NEW DELHI - People in general and Indians in particular will celebrate the
passing of 2011, a year that claimed the lives of way too many people - people
who shaped our world, our thoughts, our outlook. The latest stalwart to leave
us poorer in our lives is Mario de Miranda, the cartoonist par excellence. With
utter ease Mario was able to bring a smile to our faces whenever we had an
opportunity to bump into his caricatures.
As things stand now, the world needs many more Marios to give us momentary
relief from the charades played out by politicians masquerading as
policymakers. While this is a global phenomenon as countries and regions are
being held to ransom by self-centered politicians, we Indians have been
reminded of the perils of democracy, no less.
With the ruling government mired in controversy and several
cases of corruption hanging against them, the opposition is baying for blood,
sensing that the government is on the back foot. With some important state
assembly elections scheduled for next year, every decision is being weighed
with the potential political fallout. As a result, parliament has become
India is into the third decade since economic liberalization was ushered in
during the early 1990s, when the country faced a crisis. It has benefited from
the advantages provided by several low-hanging fruits of liberalization that
were available then.
Cartoon by Mario de Miranda
(The Illustrated Weekly of India)
The rate of growth became a forgotten chapter as India's average growth rate
was upped from 4% to 6% and even more. The Indian economy, for some years, grew
at even 9% plus and threatened to touch the double-digit mark. In fact, India
was thought of as having tremendous growth potential and some even went to the
extent of declaring that the new century would belong to India. Such comments
might not have been out of place, but in the case of India, they forgot the
biggest stumbling block - politicians of all hues.
Consider India's agriculture sector. While this now barely makes a double-digit
contribution to gross domestic product (GDP), officially about 60% of the
population (in reality about 70%) depends on this sector for their livelihood.
Years of neglect meant that investment in this sector is falling, as are
Lack of inadequate infrastructure leads to nearly 50 million tonnes of
foodgrain being wasted every year. Loss of perishable products is often
estimated at around 35% of the produce. Food inflation is spiraling out of
control. Yet, the real beneficiaries of the rising food prices are not the poor
farmers. Apart from a few farmers who are rich and well-connected, the real
beneficiaries are the middlemen with a vice-like grip on the people who till
the soil, sow the seed and depend on getting the produce to market.
Yet the plan to introduce FDI into India's retail sector has been scuppered, as
suddenly everybody fears that foreign competition will make mom-and-pop
retailers go out of business.
However, in the Indian context, we already have a few well-established domestic
retail giants. The question is - what more harm would a foreign retailer do
that has not been done by Indian retailers? If anything, it would have taken
the leech-like middlemen out of the system.
A political party that was a proponent of this policy in its heyday is now
opposing this tooth and nail. A political leader was heard saying that
investment in Indian agriculture infrastructure is not rocket science and hence
foreign investment is not required. But what precisely has India done over the
past 64 years of freedom that inspires confidence that this basic requirement
will be taken care off now?
One would do well to remember, the initial process of liberalization was
punctuated with several doomsday theories that were aimed at derailing the
process. The wave of computerization in India also brought to the fore several
such theorists. All to be proven false. Now the alarmists are at work again,
aiming to destabilize the growth process.
On the same day that they decided to prevent retail FDI becoming a reality, a
parliamentary standing committee struck down a suggestion to increase the cap
of FDI in insurance from 26% to 51%. Interestingly, the committee was headed by
a former finance minister who himself was a proponent of opening up of the
The committee cited recent issues in the world economy, particularly in the
insurance sector, to oppose the government's suggestion. Clearly, India is
getting a reputation as a country fond of endless debates and discussion but
generally refusing to take action, of having a mentality of kicking the can
down the road - something that has now become all pervasive.
Even more glaring is the apparent decision of the same parliamentary standing
committee to withdraw the National Identification Authority of India Bill 2010.
While the reasons are not clearly spelled out, I for one am not surprised. This
project has faced several roadblocks and, I am sure, there will continue to be
efforts to scuttle this because it has the potential to change the way the
government's delivery mechanism works.
India's various social sector expenditures are fraught with mindboggling levels
of corruption. Given the amount of leakage and the fact that the beneficiaries
of such practices cut across party lines, it is not a surprise the UID (Unique
Identification) scheme will face roadblocks from the high and mighty of Indian
So, where does that leave India? In a mess, I am afraid. The sentiment of
foreign investors is clearly going to be adversely impacted. The inability of
the government to carry out reforms brings to question the stability of India's
With foreign institutional investors deserting India, the country is in dire
need to attract as much FDI as possible to finance the high and rising current
account deficit. The situation is even more dire, as India's fiscal deficit is
likely to overshoot the target of 4.6% (set during the recent budget) by at
least a percentage point, if not more. The problem is further exacerbated by
the substantial deterioration of the rupee.
NEER - nominal effective exchange rate
With India's growth slowing down sharply (see graph below), RBI will not be in
a position to raise interest rates to attract foreign exchange. Neither can it
intervene in the market to alter the direction of the currency movement. The
only option to stem the flow was to have been able to attract FDI.
Ergo, with the growth rate falling off, inflation remaining stubbornly high
(though expected to come off soon, mostly due to base effect), the fiscal
deficit moving north with gusto, and with a depreciated currency (expected to
depreciate even further), the year 2012 will turn out to be very challenging
Swati Lodh is an economist and freelance writer.
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