The presidential poll in the United States of America is over, the nation’s leadership for the next four years is settled. Nothing though seems to be resolved yet about the contours of Barack Obama’s policy measures to cope with the greatest economic crisis the Americans have faced since the 1930s. The eagerness to know more about this new pack of policy decisions is equally great in the rest of the world. Global integration cuts both ways; it is generous in showering benefits accruing from economic liberalization; it can also cause acute difficulties in case circumstances develop in a major economy that entangle less important countries in a vicious grasp.
In New Delhi, awareness of these realities is evidently late in penetration. Initially, ministers and civil servants were brimming with confidence: no cause for worry, India had the basic strength to overcome the global buffetings of fortune caused by the sub-prime crisis in the US. This was soon proved to be empty bravado. That the American crisis is as much India’s headache is being demonstrated by the relevant statistics on foreign trade. Data for the past two years indicate the crucial dependence of India’s GDP growth on developments in the US. As the US economy stagnates, India’s exports — including minerals, raw materials, semi-manufactures, intermediate goods and, topping all, software — decline too, sometimes simultaneously, sometimes with a short time-lag. The fall in exports casts its shadow on the rate of growth of the products concerned and therefore that of gross domestic product as a whole. The leading growth sector, services, becomes a helpless victim too.
What is remarkable and contributes to India’s specific problem stems from falling exports and falling rates of domestic product growth, leaving no impression at all on overall imports. The economy is growing at a lower rate than before, some segments of it are contracting even absolutely, but imports of gold and jewellery, oil and petroleum products, luxury consumer goods particularly of glitzy automobiles, keep rising month by month.
Another part of the story is of some significance. Official statistics maintain silence on the movements of what is euphemistically described as defence imports. The list of unrestrained — and seemingly unrestrainable import items, there is enough reason to suspect, covers not just arms and equipment to boost the country’s ‘defence preparedness’, but also hush-hush categories of equipment supposedly to fight internal terror. Other imports may abide the question, import of gold, petroleum products, luxury goods and defence equipment is free. The jingo elements who adorn the nation have a large say in the matter. They are joined by the richest sections of society who had never had it so good since liberalization gathered speed and are determined not to be hustled out from that state of bliss. These groups constitute the core of support for the political establishment who keep insisting that their whims as well as style of living are not curtailable, never mind the approaching dark clouds over the country’s balance of payments.
An additional reason for considering these categories of import as sacrosanct is that trade transactions in many of these areas are monopolized by commission agents who, everybody knows, sustain the ruling politicians. Disciplining balance of payments during seasons of crisis in the manner goody-goody economists routinely lay down will cause political hurt. In the circumstances, policy-makers, true to the fashion they have trained themselves in, look towards the obvious escape routes. The alternative measure they consider to be the best of the lot is, of course, dependence on inflow of external funds. The official decision to go all the way to welcome direct foreign investment in retail trade is therefore not merely to comply with the agenda laid down by the Washington Consensus. It is impelled by solid domestic political considerations. The high import regime must continue to ensure the interests of thieving politicians who occupy strategically crucial positions.
However, if the global recession persists, India’s exports to the US — including software — are unlikely to take off in any marked manner in the next few years. Gestures, such as allowing entry of foreign capital in retail trade, perhaps can play a useful role in persuading some capital funds to choose India as a preferred location to move to. The American economy may or may not recover satisfactorily over the next few years. India might, in that event, attract some idle funds.
On the other hand, the prospect of a greater scope for entry into the Indian market could be only a minor solution to American investors. Besides, they will be unlikely to shed their concern over India’s political stability merely because of one particular breakthrough over retail trade investment. They could prefer to wait till the next Lok Sabha polls before making up their mind. Meanwhile, if India’s imports continue to spurt while exports languish, the country’s payments crisis could assume such a magnitude that, apart from other things, the external value of the rupee could show signs of falling precipitately.
There is no question of the existence of a great deal of complacency in the country over such matters, because of both preconceived notions and plain naďveté. A typical example is the widely held assumption that Obama, because he belongs to the Democratic Party and is black, is bound to do a good turn to India. The Democrats, however, are no longer the party of do-gooding Eleanor Roosevelts, Obama, in any case, is not going to sacrifice what in his view are basic American interests to be extra kind to India. How the internal debate in the US on the issue of outsourcing is resolved is, for instance, of vital concern for India’s balance of payments. If Obama decides to fulfil, even partly, his campaign pledge to come down heavily on outsourcing, the adverse consequence for India’s software exports could neutralize whatever advantages might accrue from extra doses of foreign investment in retail trade.
Given the built-in resentment in American households sparked by the static state of employment opportunities in the country, Obama cannot afford to back away from his commitment to prevent further export of jobs overseas. The immediate issue is whether the likely adverse effect on India’s external earnings by an Obama initiative in this area would be made good by the multiplier effect of the lowering of the bar on foreign direct investment. This is where the manner the FDI entry in retail trade has received a parliamentary nod comes into the picture. The prime minister’s animal spirit has been roused by the tongue-lashing in Time and Washington Post. He and his party have deployed their entire reserves of energy and resources to win the FDI war.
They have, on the face of it, won the war, but, in the process, brought to the world’s glare the dubious nature of a substantial section of Indian politicians. These politicians would appear to be not just two-timers, they are multi-timers, they have no qualms over saying one thing in the morning and doing precisely the reverse by early afternoon, their loyalty is a purchasable commodity in the market. Besides, in a sense, the FDI war is not exactly over. At the regional level, a number of state governments could still keep up their resistance, sending the wrong signals to US private investors. On top of all this is the blistering comments by Ratan Tata on the manner the government of India does, and does not, do things, which are bound to unnerve foreigners.
The New Delhi regime’s no-holds-barred effort to go all out for foreign investment can therefore turn into a damp squib. If the trade deficit continues to bulge and the use of hedge funds parked with Indian banking institutions is, with adequate justification, taboo, India’s policy-makers are likely to face a piquant situation. The rich will refuse to cut down on their high consumption, the jingo lobby will be adamant against suspending their China-cum-Pakistan phobia, the commission agents and other proxies of politicians in power will persist to resist any reduction in the quantum of their rip-off of the Indian economy. The consequences for the country’s balance of payments are bound to be awesome. It will continue to be desperate hours for the United Progressive Alliance despite its demonstrated superiority in parliamentary manoeuvres.