Srinagar, Jan 19: Is the Indian economy really as strong as Finance Minister Jaswant Singh seems to believe? It seems so. The first factor is that of agricultural production. Good monsoons have led to demand form the rural areas. Farmers are buying TVs, motorcycles, biscuit and gold.
The second factor is that of outsourcing. Previously American companies established their research facilities only in America because competent scientists were available only in that country. Now equally competent scientists are available in India at a fraction of the price. It is cheaper to establish call centers, undertake medical transcription and translation and other operations in India. This is likely to increase in the coming years because American companies have no alternative to outsourcing. They will be loose their competitiveness if they do not use cheap Indian labour. India will be a winner in this race because we have a virtually inexhaustible supply of labour that is willing to be trained and educated to global standards. Another factor contributing to ‘feel good’ is that Indian businesses are attaining global standards. The successful resistance by the Swadeshi lobby in the last decade prevented a free field being provided to MNCs in India. Indian businessmen got the opportunity to improve their functioning. Now Indian companies are buying out their competitors in Korea, UK and US and becoming multinational. Foreign investors appear to have perceived this reality. They have made a beeline to buy the shares of Indian companies. This explains the rise in the sensex. This rise is likely to be stable because it is based on increasing competitiveness of Indian companies. The third reason of present strength appears to be that of greater investment by the government. Jaswant Singh has jettisoned the previous infatuation with the fiscal deficit. He has given tax concessions which could lead to a loss of revenue of up to Rs 10,000 crores. Jaswant Singh refused to answer wherefrom this amount will be covered. He also refused to comment on the impact of theseconcessions and expenditures on the fiscal deficit. This shows his willingness to let the fiscal deficit rise as has been repeatedly suggested in these columns for the last many years. He has provided huge funds for investments in highways and ports and expressed willingness to provide funds for the river linking project. These investment not only generate demand for steel, cement and labour directly, they also lead to lower cost of transport and communication and improve the competitiveness of our companies in the global market. Only one of the three reasons of present buoyancy appears to be unstable. Agricultural production is dependent on monsoons. But outsourcing and increasing competitiveness of Indian companies is stable unless the government resorts to steps such as imposing taxes on outsourcing to kill it. The investment in infrastructure also depends on government policies. The present buoyancy will continue if these policies are continued. Thus, ‘feel good’ owes itself in part to government policies and is real. However, there are three problems that need attention. Jaswant Singh has taken steps to make credit available to farmers and SSIs at lower interest rates. This effort will fail. The main problem of these sectors is not that of availability of credit. Our rural banks have three times the deposits of their advances. Our villages are flush with funds. Farmers do not know where to deploy their incomes hence they deposit with our banks at dismally low rates of interest. The problem of these sectors is that capital is becoming cheap and that makes capital-intensive production more economical. Hindustan Lever is able to make soap cheap using big machines. It costs more to make soap in the cottage sector. Incentives should be provided for labour-intensive production to generate demand for the products of these sectors. If there is demand for soap made in cottage industry, the small businessman will somehow find the money to start his business.
Lower rates of interest will be ineffective if there is no market for labour-intensive costly products. The second problem is that of making the rupee convertible. Jaswant Singh has made it easier for Indian companies to invest abroad. Indian citizens can send up to Rs 12 lacs every year to foreign countries—no questions asked. This policy may appear to be good in view of the huge forex reserves that we have presently. But this policy is dangerous. We are making our currency convertible in the long run based short run FII inflows. These FII inflows can be reversed for a host of reasons. This policy will prove to be disastrous inflow of FII is reversed. The East Asian countries had a similar self-confidence in the late nineties when they were called ‘Asian Tigers’. But the situation change dramatically within a few weeks and they have not emerged from that crisis till now. A deeper moral question too is involved. We Indians have been opposing East India Company and MNCs like Hindustan Lever for extracting our wealth. Now our businessmen have become competitive. Two paths are open to us. We can become MNCs ourselves and exploit others in the same way as Lever Brothers is exploiting us. Alternatively, we could put an end to both the exploitation. The latter path appears to be more appropriate. We should not make that sin for which we have been criticizing others. The third problem is that of consumption by the government employees. BJP government is licking the boots of these employees. This may be beneficial from the standpoint of party politics but not from the standpoint of the country. ‘Feel good’ is genuine despite these problems. Indian economy is indeed entering a new age.