It is hard to imagine the suave, Harvard Business School educated Palaniappan Chidambaram as the legendary Dutch boy who saved his country by putting his finger in a leaking dike holding back the sea, and staying there all night. But that’s pretty much the situation that the Indian finance minster is facing: the economy is collapsing, and times are desperate.
The problem with the Dutch boy metaphor, of course, is that there is usually not just one hole in the dike; you plug one, and three others open up. Worse, the leak you are plugging may turn out to be just too big to handle and it overwhelms the band-aids you are using. Or if you freeze to death while doing your plugging heroics.
This is more or less what has happened with the desperate dash by Chidambaram recently to the US and the sudden opening of 11 sectors for FDI. The underlying assumptions are two-fold: that FDI is the way in which India’s gaping current account deficit (CAD) can be covered, and that there are many (foreign) investors just waiting to enter India if only we let them.
Both assumptions are completely false. To use a medical analogy, let us say the diagnosis is that the patient is suffering from a bacterial infection, and so you give him an antibiotic. However, his real problem is that has gangrene in his leg, and the proper treatment is to amputate the limb. With the antibiotic, he will still die of the gangrene. The UPA is thus solving the wrong underlying problem and the alleged cure will do nothing of use.
The real problem is that the CAD is soaring because of the plummeting rupee, as well as galloping demand for oil. There are no quick fixes for these. The rupee is falling because the economy is collapsing. The economy is collapsing because of lack of investment in infrastructure for the last 50 years, and the loss of competitive advantage due to huge, unproductive entitlement policies.
India doesn’t have the roads, ports and electricity in place to support just-in-time global supply chains. Half of Indian agricultural produce is spoiled, or eaten by pests/rodents because we don’t have the storage silos or refrigerated warehouses or value-added processing facilities.
The demand for oil is going up because of poor policy and tactics. On the one hand, the mandarins did not wake up to the need for energy as a prerequisite for economic growth until recently; this meant that a more alert China had already sewn up most of the long-term contracts for energy supplies. Thus India is left scrambling for the leftovers; and given the arrogance and incompetence of India’s negotiators, we have been not managed to sign up even Bangladesh’s natural gas right on our doorstep.
On the tactical side, there is tremendous wastage in Indian energy use. Have you seen the vast motorcades of any politician? Why aren’t these people given a rationed amount of fuel? How about the fact that 50 percent of electricity generated in India (sometimes using imported oil or coal) is wasted, lost, or simply stolen?
The other reason for loss of competitiveness is that the Indian state has been investing many billions of dollars in useless, unproductive, populist vote-getting schemes. White elephants like NREGA, RTE, and now Food Security Bill are clearly distorting the economy.
Further, none of the alleged welfare schemes in the last 50 years has borne fruit – the Asian Development Bank reported recently that India’s welfare is the worst-performing in Asia. It is neither broad nor deep, that is, neither are the majority of the target populations covered, nor is the payment to the lucky recipients sufficient. An article in the Economist magazine of 6 July 2013 (“Widefare”) provides the details, as shown in the attached graph. So depending on FDI to solve structural problems is a non-starter.
The second major assumption, that potential investors are lining up to bring in FDI, is even more laughable. First of all, given the massive corruption levels in India (after the CWG fiasco and the 2G scam, many foreign analysts are aware of this) and the plunging rupee, what we are offering the foreign investor is a not-so-seductive message: give us your dollars, your yen, your euros, and we will rapidly depreciate the rupees that these will be converted into. In other words, we will steal your money.
Second, large Indian investors are doing outbound FDI in a big way, which is hardly a vote of confidence in the economy. They are voting with their feet on the prospects of India’s economy.
Third, everyone remembers the capricious way in which Vodafone’s FDI has been treated. To refresh one’s memory, the UPA government changed a law to be retroactively applicable to the last 50 years – yes, the last 50 years – just so they could apply capital gains tax on Vodafone’s investment in India. This sort of lack of consistency in policy – this is only marginally better than outright nationalisation – is the kiss of death for FDI.
Fourthly, and most comically – and this is where the delicious image of P Chidambaram as the Dutch boy with the dike leaps to mind – in the very week when this flurry of activity happened trying to induce American FDI, two of the biggest-ever FDIs in India, Arcelor Mittal’s $12 billion plant in Odisha, and Posco’s $7 billion plant in Karnataka, have been cancelled, after languishing for years!
Talk of bad timing. Tough luck, indeed!
Further, there is the terrifying possibility that the UPA government has given away a lot in its zeal to attract FDI. Those will long memories will remember the last time there was a ‘deal’ with the US – that was the infamous ‘Nuclear Deal’. In that case, India gave up its pathetic and tiny nuclear deterrent (in effect, although some may quibble) in return for the promise of American nuclear technology for power reactors. We have no idea what the pound of flesh this time is.
As much as the UPA in its desperation might gyrate its hips, its charms at the moment are simply not seductive enough to attract the kind of white-knight foreigner who can rescue the damsel. In other words, there is no quick-fix remedy for a lingering, structural malady. It is black comedy that in the very week FDI was offered to all on a platter, two of the biggest investors pulled out of their mega projects.
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