Ashoak Upadhyay

The loneliness of being FM

ASHOAK UPADHYAY | Updated on March 12, 2018 Published on August 13, 2013

Finance Minister P. Chidambaram…trying one policy fix after another

The enthusiasm for external sector reforms seems misplaced. Our addiction to external debt and gold and oil imports is here to stay. If one was asked which minister was leading the policy thrust to talk up the economy, the unanimous answer would be, of course, P. Chidambaram.

If one was asked which minister was leading the policy thrust to talk up the economy, the unanimous answer would be, of course, P. Chidambaram. Most other key members of the Cabinet are silent because they either have little clue as to what should be done, or too much knowledge of all that has not been done.

The Finance Minister offers one solution after another even as the evidence grows that the economy is not listening.

The latest offerings came on Monday as part of a series of “sops” that the Finance Minister thinks will kickstart the fortunes of India’s export sector and fill some of the current account deficit (CAD). His “blueprint” includes spikes in customs duties to restrict imports of certain goods, relaxations on external commercial borrowings, both meant to reduce the alarming CAD.

Will he succeed?

It seems unlikely. Demand for gold is price inelastic because of tradition that endows it with an exaggerated and perhaps irrational value as a hedge against the uncertain times we live in. Fuel, that other debilitating burden on the current account, is also price inelastic because public policy has not been able to crank up domestic output enough to let us believe that the Finance Minister’s efforts at reducing imports will succeed.

Equally, its demand is also insensitive to price hikes because of the ease with which escalations can be passed on to the consumer. The poor do not matter, the rich don’t care and like them the middle classes are in love with the automobile. So long as economic growth is identified with consumption of goods that make our lives so much more stressful — think of those traffic snarls and the pall of poisonous smoke even in small towns with big-city attitudes and the money to showcase them — the pressure on imports will not be tempered with customs duties.

Deeper into debt

As for external commercial borrowings, what good will more debt do the economy? It’s not capital that is in short supply for infrastructure, the lack of which we all bemoan; it is the inability of policymaking to make intentions adumbrated in Five Year Plans and project MoUs come true.

What the liberalised ECB norms will do is increase India’s external debt through the window of opportunity for the private sector that the Finance Minister would like to open wider. The Finance Ministry’s own report “India’s External Debt as at end-September 2011” may be dated but we should have no reason to doubt the seriousness of the situation it so blandly describes. India’s debt, says the report, increased end-September 2011 over end-March 2011 “primarily on account of higher commercial borrowings and short term debt. These two components have, in unison contributed over 80 per cent of the total increase in the country’s external debt.”

Hear that hollow ring

Chidambaram, some might say, is addressing the problem with his plans to moderate imports through customs duties. These should, it seems, reduce demand for short-term trade credits that were needed when the economy was growing.

Will they work?

It’s a long shot really, considering demand inelasticity for gold and oil imports.

Besides, the benefits of such moderation will be more than wiped off because of the valuation effect; even in December 2011, the report noted the impact rupee depreciation would have on the huge spike in ECBs between 2006 and 2011 when they grew at a CAGR of 27 per cent, compared with 1.7 per cent in the previous five years.

More than half of India’s external debt was then denominated in dollars; if the trend stands, one can only shudder to imagine — in the light of the steep fall of the rupee — what that window of opportunity Chidambaram wishes to open wider will bring in.

Chasing windmills

So, why is the Finance Minister, certainly one of the more perspicacious of India’s policymakers, opening the panes to more pain?

In part, it is to divert a perceived demand for capital from a stressed-out domestic banking system and obdurately high interest rates to a more generous global market and to create the right mood for more global capital to flow in, courtesy existing FDI norms diluted recently.

But in wishing for a positive effect on a dispirited economy, the policymaker takes for granted the rest of the environment for investments.

He assumes all is hunky-dory, that mechanisms exist to ensure money does not pour into the hungry maw of avarice and sloth.

He also assumes that the kind of FDI that will find India attractive will be the kind that fires up not just the Sensex but transfers technology, ramps up obsolete managements, in effect serves as the white knight for that noble purpose of investing India’s vast manufacturing base with global excellence.

Past experience does not bear that hope out; studies have shown that just 40 per cent of the FDI in all its variants that came in during the four years to 2009 went to manufacturing, IT, telecom.

Of the total FDI to that date, less than half was actually ‘FDI’, the rest being short-term funds, portfolio investments and ‘round-tripping’ capital.

Right now, the UPA’s guide to cheerleading is pretty thin with nostrums for an economy saddled with various liabilities: High NPAs, high external debt, high inflation, high interest rates, contracting output, and a derring-do policymaker alone at his drawing boards.

Published on August 13, 2013
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