Prime Minister: Can we think beyond FDI?
by Krishnarjun on 15 May 2015 3 Comments

As the BJP completes a year in power, there is increasing pressure on the government to deliver on the economy. Though the government is steadily progressing on the promises committed in the BJP manifesto, there are attempts to create confusion on the ground, particularly among the urban middle classes, regarding the direction of the economy.


A section of lobbyists made all efforts to re-image the popularity of Narendra Modi to their vested agenda and ideas of development when his rise to the top seemed inevitable. They have tried to obfuscate the real reasons for his popularity with jargon about free markets, disinvestment and growth. An honest analysis of the election result would show it was the promise of “Sabka Sath Sabka Vikas” that finally swung the election in the BJP’s favour.


The lobbyist cum expert class never bothered about the public commitments of Narendra Modi during the campaign with their sheer arrogance that they would manage the prime minister once he sat in government. When it became clear that the Prime Minister would run his government on the agenda committed to the people, the lobby activated the sleeper cells in the establishment. A disgruntled former disinvestment minister whose contribution to the NDA 2004 electoral loss was significant, condemned the government as directionless and communal.


Income tax notices to a group of FIIs that made huge profits without paying any tax are seen and discussed as tax terrorism, anti-business, anti-reform, anti-growth and even socialism. In the past, government’s perspective was that huge organized syndicates that book hefty profits by manipulating and creating volatility in equity markets have to pay tax on par with other businesses making profit, so notices were issued to select FIIs for MAT (Minimum alternative tax) based on their trading volumes and profits booked. In many cases these FIIs were not paying capital gains tax in India, exploiting double taxation agreements with Mauritius and Singapore.


ARS (Advance Ruling Authority) ruled in certain cases that FIIs are liable to pay MAT if Indian securities are traded between them. This government has removed MAT on FIIs in the 2015 budget and deferred implementation of GAAR (General Anti-Avoidance Rule) that proposes to stop tax avoidance by FIIs till 2017. The tax notices were for the period prior to the removal of MAT in 2015. The series of events again raise questions on the role of foreign investments in an economy.


While manufactured mainstream expertise shows any kind of foreign investment is a path to economic salvation, there are serious studies on different grades of foreign investment and their overall impact on economy. As a thumb rule, foreign investment has to be judged on its net impact on country’s foreign exchange reserves, natural resources and overall balance in economy. Foreign investments in short-term debt or in established sectors through equity, takeovers can only lead to more repatriation of capital through interest and profit earnings than what comes in as investment with net negative impact on foreign exchange reserves. This type of investment forms a major chunk of investments from FIIs. Currently they own approximately 350 billion dollars in Indian equity and debt markets, almost equal to current Indian foreign exchange reserves.


Foreign investment can help the economy if it brings technology and expands the economy into new areas, creating necessary technical human resources in the process and reduces the country’s dependence on imports. These investments generate employment, save foreign exchange and seed new areas of growth in an economy. The ‘Make in India’ program is an attempt by the Indian government to capture this type of foreign investment with focus on Defense and Electronics.


Another kind of foreign investment focuses on exports to the home or international markets, utilizing human and material resources in a country at cheap costs. This model earns foreign exchange but at huge cost to country’s human and material resources. The excessive export orientation distorts balance in the economy, makes the sovereign economy a satellite of export markets


It is nobody’s argument that a country has to shut itself to the world, but the propaganda that foreign investment is a pre-condition for any kind of growth and development has to be countered. It’s a myth perpetuated by financial colonists through their well groomed agents in the establishment, academics and media. Theories perhaps valid at a particular time, context and societal backdrop are standardized and presented as complex universal theories of growth and development, beyond the intelligence of common man.


In reality, the economy is a part of the individual and the family and there is nothing in it beyond the grasp of common man. A country like an individual or family cannot live beyond its means; if it needs something that it doesn’t have then it has to trade with something it has, that is the bottom-line of foreign trade. If the import-export transactions log, refereed as “current account”, has negative balance it means imports exceed exports and a country is living beyond its means.


A country with no industrial base aspiring for industrial goods has to import them before it makes them on its own; it takes many decades to create an industrial base. Meanwhile, the country has to either exchange industrial goods with natural resources, agriculture products and other non-machine made items or face trade deficit; the deficit can be financed by external loans on the terms of lender or let foreign investments takeover the economy leading to socio-economic colonization  with resource and environmental exploitation.


The toughest part in a country’s journey is achieving a mechanized industrial base from a pre-industrial non-mechanized economy. India after independence has achieved it through judicial planning and management of resources without letting foreign takeover of the economy. The country paid a mandatory price with its natural resources, agriculture products, and human resources to achieve an industrial base. After the difficult work was accomplished through numerous public sector enterprises, when the economy is ready for a big leap forward, the international financial colonists through their native collaborators scheme to take over the economy.


Through their collaborators in government, the financial colonists created a balance of payment crisis in the 1990s and used the opportunity to enter Indian markets. The two decades that followed created a services bubble led by information technology, finance and real estate, while manufacturing and agriculture stagnated. Foreign exchange earned through exports from IT-BPO service sector couldn’t even pay the rising demand for electronics, energy and other luxury items from the bloated incomes in the service sector.


After two-plus decades of buoyancy and propaganda, India’s growth story through foreign investment is staring at the reality of ever increasing current account deficit. The share of agriculture in GDP has shrunk to 13% while there is hardly any significant decrease in workforce engaged in agriculture, currently at 50%; distressed farmer suicide numbers have risen from thousands to lakhs. The share of manufacturing in GDP has declined and it has become hard for SMEs to survive. The stock market though is zooming with no job creation on the ground and this speculative bubble in the economy is increasing inflation and the common man’s woes.


Crony capitalism has peaked and the brazen politico-corporate nexus has repulsed the man on the street. In his extreme disgust towards the establishment, the common man saw some hope in a man with roots like him and who for a decade showed his mettle in improving agricultural income and enhancing the manufacturing base in Gujarat, as chief minister. For the first time the common man, the peasant, the urban and rural poor overwhelmingly voted for a party considered as representative of urban elitist interests.


India is at a crossroads, it can either choose to emerge as an independent sovereign political economy with grassroots empowerment of the masses or become a vassal state of international finance and its native collaborators. Anticipating Narendra Modi’s rise to the top, they have already planted their lackeys in key institutional positions in the economy.


The prime minister has a huge task of creating jobs and livelihood, preferably self-employment, on the ground. The lobbyists cum experts are clamoring for more power over the Indian economy to Dalal Street and Wall Street; they want business on their terms and condescendingly wait for the government to fail on the economy to prove their indispensability. The prime minister has two choices - he can succumb to the Dalal Street Wall Street nexus or empower the common man who overwhelmingly supported him. This is not an easy task, but it’s not impossible either.


The prime minister needs to focus on solving the basic necessities of the common man. Basic necessities are the core drivers of the economy and the major contributors to GDP. A dogma is being promoted by financial colonists that governments have to borrow from markets to spur economic growth.


But with good planning, the government can create investment without causing inflation. In history, there was initially no investment when groups came together and cooperated to improve their living conditions and achieved prosperity. If government judiciously expands the productive capacity in core sectors like food, steel, cement and other necessary consumer goods, growth can be achieved with minimum inflation. For example, a massive impetus to public housing would need parallel augmentation of steel and cement capacity. 


Fortunately government can use PSUs and the banking system efficiently to achieve growth in core areas that need massive investment. If the so called investment from private sector is mostly managed from the banking system, why can’t government creatively use its own banking system through well established PSUs for growth?


The Make in India initiative in specialized technology areas can complement growth with necessary technical infrastructure to produce capital goods locally that can support capacity expansion in core areas and consumer products. It’s not an impossible task to achieve growth without compromising with crony capitalism.


Government presence in core areas through PSUs can create a real level playing field for the masses and prevent takeover of the commanding heights of the economy by a few crony capitalists. The gap between core areas that need massive investment and the end consumer can be filled with a network of private SME entrepreneurs. This would ensure diversity and balance in socio-economic life supported by strong family and social structure.


The government’s focus on key areas likes agriculture, food security, housing, education, health and core industrial activity through PSUs is enough to create massive job and self-employment opportunities.


Real estate, Health, Education have become huge avenues for undue profit booking, black money and mafia style operations. Without proper public education system, a healthy and just society is impossible. The official patronage to English language by the Government of India has made meaningful universal public education an impossible target and heavily discriminates against the masses to the advantage of a few anglicized sections.


An average family spends anywhere between 20-25% income on private English education given the pathetic public education. This is a heavy burden on the common man. Real estate speculation is suffocating the common man, with no connection between average income and real estate prices. One important use of the land acquisition bill could be to burst the real estate bubble in urban areas as it has provision to acquire land for public housing while sharing a part of the developed land with the owner. Public health is dysfunctional and a major cause of bankruptcy in families. A universal insurance coverage for high risk costly ailments at reasonable premium on the lines of recently announced social security schemes would go a long way in fixing public health costs. Minimizing leaks in real estate, education, health services is the secret of a happy economy.


In sum, the prime minister has to achieve growth without disturbing the basic character of Indian society, preserving its diversity, family orientation, aloofness from state or corporation, and independence through socio-economic decentralization. What India needs is meaningful growth with creation of livelihoods on the ground, not rapid growth for growth’s sake that benefits the few on the top of the pile and trickles down to few in the middle with no connection to the bottom.


Foreign investment has to be discreetly allowed to connect the missing links in the economy to achieve contemporary material standards; it’s not a panacea and cannot be a major source of investment for economic growth. There would be many challenges in the path, but the prime minister’s approach, his actions and comments so far seem to indicate that he is heading in the right direction.    

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