Global meltdown: Save Indian economy
by Sandhya Jain on 27 Oct 2008 0 Comment

In the first week of October 2008, NRI steel tycoon Lakshmi Mittal lost £ 16.6 billion in the global credit crunch as stock markets took a beating. NRI metals entrepreneur Anil Agarwal lost £ 2.7 billion. Previously, as the Wall Street financial crisis began spreading its long shadow over India, the ICICI Bank stock crashed 10 percent in mid-September. ICICI reportedly had $ 80 million exposure to Lehman Brothers.

India and the rest of the world have important lessons to learn from the collapse of Wall Street. Literally hundreds of billions of dollars managed by the Wall Street investment banks have vanished into thin air, taking the earnings and pensions of almost the entire working population of the United States. The effects are already reverberating in Europe and other world markets.

India has escaped the worst of what is rattling the entire West today, thanks almost entirely to the Left parties that refused to support the legislation enabling the very same scam-ridden Western banks and insurance companies to walk into India. The scam that has vapourised the savings and even the homes of millions of Americans, the scam that is even now bailing out only the guilty bankers and financiers, would equally have gobbled up Indian savings, pensions, insurance policies, provident funds. It has been a very narrow escape – a Congress-majority government would have allowed full globalisation without safeguards, bringing millions of Indian families on to the street.

As Governments the world over rush to intervene to save and stabilize their respective economies, it is being admitted that Government has a responsibility in regulating the economy to ensure that ordinary citizens are not cheated by crooks and swindlers. The argument that the private sector knows better and works better without scrutiny stands discredited.

In America, the major private investment banks speculated with the money of the people, with the result that all private pensions have gone bankrupt! Mercifully for ordinary Americans, whatever is left of the Social Security programme (steadily whittled down by the Bush White House), has been protected by the fact that it was preserved from Wall Street. Had the White House and leading Republican and Democrat Congresspersons succeeded in their attempt to ‘privatize’ Social Security, the fund would have been bankrupt today.

The American experience is that the linking of pension funds to the stock market has already cost all major private pension funds for public and private employees between 23% to 30% since January 2008. This has hit the living standards of retirees, forcing many to work even in their seventies and beyond. It is only pensions linked to publicly-funded productive activity that can avoid the losses and risks associated with the stock market. There is a timely warning for us all in the American crisis.

Growth, particularly sustained growth, comes out of a diversified economy and a manufacturing base within the country - something India has in good measure. America foolishly lost by outsourcing all manufacturing to cheaper countries like China. The greatest lessons from America, therefore, are the pathways and pitfalls we should avoid.

Here the biggest lesson is – avoid crony capitalism. From the time the UPA came to power, we have seen the State favour private investors unfairly. It began with the Haryana Government’s establishment of a Special Economic Zone for a favoured family, rather than as a policy issue that any investor could benefit from. Thus, this was not a zone with special facilities like power to foster industrialisation – but a huge tract of land to be owned by private industry, totally out of proportion to the needs of a specific industry. The land would be seized from farmers, who would be driven out with the use of State power, and handed over to industrialists to sell further, and pocket the huge differential.

Congress MP Kuldip Bishnoi was the first to object to this new face of crony capitalism, which led to his suspension and later expulsion from the party. But Congress’ brutal repression of dissent put the nation on alert; farmers everywhere began to resist acquisition of fertile land to promote industry. In Goa, the Congress chief minister himself sought the cancellation of three SEZs, and more recently, in Raigad, Maharashtra, district authorities organised a local referendum – 95% voted against SEZ!

Crony capitalism showed its ugliest face in West Bengal, where Tata Motors began work on land acquired forcibly by the State Government, and then pulled out of Singur when things got tough. Senior journalist Prem Shankar Jha observed that though Mr. Tata blamed Trinamool Congress leader Ms. Mamata Banerjee and was supported by industry leaders, the flip side of the story was that Mr. Tata did not pay farmers for the land. A compensation of Rs. 131 crores was paid by the State, and the land handed over to the Tatas on a nominal lease rent. This is nothing but a fat subsidy (Hindustan Times, 5 October 2008).

That is why the Tatas could walk out so easily – they had no stake in West Bengal. The major part of their investment in the Nano project (machinery, generators, computers, etc.) is moveable, and has been moved out. Only the sheds will remain, a loss the company can afford, and which is far less than the West Bengal’s government investment in acquiring the land after beating farmers black and blue. [As of now, it is said Tatas will pay for the land at Sanand, Gujarat]. 

In America, crony capitalism led to the $ 700 billion Wall Street bailout, which may yet prove inadequate to satisfy the bankers and financiers who created the mess. What is sacrificed to pay for this it is universal health care; reduced Social Security; education. The Bush administration never once thought of investing public funds in manufacturing, construction, education and health care, all of which have a multiplier effect on the economy, and could have guaranteed decent living wages for everyone.

The Manmohan Singh regime in India is equally uncaring about the people and the general health of the economy. As stock markets tumbled in the wake of the crisis, the Securities and Exchange Board inexplicably [7 October] allowed indirect investments in Indian shares by foreign portfolio investors. Supposedly aimed at reviving capital inflows after sharp losses in the benchmark index, SEBI removed restrictions on issuing participatory notes (P-notes) where the underlying asset is a derivative. In the on-going Wall Street crash, the base cause was derivatives – a complex financial instrument which turned out to be based on hot air. So when the balloon burst, everything went up in smoke.

Now, the Indian powers-that-be have suddenly scrapped a rule which said P-notes could only account for up to 40 percent of the value of assets held by a foreign fund. P-notes are issued by foreign funds registered in India to unregistered overseas investors (who could be anyone).
Whichever way one looks at it, this is a scandalous directive, as the foreign investor remains unknown, and there is no way of knowing who the real holders of the assets are. In the wake of his peculiar conduct during his recent visit to America and Europe, Dr Manmohan Singh should explain why his Government has suddenly overturned its own previous directive asking all Foreign Institutional Investors to remove all P-notes from the market by December 2008.

The directive was issued primarily to prevent the use of the Indian share market by terrorist organisations to raise funds for – naturally – more terrorism. That threat has by no means disappeared.  So the Indian public has a right to know what has changed to make the UPA change its course – was there a “request” to Dr. Singh to bail out some of his new Western ‘loves’ by compromising the health and stability of the Indian economy?

The author is Editor,
[This article was written three weeks ago for the Diwali issue of the Gujarati weekly, Sadhna]

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