World Bank: A thorn in small traders' flesh

The World Bank and the International Monetary Fund (IMF) have made some suggestions for reviving the Indian economy, but detailed scrutiny shows that these are made to favour big businesses and will take the economy further downhill.

They have asked for the implementation of labour reforms. It is indeed true that businesses today invest in labour-displacing automatic machines because they are weary of employing large numbers of workers.

It is difficult to remove inefficient workers because of the labour laws. This is the main reason of labour productivity being less than half of that in China. The freedom to hire and fire in China encourages businesses to employ large numbers.

The government is soon bringing reforms in the labour laws and plans to allow hiring of contract workers who can be removed at the expiration of their contracts. That is a step in the positive direction though inadequate because it will continue to be impossible to remove existing inefficient workers.

There is a deeper problem though. Adequate numbers of jobs may not be created even if the government enabled the removal of existing "permanent" employees. Capital has become cheap.

It is more profitable to employ machines than man. It will require explicit policies to generate employment if we have to provide jobs to millions of our youth. Most jobs are created in small businesses using labour-intensive methods of production.

But their cost of production is higher compared to big businesses. The only way to create employment in manufacturing is to provide protection to small businesses.

But this will hurt the interests of the big businesses — both Indian and multinational — thus the World Bank is silent on this.

Second, the World Bank has asked that the purchase of land be made simple. The real problem is the price of land, not the law. I know of a number of businesses that have acquired land without any litigation. They arrived at a mutually agreed price with the sellers.

The question is whether the big business will get the land cheap through a "hard" acquisition law; or the people will get more money by selling at a mutually agreed price. The World Bank wants a hard law so that big businesses can benefit.

According to one study, the price in Mumbai is US Dollars 174 per square feet against USD 444 per square feet in Beijing. So, businesses can afford to pay the market prices. The World Bank wants draconian laws to forcibly take the land from the people at low prices.

The third and main recommendation is that India embrace free trade and free movement of capital yet more deeply. It is not disputed that the Indian economy is today more open than it was three decades ago.

Why is it then President Trump in the United States and Prime Minister Boris Johnson in the United Kingdom are pushing for protectionism?

The fact is that free trade has not delivered for even for these developed countries, let alone delivering benefits for developing countries. It has delivered profits for Microsoft and Amazon, not for the people.

The reason is that free trade favours large businesses against the small. Free trade enables a Chinese Corporate to produce footballs in large volumes with automatic machines in Shanghai and sell them cheap in Mumbai.

That provides cheap footballs to the Indian consumer but, at the same time, kills the small football maker in India. The result is that Indian workers do not get employment in making footballs, they are rendered unemployed and they cannot buy the cheap Chinese footballs.

This is the simple reason why the United States and the United Kingdom want to step back from free trade. Let there be no illusion. The businesses in these countries want free trade. I was recently in London.

A shopkeeper was painting a gloomy picture of Britain leaving the European Union saying that even bread would only be available at four times the present price after Brexit! The situation prevails in India.

The big businesses have benefitted from free trade. The Sensex has gone up from 3,000 to 4,000, while at the same time, the growth rate has gone down from seven percent to four percent.

This means that the big businesses are galloping whole economy is collapsing. The main reason is free trade. Big businesses have got the freedom to export pharmaceuticals from India and import footballs from China. Thus, the Sensex is galloping. But the common man has lost his job. Thus, the economy is collapsing.

The harangue of the World Bank and IMF is that we need to embrace more of free movement of capital and implement domestic reforms to attract foreign capital. There should be freedom for Amazon to invest in India and for Indian businessperson to migrate to the US.

The ground reality is that free movement of capital has become the route for the outflow of capital from India to the developed countries. The World Bank publishes a yearly Global Development Finance Report.

Previously it used to give estimates of how much capital has moved from the developed to the developing countries and vice versa. Those movements indicated that large outflows from India and other developing countries were taking place to the developed countries.

In the last few years, however, the World Bank has stopped giving that detail. Obviously, it does not want the people of the developing countries to know that the opening to the global economy is leading to their impoverishment.

Worse, the World Bank gives partial data that is misleading. It says that net private capital inflow into the developing countries is taking place.

But this is only part of the picture. Most outflow takes place through trade manipulation and illegal channels. This is the figure that the World Bank was giving previously that it has now suppressed.

The proof that net outflows are taking place is that the currencies of the developing countries are declining against those of the developed countries. This necessarily means that more rupees are moving out of India and less dollars are coming into India.

The supply of rupees is more, and supply of dollars is less leading to decline of the rupee.

That said, one good suggestion made by the World Bank is that the Public Sector Enterprises must be privatised. I would say that the same should apply to the Public Sector Banks.

But these positive suggestions are few and afar. The basic purpose of the World Bank and IMF combine is to promote the interests of the big businesses and kill the small businesses and the Indian economy.

(The writer is formerly Professor of Economics at IIM, Bengaluru)