Has Chidambaram got his economic strategy right?

The times are desperate. The UPA-II government is finding difficulty in surmounting cataclysmic prospects the economy is facing. Otherwise, suave Finance Minister Chidambaram would not resemble a bull in china shop. Clueless in a global scenario where the neo-liberal dogma is providing absolutely no relief, he appears to have run out of ideas.

Therefore, the government has opted for hackneyed preference for foreign direct investment. Simultaneously, it has liberalized conditions for FDI entry in 12 sectors. The defence production sector, which was earlier considered as too sensitive for its strategic nature is now opened. Though the cap for defence production in general is at 26 per cent, subject to clearance by the Cabinet Committee on Security, higher limits may be set for `state-of-the-art’ manufacturing.

FIPB clearances earlier required for oil refineries, commodity exchanges, power exchanges, stock exchanges and clearing corporations will now be allowed up to 49 per cent under automatic route. Similarly, in the telecom sector, FDI cap has been raised from 74 per cent to 100 per cent, of which 49 per cent will be under the automatic route and rest subject to FIPB approval. In the insurance sector, the FDI cap is proposed to be enhanced to 49 per cent from 26 per cent. But this is subject to approval of Parliament.

Thankfully, in the media sector, both print and electronic, the FDI entry has been stalled due to opposition from the Home Ministry. But, in effect, this hardly matters, because the content of media is already metamorphosed with liberalized FDI regime in public relation and the market research segments which, in real terms, decide revenue for financing media. In both these segments, 100 per cent FDI is already in place under automatic route.

But, perhaps the most serious development has taken place vis-à-vis the government’s policy on FDI in the retail sector. There has been fierce opposition to introduction of FDI in multi-brand retail sector. This had forced the government to propose certain safeguards to offset possible harmful impact of the policy; especially to address concerns sharply articulated in course of that opposition.

They are now being completely withdrawn. That FDI in retail will kill jobs and adversely affect earnings of small producers and force distress sale were some major concerns. To address these, the government had limited the entry of global retail chains only to a few big cities and restricted them in smaller ones. Additionally, there was a mandatory requirement that of all commodities to be sold in such chains, 30 per cent will have to be procured from small and medium scale enterprises. Similarly, there was also a stipulated level of investment to be made in supply-chain infrastructure. Here again, sufficient flexibility has been offered to virtually obviate this requirement.

It is obvious that on FDI in retail, the government has buckled under pressure of global investors, particularly retail giants like Walmart and Carrefour. And in capitulating, the government has been totally oblivious of its commitments in parliament to win passage for the policy. Therefore, this change now constitutes a grave affront to the basic principle of accountability of executive to legislature; a severe blow to the basic feature of our Constitution.

Why is this tearing hurry? The reasons are not difficult to fathom. The government is completely at a loss to stop downslide of the rupee. Earlier practice of current account deficit being financed by foreign financial inflows is no longer feasible. At the time of the budget presentation, this was pointed out quite explicitly.

But the government’s overriding neo-liberal dogma impeded exploration of other avenues. A low tax regime for corporates and a huge waiver of taxes were what the government clearly opted for. The modification of GARR to plug loopholes for tax defaults was what the government decided to keep the investors in good humour. But all those efforts have gone in vain.

Chidambaram’s blinkered views do not allow him to appreciate that the nature of financial flows does not essentially depend on what he is offering. It is necessarily a structural issue. Financial investments from developed economies towards emerging economies take place when there is a degree of comfort, possibly a boom scenario. When risks are involved, metropolises will shirk away from the periphery. That is exactly what is happening right now.

In fact, earlier when there were huge financial inflows coming in and economy was giving an impression of becoming overly bloated, suggestions were made but they fell on deaf ears. Suggestions for certain taxes on such flows as introduced by China and Brazil were treated with absolute contempt. Today, the government cannot explain why flow of investment has dried up. And it can hardly explain how all assurances to arrest the free fall of the Indian currency are failing to produce any tangible results.

For one thing, free fall of the rupee is making imports hugely dearer. This, in its turn, is contributing massively to the inflationary spiral and the prices of essential commodities. But still, Chidambaram is continuing to soldier along the course of wooing investors and corporates regardless of its cost.

Though the cap for defence production in general is at 26 per cent, subject to clearance by the Cabinet Committee on Security, higher limits may be set for ‘state-of-the-art’ manufacturing

Nilotpal Basu