The Telegraph
Friday , July 27 , 2012
Since 1st March, 1999
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- A season of embarrassments for India’s relations with the US
Cutting Corners

Bad news for New Delhi; it is now official, the dearest non-Nato strategic ally of the United States of America is not India, it is Afghanistan. This is no way to treat the world’s largest democracy, some people over here might grumble. But the US is a sovereign nation and has the prerogative to decide which country would be its darlingest.

This is, however, not the only unkind development. Barack Obama has suddenly gone a bit berserk and launched a frontal attack on India’s economic policies, including its squeamishness towards foreign direct investment and its taxation structure, which is alleged to discriminate against corporate bodies. Admonitions of this nature from such august quarters hurt. But Indian authorities have taught themselves circumspection. Instead of telling off the US president for intruding in our internal affairs, such as fiscal policy, a couple of sad-sounding, less-important ministers in New Delhi have merely speculated that perhaps the eminent gentlemen in Washington DC were ‘misinformed’. The ministers could have done worse; they could have claimed that they were not aware of what Obama had said.

The season of embarrassment refuses to end though. With the campaign for the US presidential election gathering momentum, Obama is at the moment engaged in bitter, biting polemics over several key issues with his Republican Party opponent, Mitt Romney. He has accused Romney of being the number-one champion of the lobby, which encourages outsourcing, thus robbing hundreds of thousands of young Americans of job opportunities. On the other hand, a crucial element in India’s economic policy over the past decade has been dependence on outsourcing by US firms, which proved a bonanza to this country’s information technology sector.

Obama’s stand cuts athwart vital Indian interests. It would have been altogether rational for an official Indian spokesman, at whatever level, to join issue with the American president on the matter. Discretion is the better part of valour. Even if not recognized as the dearest among non-Nato chums, India still prides itself as a principal strategic ally of the great United States of America. There is evidently rude limits to reciprocity in relationship between allies; the US can give a dressing down to India, India cannot afford to return the compliments.

Is this not, however, a species of the fear of freedom? For the US is no longer in a position to help India in any meaningful manner in the economic sphere. It may still be the mightiest military power and continue for some more time as the world’s leading economic entity. But there is every likelihood of the story being different from now on. Spectacularly advancing technology has raised productivity levels in the US to such levels that domestic demand is failing to keep pace with the rising flow of output the ever-improving technological base is capable of producing. The outcome is cutback in output, falling profit and fresh employment. Another factor is also at work endangering profit-making.

Superior technology calls for engaging workers endowed with superior grounding in sophisticated techniques. American wages have steeply moved up for such talented, highly skilled employees. So, unit cost of production remains high and domestically produced goods are often shunned by American consumers especially in favour of Chinese imports of equal quality. Recession on the home front stemming from stagnant or declining sales and falling profit creates a crisis for investible capital. With zero, or at least deeply unsatisfactory, prospect of profitability from productive activities, investible capital tries its luck in speculation. Thereby hangs the sombre tale of the past few years. Large-scale, and sometimes reckless, indulgence in speculation by American banks and corporate firms have had disastrous consequences, with across-the-board bank failure and corporate collapse, none of which helped the American economy. Government bail-outs to private entities gone bankrupt have added to the fiscal burden, corporate bodies have sought to pare costs and thus stay competitive in the market by outsourcing work to low-wage countries, thereby adding to the crisis in employment and heightening social tension.

It is not given to those who are at the helm of affairs in the polity to cut back American wages. It is equally difficult to boost demand for domestically produced goods by placing restrictions on imports, say, from China; the average American shopper would be furious. The administration keeps attempting to boost the economy by increasing defence outlay every year thereby shoring up the arms manufacturing industry, expanding money-sucking military bases in different parts of the world, forcing agreements on loyal, reliable countries to buy junk nuclear power generating plants, which American citizens will not allow to be set up in their own country and continuing to purchase, at massively extra-generous prices, farm products including corn and wheat. And yet, the economy remains in the doldrums.

Obama is, in a sense, right. Outsourcing implies substituting high-wage American labour by subcontracting work to, for instance, Asians who can be fobbed off by paying 80 to 90 per cent less than the going American wage rate for a comparable job. That apart, the US administration loves the idea of the excess supply of professional persons, including even lawyers, accountants, doctors, college and university teachers, being exported to India, but which would spell trouble for India’s vast middle classes, and would be politically difficult for the government to go along with. However, the pressure is there, particularly on the ministry of human resources; the ambivalence of policy-makers has been all too noticeable. The corporate sector, as impatient as the US president that the introduction of ‘second and third generation reforms’ had been delayed, would want the government to act on its pledge to unleash the animal spirit once more without further dithering.

What exactly are these supposedly crucial reforms belonging to the second and third generation categories? The roster is fairly long and comprehensive: permitting greater entry of foreign banks and insurance companies in the Indian market, withdrawal of existing ceilings on foreign direct investment, further reduction of direct taxes including a commitment to stay away from the disgusting practice of retrospective taxation, expeditious lowering of the tariff barriers on the import of farm products, thoroughgoing reform of labour laws with severe curtailment of trade union rights, more free economic zones, accelerating improvements in the economic infrastructure especially in the areas of transport and communications, no further procrastination over carrying out the conditions of the Indo-US nuclear agreement, wholesale withdrawal of subsidies, a monetary policy of cheap interest rates, further liberalization of capital account controls, no interference with the autonomy of stock exchange.

Caving in to these demands amounts, in most cases, to the delegation to foreigners a substantial chunk of basic decisions on socio-economic policies. The denouement, a few might even comment, would be akin to surrendering a piece of the nation’s sovereignty. There are still others who think that the sacrifice is worth going through, the outcome is going to be a return to the nearly 10 per cent growth trajectory of the gross domestic product and all that. They need to be yanked out of their romantic reverie though. The data are a clincher. The phase of buoyant GDP growth experienced in the course of the past decade was sourced in expanding demand, only a minor particle of which originated within the country — from the 100 to 160 million who constitute the affluent and the emerging middle classes. It was, by and large, export-driven, spurred by the export of softwares, minerals, raw materials, semi-manufactures, some manufactures. The US had a significant role in the whole process by being the leading recipient of such exports.

The picture threatens to change drastically from now on. Should the Congress-led regime in New Delhi, rejuvenated by its triumph in the presidential poll, decide, what the heck, to be the full-scale comprador and bow down to American diktat, the worst affected are bound to be, apart from the peasantry and small traders and artisans, the emerging middle class. Foreigners are going to come in and take away quite a bit of their trade and professions. This development would have a depressing effect on domestic demand. The much bigger disappointment, though, would be with export demand, the main propeller of growth in the preceding decade.

We could give all the concessions to the Americans’ demand. But, as long as the US economy stagnates — and there is hardly any indication that it would make a recovery in the near future — resumption of Indian economic growth, too, would be a mirage within the existing framework of economic policy and practice. The measures Obama is proposing to discipline outsourcing, for instance, might actually spell disaster for India’s IT industry. In any case, the sufferings caused by the reforms being demanded for India by the US president to the country’s masses are of no concern.

The message beamed by Obama is stridently John F. Kennedy-esque: ask not what the great US can do for India. Better ask what you — lazy, laggard Indians — can do for America, period.