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December 20, 1997


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Business Commentary/Ashok Mitra

To hell with reforms!

Economic liberalisers are a committed lot, life to them is not worth living unless the last vestiges of controls have been removed from the system. With full-fledged capitulation of economic and financial policies to the dictates of international capital, India's long night of travail, these zealots are convinced, will be over as it, for instance, is all but over for Russia, slowly climbing out of the nightmare of socialism.

Things have not in fact clicked in Russia though. If a free vote were organised at this moment, the Russian people will perhaps opt for the old Communist regime which, despite its several negative aspects, had provided for all of them jobs, food, education, health measures and comprehensive social welfare. Major backsliding has taken place in all these spheres in the course of the past decade. Capitalism has not delivered the bounty. The Mafia have taken over the economy, devotees of globalisation are wearing puzzled looks. Socialism had failed the Russian people, or such is the assumption. A similar fate under capitalism is going to be a first-rate embarrassment.

Bad tidings for free market fundamentalists. Besides, it never rains but pours. Even if Russia failed them, the liberalisation ideologues had a fall-back position, they could still quote the economic miracle accomplished by the Asian Tigers -- South Korea, Thailand, the Philippines, Malaysia, Indonesia, et al -- under the dispensation of unbridled free enterprise. The legend had been as follows: Investment -- particularly foreign investment -- soared higher and higher in these countries; there was record accumulation of foreign exchange reserves; exports boomed; the stock exchanges had a most exciting time and the rates of growth of income and employment scaled to fabulous heights.

Admittedly not as great heights as attained by China, but then China did not have democracy, while these Asian Tigers had both democracy and dizzy growth, thanks to the good and wise free market policies. The two finance ministers India has had since globalisation was ushered in 1991, had wondrous references to the Asian Tigers paradigm always on their lips while preaching the virtues of free market economics and its appropriateness for India.

Now there is a twist in the table. International currency and stock market speculators, who had penetrated deep into the economic system of the Asian Tigers, suddenly chose to indulge in some fun and games. They began to pull out their portfolio investments fast. Their bearish frenzy set the bourses crashing. At the next stage, foreign speculators targeted the currencies of the Asian Tigers, and maneuvered to depreciate their value in terms of the dollar and other Western currencies by a considerable order which in turn resulted in a run against these currencies. The foreign exchange reserves of the Tigers have plummeted as a result; the exodus of capital is still continuing.

India is a more recent convert to globalisation. Despite this johnny-come-lately status, our civil servants and ministers have done remarkably well in accelerating the pace of surrender of the nation's economic apparatus to foreign predators. Is that not what economic liberalisation is about?

Industrial and exchange controls have been lifted across-the-board, restrictions on short-term capital movements are off, the stock exchanges have been opened up for foreign parties who are permitted to buy in the bourses equity of a domestic company, including of a banking company, to the extent of 30 per cent.

The other standard conditions of globalisation have also been religiously observed. Import tariffs are drastically down; quantitative restrictions on imports are being dismantled even faster than the provisions of the Marrakesh Treaty stipulate. These measures taken together were supposed to do wonders to the efficiency and international competitiveness of Indian industry, thereby promoting exports as well as growth on all fronts. Once this beautiful set-up has been made ready, direct foreign investment, countrymen were assured, would flood the country; the estimate of FDI inflow trotted out day in and day out by the United Front finance minister was a magnitude somewhere in the neighbourhood of $10 billion annually.

Such a development, it was explained, would make investment and capital formation activities on the part of the state agencies altogether unnecessary; the public sector should therefore be progressively marginalised. Direct taxes are also to be brought down several notches providing an additional stimulus to investors, domestic as well as foreign.

Foreign institutional investors and NRIs had shown approval of the foreigner-friendly gestures initiated by the government of India. They decided to park some of their spare funds with Indian financial institutions and activated themselves in the Indian bourses. Such gestures pushed up India's exchange reserves to $ 30 billion. These reserves are understandably subject to wild volatility: institutional investors may suddenly change their mind and pull their money out. Should they do so, our exchange reserves could once more dwindle to insignificance.

This part of the story has just begun. International currency speculators have recently taken immense pleasure in ruining the bourses and the external value of the national currencies of South Korea, Thailand, Malaysia, Indonesia and the Philippines. They have no good reason to leave India out. They have not targeted the Indian rupee with great earnestness: The exchange rate of the rupee to the dollar is down from the range of plus-minus $ 35 to plus-minus $ 40 over the past fortnight. A magnificent stratagem at work.

The run in the international currency market against the domestic currency is generally marked by a draining of exchange reserves. This happens because of two reasons:
a. Foreign institutional investors and their associates desert the currency that is falling so as to avoid loss-making; and,
b. The country's central bank has to sell large sums of foreign exchange in its endeavour to stall the fall of the domestic currency. The Indian public is yet to be informed how much of our foreign exchange holdings have disappeared in recent weeks because of this twin development. But the central message is clear. The only substantive gain from globalisation, the accretion to foreign exchange holdings, is also going the way of all flesh.

An interesting sub-episode is still worth reporting. During the few days the Reserve Bank of India was desperately selling dollars to protect the value of the rupee, it found to its consternation a whole array of Indian commercial banks pitted against it, including the State Bank of India. The commercial banks following the example set by foreign speculators were furiously buying dollars in order to do the rupee in. Even though 51 per cent of the equity of these erstwhile nationalised banks continue to be held by the government, official representatives on the boards of these banks hardly bestir themselves. The banks are in effect run according to the whims of foreign equity holders.

The sharks have not been reprimanded for their behaviour. On the contrary, the RBI has as good as given up its efforts to defend the rupee. For word has come from the IMF that the exchange rate of 34:1 was unrealistic, India should accept the 40:1 rate. Indian officialdom has agreed without demur. Apart from the other consequences, the decision will lead to a 15 per cent decline in India's national income, as if by magic.

Direct foreign investment has turned negative. All other macro-economic signals are equally depressing. Our mandarins have still the cheek to suggest that all this has been brought about by political instability. That is to say, events occurring in November 1997 were retrospectively responsible for the lack of capital formation and growth in the preceding six-and-a-half years.

Ashok Mitra

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