-market.
The argument often advanced that the burden on the exchequer
on account of pension payment obligations is becoming
too heavy is unacceptable. It is the solemn duty of
the government to meet whatever burden pension payment
obligations impose upon it, and it has to find the resources
to fulfill it. Considering the fact that 50 percent
of the pension payment obligations are on account of
the armed forces, demurring at discharging this duty
is in particularly bad taste.
But then, even some well-meaning observers point out,
since the pensioners would be exposed to the possibility
not just of losses but of gains as well, they may even
end up being much better off from the proposed measure.
Why should they object to it? The reasons are simple:
first, any person would be the most risk-averse when
it is his or her pension funds which are at stake; and
secondly, the risks are far greater than usually supposed.
They arise not only from the fact that the stock market
fluctuates wildly, but also from the fact that the pensioners
could well become victims of unscrupulous speculators
using their funds.
This last point is often missed: in a country like ours
the political empowerment of the people is far greater
than their legal empowerment. They have a much better
chance of getting redress through political pressure
than they have of getting redress through legal action.
They are safer when their claims are with the State
than they are when these claims are on some private
speculators. To leave pensioners to the mercy of a bunch
of speculators by allowing the latter to play the market
with their funds would be an almost criminal dereliction
of duty on the part of the State which the Left has
rightly vowed to resist to the bitter end.
The Patent Amendment Act
There are two areas where the government has yielded
some ground under pressure from the Left. One is in
the area of patents; and the other is the current year"s
budget. Let us examine these.
India had a Patent system introduced through an Act
in 1970 which was highly appreciated by progressive
opinion all over the world. Among other things it kept
the prices of drugs low, and did so by not recognizing
product patents. No patentee in other words could prevent
someone else producing the same good using some process
other than the one which had been patented. This enabled
the domestic production of drugs, which had been developed
abroad, by using a different process. Domestic substitutes
of drugs developed abroad could therefore be locally
produced and sold cheap. The TRIPS agreement under the
WTO permitted product patents, and allowed a 20 year
life-span for patents compared to the 7 years under
the Indian Patents Act 1970. The WTO agreement which
was signed without taking the parliament"s prior
permission, enjoined on India the obligation to amend
her Patents Act to make it TRIPS-compatible.
The WTO agreement however, like all international agreements,
has provisions and loopholes which could still be exploited
to the benefit of the Indian people while amending the
1970 Act for TRIPS-compatibility. In other words, the
term "TRIPS-compatibility" is itself a matter
of interpretation, and any government that is concerned
with the welfare of the common people, should naturally
use an interpretation that safeguards their interests
to the maximum extent, even assuming the we have to
fall in line over "TRIPS-compatibility". But
the NDA government brought in amendments that showed
scant respect for the people"s welfare and passed
an ordinance incorporating them. The UPA not only re-issued
the ordinance, but proposed an amended Act that was
an exact carbon copy of the NDA"s proposed legislation.
This has been changed under pressure from the Left and
the amended Act, though TRIPS-compatible, protects the
people much better. To be sure the very introduction
of product patents has deleterious consequences, and
in that sense any amendment of the 1970 Act is retrograde.
But within the framework of the WTO, the amended Act
is much better than the NDA/UPA Draft.
This becomes clear if we take a look at the demands
made by a Peoples" Commission which operated with
the aim of getting the most out of the existing TRIPS
agreement. Its main demands were as follows:
"(i).. The term "invention" should be
reserved for a "basic novel product or process
involving an inventive step and capable of industrial
application". All three criteria, "novelty",
"inventive step" and the quality of being
"capable of industrial application", must
be insisted upon. (ii)…The proposed amendments allow
patenting of micro-organisms. This must not happen.
Micro-organisms, including viruses, should not be patented,
and hence should also figure alongside plants and animals,
including seeds, varieties and species, in the list
of non-patentable items… (iii)… The proposed amendment
provides no scope for compulsory licensing in cases
where, notwithstanding the offer of reasonable commercial
terms and conditions to the patent holder by an enterprise,
the patentee does not respond within a stipulated period
of time. In all such cases compulsory licensing is permitted
even within the framework of TRIPS Article 31 (a) and
(b), and countries like Brazil and China have passed
legislation allowing compulsory licensing. This omission
from the proposed amendment must be remedied forthwith.
(iv) …In all cases where compulsory licenses are granted,
even though the production is supposed to be "predominantly"
for supply in the domestic market of the country in
question, exporting should also be explicitly allowed…
(v) …Where applications have been received during the
transitional period 1.1.1995 to 31.12.2004, … patents,
if granted, would be effective from the latter date
for a period of twenty years from the date of application.
In all such cases if any production activity has been
started by any enterprise during the transition period,
then that enterprise should be allowed to continue production
on payment of a nominal royalty to the patent-holder,
after the patent has been granted, instead being accused
of violating the patent. (vi) …The magnitude of royalty
payment should be explicitly stipulated within a range,
say 4-5 percent, of the sales turnover at ex-factory
price. (vii) … Since the TRIPS Agreement itself provides
no explicit system of examination of any pre-grant opposition
to the grant of a patent, the existing provision in
the Indian Patents Act 1970, which is being sought to
be amended, should be retained."
It is noteworthy that all these suggestions, barring
(ii) and (vi) were incorporated in the amended draft
of the Act owing to the Left"s insistence, and
that (ii) has been referred to an experts" committee.
At the same time however the necessity for mobilizing
public opinion in favour of a re-negotiation of the
WTO, including in particular the TRIPS agreement, remains.
Unless a strong public opinion is built up the correlation
of political forces cannot be changed to a point where
we can either reject or go beyond the existing framework
of the TRIPS agreement.
The 2005-06 Budget
The
2005-06 budget differed from other recent budgets both
in its rhetoric and in the somewhat larger allocations
it made for social sectors and rural development, including
employment generation. The absolute amounts involved
of course were still very small, and even these small
provisions may not materialize if on account of tax
shortfalls, which are bound to arise this year, as they
did last year, owing to the significant overestimation
of tax receipts in the budget, the Fiscal responsibility
and Budgetary Management Act comes into play and expenditures
have to be scaled down. Even so, the change is noteworthy.
This change however does not signify any shift away
from the neo-liberal package of policies. On the contrary
many of its suggestions like opening up the mining and
pension sectors to foreign direct investment, encouraging
crop diversification at the expense of foodgrain self-sufficiency,
the reductions in customs duties on a range of capital
goods, and the cut in corporate income tax rate from
35 to 30 percent on domestic capitalists, are all measures
emanating from the neo-liberal perspective. And when
one adds to this the pronouncements of the Economic
Survey on capital account convertibility and on "labour
market reform" (which means in effect the institutionalization
of the right to retrench), it is clear that no change
of direction away from neo-liberalism is being contemplated.
Two questions immediately arise. First, how is it that
within a regime committed to neo-liberalism, additional
financial resources have been found for rural development
and social sectors? The Finance Minister appears to
have given out substantial tax concessions all around
and yet managed to increase the Gross Budget Support
for the Plan by 16.9 percent over the previous year
(BE to BE) and the Budget Support for the Central Plan
by 25.6 percent, even while ensuring a marginal reduction
in the fiscal deficit to 4.3 percent of the GDP. For
a government that till the other day kept asking "Where
is the money?" when any worthwhile proposal was
mooted, including a universal EGA, this is a remarkable
turnaround. How has this become possible? Secondly,
does the fact that the government has made larger provision
for rural development and social sectors while remaining
committed to a neo-liberal course suggest that we have
finally arrived at "liberalization with a human
face", contradicting the claim made above that
the two cannot go together? Let us discuss these seriatim.
The answer to the first question, about the source of
financial resources, is simple: the budget manages to
balance its figures through substantial "window
dressing", both in the matter of the expected tax
revenue and in the matter of the expected fiscal deficit.
With the reduction in corporate tax rate, with the removal
of a large number of service providers from the purview
of the service tax, with the lightening of the income
tax burden, with the reduction in customs duties on
a large number of items, especially capital goods, and
with significant concessions in the excise duties on
several items, the Finance minister's claim that his
indirect tax proposals would be broadly revenue neutral
and that his direct tax proposals would garner Rs.6000
cr. extra, appears untenable, notwithstanding the 50
paise cess on petrol and diesel, and the slightly heavier
taxation on "health hazard" goods. But even
if his claim is accepted, the tax revenue calculations
still appear grossly unrealistic. If we assume a generous
9 percent growth in real terms of the non-agricultural
sector during 2005-06, and a 6 percent rate of inflation,
the nominal growth rate of this sector comes to 15 percent.
At existing tax rates the tax revenue cannot be expected
to increase at a rate much higher than this. And if
additional tax revenue mobilization is a small Rs.6000
cr., it follows that total tax revenue should also increase
at around 15 percent. Instead we find an expected tax
revenue increase, compared to 2004-05 (RE), of 21 percent,
clearly an overestimate. This would not matter if the
Finance Minister chooses not to be tied down by the
FRBM, a silly piece of legislation as we have seen;
but if he does, then the positive features of the budget
would be undermined.
The second area of "window-dressing" is with
reference to the fiscal deficit. There is a substantial
"off-loading" of borrowing from the budget
to off-budget entities. At least three deserve mention.
The first is State governments. The Budget documents
show what at first glance appears a rather surprising
reduction in total capital expenditure, and correspondingly
in the Gross Budgetary Support for the Plan. Plan Expenditure
for instance falls from Rs.145590 cr. last year to Rs.143497
cr. this year (BE to BE). The Finance Minister however
claimed that the Gross Budgetary Support (on a comparable
definition to what was used earlier) would be Rs.172500
cr. for 2005-06. The reason for this discrepancy lies
in the fact that following the Twelfth Finance Commission's
report, State governments would be borrowing around
Rs.29000 cr. for their Plans from the market. Earlier
the Centre would have borrowed this amount and handed
it to the States, but now the States themselves would
have to go the market.
This represents an offloading of the fiscal deficit
from the Centre to the States. In addition it is fraught
with potentially serious consequences. States may not
be able to get the loans on reasonable terms, especially
in these financially "liberal" times (when
even the captive market for government and government-approved
securities provided by the Statutory Liquidity Ratio
is being abandoned according to this year's budget);
some States may not be able to raise their loan requirements
from the market at all. True, the Centre which earlier
had the sole prerogative of market borrowing charged
the States exorbitant rates on the loans it provided
to them; but the solution to that lies in regulating
the rate at which the Centre can lend to the States
(pegging it for instance at certain fixed percentage
points below the average nominal growth rate of the
GDP) rather than having the States borrow directly from
the market which could even be a prelude to the fracturing
of the nation's unity (if States started borrowing freely
from international agencies).
The second instance of implicit off-loading of the fiscal
deficit is with regard to the Infrastructure Development
Fund, whose capital of Rs.10000 cr., which is supposed
to provide "bridge finance" for infrastructure
projects that are remunerative economically but not
financially, is not provided for in the budget. Instead
of borrowing directly, the government, in other words,
is making an agency set up by itself do the borrowing.
This borrowing, being off-budget, is not shown as part
of the fiscal deficit.
The third instance is the absence of any reference to
the food component of the Employment Programmes in the
budget documents. The 5 million tonnes which the Finance
Minister has promised as the food component of the Food
For Work programme and which does not figure in the
budget will obviously be loaned by the FCI to the FFW
programme. A part of the fiscal deficit is thus shifted
out of the budget by making the FFW borrow from the
FCI instead of getting funds from the government which
would have had to borrow for the purpose.
For these reasons the actual fiscal deficit generated
by the budgetary provisions is much larger than what
appears in the documents. One cannot fault this in principle.
On the contrary it only confirms the point that the
FRBM Act which forces the government to do such "off-loading"
of the fiscal deficit away from the budget to other
government organizations is a nuisance which even people
like Mr.Chidambaram have come to realize.
But it is more than a nuisance. The practice of "off-loading"
which it implicitly encourages can have positively harmful
implications. For instance, such "off-loading"
may, given the general neo-liberal ethos, jeopardize
the future of the agencies on to whose shoulders the
deficit is being off-loaded: State governments, as already
mentioned, might turn into proteges of agencies like
the ADB and the World Bank (which some of them are already
in the process of becoming) under these circumstances.
This could damage the integrity of the nation. Likewise
if the FCI's giving loans to the FFW programme increases
its own deficit (which is covered through the food subsidy),
then in the name of cutting the food subsidy the same
government might decide to wind up the FCI. In other
words, enlarging the fiscal deficit whether directly
through the budget or through other government agencies
is fine provided a consistent approach of defending
the government agencies is simultaneously adopted..
But, one cannot be sure of this.
Besides, while enlarging the fiscal deficit for incurring
larger expenditure is perfectly legitimate in a demand-constrained
system, there is little justification for doing so together
with a reduction in corporate income taxation. The argument
that some parity has to be established between personal
income taxation and corporate income taxation has no
basis whatsoever. Hence the argument that since the
highest rate of personal income tax is 30 percent, the
rate of corporate income tax must also be reduced to
30 percent from the current 35 percent lacks substance.
Indeed most of the tax concessions given in the budget
lack any justification. There is no reason why the scope
of the service tax should be cut down from its existing
level. There is no reason why import duties should be
reduced on a variety of capital goods: while it would
have a scarcely noticeable effect on the overall investment,
it would act to the detriment of the domestic capital
goods producers, causing a degree of de-industrialization
in this sector, which would also follow from the de-reservation
of a number of items hitherto reserved for the small-scale
sector. Likewise, there is also no reason for reducing
the excise duties on a variety of luxury goods like
air-conditioners. And the reduction in import tariffs
on a range of agricultural goods is precisely the opposite
of what the government should be doing if it wished
to undo the damage done to this sector by neo-liberalism.
Even experts like M.S.Swaminathan have been arguing
that agriculture cannot be treated like any other sector
in the matter of protection, since the livelihood of
millions of peasants and labourers who have nowhere
else to go depends upon it. The budget alas pays scant
heed to such sage advice.
While these tax concessions are being given, the imposition
of a cess of 50 paise per litre on petrol and diesel
appears uncalled for, especially as it comes on top
of price-hikes decreed very recently on these commodities.
The relief which the budget provides by way of reductions
in import and excise duties on kerosene and LPG would
be offset to an extent by this cess. In the case of
petrol the net revenue raising effect is much less than
what appears at first sight since the government is
a major consumer of the commodity. In the case of diesel,
any price hike jacks up transport costs and has an across-the-board
inflationary impact which should have been avoided.
Two suggestions thrown out in the budget are a source
of disquiet. The first relates to the banking sector
where the bounds on the Statutory Liquidity Ratio and
the Cash Reserve Ratio are sought to be removed and
the Reserve Bank made free to prescribe such prudential
norms as it deems fit. This entails giving greater autonomy
to the RBI and making banks free in their portfolio
choice which would enable them to speculate more freely.
Both these, like the earlier pronouncement regarding
making the management of public sector banks more autonomous,
are measures of financial liberalization which would
have adverse consequences for the economy. The Finance
Minister who talks of giving more credit to agriculture
in one breath, cannot advocate financial liberalization
in the next without inviting the charge of not being
serious about the former objective.
The second disquieting suggestion relates to the entry
of foreign direct investment into mining and pension
funds. The case of pension funds we have already examined
above. As regards mining, the argument against FDI is
obvious. Indeed, as Joan Robinson, the well-known Cambridge
economistmentioned earlier, had once remarked, of all
the different areas of FDI involvement, the mining sector
is the worst, since minerals are an exhaustible resource.
The MNCs extract the mineral, ship the surplus back
home, and leave when the mine gets exhausted. But when
that happens, the country is left high and dry, with
no more mineral resource left. The case of Myanmar illustrates
the point. At one time its oil wealth attracted much
foreign investment (Burma-Shell), and it experienced
for a brief period an enormous boom, when oil extraction
was going on. But today, with its oil wealth exhausted,
it is one of the forty "least developed" countries
in the world. There is absolutely no argument whatsoever
for inducting MNCs into the mining sector.
This brings us to our second question: is the budget
an embodiment of "liberalization with a human face"?
The fact that patently neo-liberal measures are being
contemplated by a Finance Minister who has ostensibly
shown concern for the poor, only demonstrates that this
budget is an attempt to please all, the MNcs, the corporate
sector, the salariat and, to an extent the poor and
those who speak for them. Such a "please-all"
budget can only be based on a degree of arithmetical
jugglery and hence can only be a transitory phenomenon.
Or putting it differently, this budget does not mark
the ushering in of a "growth-with-equity"
trajectory, or of "liberalization with a human
face". It rather represents a temporary tactical
compromise, a tactical adjustment in the march along
a neo-liberal path, which has been necessitated by the
relentless pressure exerted on the "liberalizers"
by the Left.
Concluding
Observations
The
last few months of the functioning of the UPA government
reveal clearly the bind in which it is caught. It cannot
openly discard the Common Minimum Programme to which
it is ostensibly committed; it cannot push ahead with
impunity with the neo-liberal programme which international
finance capital enjoins upon it. Its attempts to browbeat
the Left to allow it to discard the CMP for a neo-liberal
programme have failed. Some bourgeois commentators,
impatient with this situation, have even started flying
kites about a "grand coalition" between the
Congress and the BJP, which in effect means a "grand
coalition" between sections drawn from both these
Parties. What these commentators fail to understand
is that even if such a grand coalition were to come
about, which is a tall order anyway, it would not get
the mandate of the people who have expressed their rejection
of neo-liberal policies in the May elections. The bind
of the government is really the outward manifestation
of an interregnum, a stand-off between the forces aligned
to international finance capital on the one hand and
the popular forces on the other. As the latter become
more organized, conscious and effective, the present
situation would change in a more favourable direction
for the progressive movement.
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