Jun 16, 2012

Kaushik Basu's useless suggestions to prop up the Indian economy.

I was dismayed to read the lead article in The Times of India today (TOI, June 16, 2012). The article: Let's not overreact by India's chief economic advisor Kaushik Basu (available here: http://bit.ly/KzAhKA) in reality makes a fervent appeal to allow FDI in retail. To bolster the sagging economy, he has only two suggestions: 1) to open up for FDI in retail, and 2) to cut bureaucratic red tape. And both are useless suggestions.

First, let us look at one of his flawed arguments. He praises Indian policy makers for providing the enabling environment for FDI outflow. He says: "India has in recent times become a fairly large exporter of investment. Historically, we placed severe restrictions on the outflow of FDI. Up to the early 1990s, overseas investment by companies was restricted to a paltry $2 million in a block of three years. This made global investment by Indians unviable. In two important policy moves, in 1995 and 2002, this was liberalised. And Indian entrepreneurs have been quick to seize the opportunity. In terms of value of net overseas purchases, Indian companies now rank fifth in the world, after USA, Canada, Japan and China." 

On the one hand, policy makers, economists and business journalists are blaming the prevailing 'policy paralysis' for the flight of capital from India, here is Kaushik Basu appreciating the move that allows India Inc to invest abroad. In fact, as I said earlier in one of my blogs, the Reserve Bank of India has allowed India Inc to take out as much as 200 per cent of their economic worth for investing overseas. More sops/concessions are to be thrown in. This is happening at a time when most TV anchors rue over the declining foreign investments. I don't understand the economic justification for luring FDI and FII investment by providing national treatment to foreign companies, while at the same time allowing Indian money to be invested abroad.

It clearly shows that India Inc has no preference for India. When the Indian economy is in doldrums, I would expect the Indian companies, slush with liquidity, to invest in India. Whatever the neoliberal economists might say, nationalism has to be imbibed in economic thinking. The tragedy is that whether it is Greece or Spain or India, the rich industrialists have no interest in saving their own country from a virtual collapse. The reason is simple. They know for sure that the bailout money too would be to their advantage. Any disaster is a business opportunity for them. Corporates are always looking for an economic disaster, with many of them responsible for the economic crisis (2008-09 has amply shown how the economic meltdown was triggered).

Having said that, I had expected Kaushik Basu to come out with some plausible suggestions as to how to ensure food for 320 million people who go to bed hungry, and at the same time ensure drastic reduction in the levels of malnutrition. Economic reforms unleashed in 1991 haven't been able to make any dent on poverty and hunger (poverty too has grown) despite the claims of the Planning Commission. What is the use of the economic reforms if the population of hungry and malnourished continues to grow? Can any economist justify this?

Regarding FDI in retail, I would like to draw the attention of Kaushik Basu to two of my presentations. Let him answer my analysis: Allowing Retail FDI in India: Lies, lies and damn lies ( here is the link: http://devinder-sharma.blogspot.in/2011/11/allowing-retail-fdi-in-india-lies-lies.html), and if possible also view this video: http://www.youtube.com/watch?v=SPElhVyOJM8&feature=youtu.be There are several others who have challenged the claims made by Kaushik Basu and others, but perhaps India's chief economic advisor's commitment is towards bailing out the American economy.

Talking about bureaucratic red tape, I am amused to see him quoting the US defence secretary Leon Panetta. It is the US which has ensured that the WTO Agreement on Agriculture is so designed that it does not open up the US domestic sector to imports. After arm-twisting the developing countries to accept the final draft, it now wants more market access. It is the US which has refused to cut down on huge agricultural subsidies. In fact, after losing the WTO dispute on cotton subsidies to Brazil, it has provided US $ 147 million of subsidies to Brazilian farmers. This is a bribe paid to by US to Brazil so as to ensure that Brazil does not take countervailing steps. More than worrying about bureaucratic red tape, if Kaushik Basu had raised the issue of level-playing field in WTO Agreement on Agriculture, Indian economy would have easily looked up. Studies show that if US was to remove its Green Box subsidies, its agriculture would drop by 41 per cent or so thereby enabling developing countries to export food and food products to America. India would be a gainer.


Arun Kumar said...

Mr. Devinder Ji, I am the great admirer for your insightful thoughts on the issue realted to agriculture, food policy and all.But i would like to say that all your blog are simply in nature of blaming others. Why dont you highlight in your blog a separate post dedicated to what has to be done exactly to correct the plugholes we have in agriculture policy, food distribution, eradicating malnutrition and EXIM policy on agricultural commodities.

Devinder Sharma said...

Simply because macro-economics has a direct impact on agriculture. When S&P downgrades India and suggests reforms or perish, it's implications for agriculture are immense. We do not normally see this, and treat agriculture as a separate compartment.

It is high time we draw the linkages, and then evaluate the impact on agriculture.

Devinder Sharma

Anonymous said...

Dear Sharma ji,
Congratulations on this piece and incisive comments. You might like to read my comment sent to TOI. I amk not sure TOI will carry it but for your information and use I am appending it below:
The ‘irrational exuberance’ of Kaushik Basu is expected as he has to go back to a lair to sustain and ensure livelihood security. We Indians are not surprised by this as Basu gave a number of indications starting with the Economic Survey 2009-10. The Chapter 2 in general and para 2.6 is the foundation for the utter failure of the Indian economy since 2009. The crisis of ‘pessimism spirals’ gaining upper hand over ‘irrational exuberance’ is a Washington consensus. Our Prime Minister has realised it and hopefully will strongly articulate it at the G20 summit next week. The food price inflation attained record levels during Kaushik’s tenure. It should be surprising to Kaushik that under the inclusive growth template food processing industries, dependent entirely on the food producing farm sector, posted an all time high 14.75 per cent annual average growth since 2009. The moot point here is whether or not massive tax concessions and bailout packages to the industries either bring down food price inflation, fan ‘irrational exuberance’ or triggered ‘pessimism spiral’. Clearly Kaushik did not read the writings on the Indian democracy wall. Both ‘irrational exuberances’ and ‘pessimism spirals’ are like mood swings that is so very characteristic of a dementia patient.
with my best wishes,