Dr Bharat Jhunjhunwala
Government sources are repeatedly saying that present slowdown in the Indian economy is largely due global problems. A look at the events of the last decade, however, speaks otherwise. The global economy was doing well between 2002 and 2008. The rupee was stable at about Rs 45 to a dollar in that period. The global crisis erupted in 2008 and continued till 2012. The rupee was stable at Rs 45 in this period as well. This means that the severe global crisis of 2008 did not impact the Indian economy much. The rupee started to decline only in 2012 just as the global economy was beginning to look up. The United States is on the growth path today and Europe has recently emerged from recession. If our problems were due to the recession in global economy till recently; then our economy should be looking upwards now as the global economy is reviving. The fact, on the contrary, is that the rupee is falling now while the global economy is looking up. The reasons for the decline of the rupee clearly lie elsewhere.
The impact of global ups and downs on our economy is transmitted mainly through trade and investment. Let us consider these separately. The global crisis is a mixed bag for our foreign trade. It is beneficial because imports become cheaper. The price of oil had reached USD 140 when the global economy was in its heyday before 2008. It fell to USD 40 soon after the crisis erupted in 2008. This decline in price of oil was beneficial for us because we had to pay less for our imports. On the other hand, a global crisis leads to stress on our exports because foreign countries do not have money to buy our goods. Businessmen tell me that export orders had dried out after 2008. They have started pouring in again during the last six months or so. This is because the recent upward movement in the global economy has enabled foreign countries to import our goods. The net impact of global ups and downs on our economy is virtually nil because the impact on imports and exports is in the opposite directions and it cancels out.
The real problem, therefore, is not the global economy. The real problem is that we are unable to compete with other producers. A recession is the time of test for versatility of businesses. A businessman reduces the price of his goods during crisis and plods through. Having cut costs during crisis, he reaps huge profits as buoyant times return. Our businesses are not able to cut their cost of production during the crisis. This is the reason we are losing our sheen in the global markets.
Inability of our businessmen to reduce their cost of production appears to arise for three reasons. First is higher wage costs. Implementation of MNREGA has led to higher wages across the country. This has made it difficult for businesses to cut costs. This, however, is beneficial aspect of the matter because the social benefits of increased wages are huge. The second reason for our businesses not being able to reduce their costs is increasing corruption and rent seeking by bureaucracy. Third reason is poor infrastructure. These latter two are the negative aspects which are at the root of our losing out in the global markets.
The second route through which global movements are transmitted to our economy is through foreign investment. Here too the impact is mixed. Global crisis makes foreign investors averse to taking risk. This leads to reduction in foreign investment. Thus our foreign investment receipts fell from USD 43 billion in 2007 to mere 8 billion in 2008 at the height of the crisis. On the other hand, crisis in the developed countries leads to the investors hunting for opportunities outside. Thus foreign investment bounced back in 2009 to the earlier level of 43 billion dollars a year and remained at that level till 2012. Foreign investors found India a bargain at that time. This, again, proves that our present problems are not due to global conditions. Foreign investment had continued to come when the global economy was upbeat before 2007; and also when the global economy was downbeat after 2009. Foreign investors are fleeing because they are finding that Indian businesses are under stress now. This stress, as explained above, is due to MNREGA and governance issues. So the problem is not the global crisis.
Why this sudden change of heart on part of foreign investors in 2012? My take is that the problem was brewing for a long time. It tipped in this year. The fundamental mistake made by us was that we used capital receipts for financing current expenditures. A company prospers if it borrows money and invests it in factories. It fails if it uses the borrowing for building a high-profile office in an expensive area. Such expenditures do not translate into productive investments and profits. As a result, the debt begins to accumulate and at some point the investors become weary and exit. That is when the company collapses. The same happens to a country. The foreign investors deposit dollars with Indian banks. Banks sell these dollars to Indian importers. The crucial question is whether buyers use these dollars for importing goods for investment in new factories or for importing Chinese toys and other items of consumption? The country prospers if the dollars are used for investment. The country collapses if the dollars are used for consumption. The toys soon go into the dustbin but the debt on the country remains standing. This is precisely what has happened to us. The government has led the countrymen into a consumption spree. There is not a word from the leaders about the need to reduce consumption of imported goods like Washington Apples, Swiss Chocolates and French Wine. The Government wants these imports to continue apace. It is making efforts to attract larger amounts of capital receipts through foreign investments so that payment can be done for these consumption imports. In other words, capital receipts from foreign investments are being used for financing current expenditures. This is like a company taking a loan to provide foreign leave travel facility to its employees.
Foreign investors saw a crisis in the making. They realized that Indian economy was losing its competitive edge in the global marketplace; and that money was being squandered into consumption instead of being used for investment. The tipping point came last year and the rupee has been on a losing spree since then. The present crisis, therefore, is wholly due to the bad domestic policies; not because of global crisis.
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