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Finance Minister riding on two horses

Dr Bharat Jhunjhunwala
The Finance Minister is not able to either reject or adopt globalization. He will fall trying to do both.
The Finance Minister has imposed higher import duties on mobile phones and a few other items in his quest to provide protection to domestic manufacturers from cheap imports and to increase the revenues in the coming year. The revenues earned will be used, in good part, for investing in infrastructure such as highways, rural roads, rural electrification and airports. Thus far the Budget is good.
The Finance Minister also expressed concern with the outflow of Indian capital to foreign countries in his Budget speech. The Reserve Bank has liberalized the rules for Indian citizens remitting money to foreign countries for investments. This has led to large outflow of our capital. The Finance Minister is worried about this. However, he did not disclose the steps, if any, which he proposes to take to stop this outflow.
These two factors indicate a discontentment with globalization. Globalization was conceived as a route to increase exports; and to increased inflow of foreign capital to meet our investment requirements. The above narrative in the Budget points to exactly the opposite happening. Globalization is leading to increased imports. We experience this every day in the purchase of light bulbs and toys made in China, chocolates made in Switzerland and guavas imported from Pakistan. Globalization is also leading to our capital fleeing the borders of the country seeking greener pastures in foreign lands as mentioned by the Finance Minister. Globalization stands on its head today.
At the same time the Finance Minister continues to pander to the foreign investors. He wants to fulfill their demands. International rating agencies have repeatedly stressed the need for the Government to control its fiscal deficit. “Fiscal deficit” is the amount borrowed by the Government to meet its expenditures that are in excess of the income. Say, the Government earns Rs 1,000 crores from taxes and sales of PSU shares, while its expenditures are Rs 1,200 crores. The fiscal deficit, then, is Rs 200 crores. The mantra of controlling fiscal deficit was evolved by the World Bank, International Monetary Fund and the United States Government in the eighties in the context of South America. A number of leaders in that continent were brazenly corrupt. They increased the fiscal deficit of the Government, took loans from the domestic market, embezzled the money, and deposited it in their personal accounts in the Swiss Banks. In this circumstance, the World Bank prescribed that the developing countries should control their fiscal deficit and restrict their expenditures to the level of their income. At the same time, the World Bank prescribed that the developing countries should open their borders to foreign trade so that they could export; and to foreign investment by Multinational Corporations so that their needs of investment could be met.
The trigger for the mantra of reducing the fiscal deficit was corruption and bleeding of government monies by the leaders. There is no need to control the fiscal deficit if the leaders are honest and use the borrowings for investment in highways etc. It appears the Finance Minister thinks that his Government is corrupt and cannot be relied to borrow and invest honestly. Therefore, he has followed the prescription of the World Bank to reduce government investment, reduce borrowing, and reduce the fiscal deficit. The fiscal deficit in the current year 2017-18 is expected to be 3.5 percent of the GDP. The Finance Minister has promised to bring it down to 3.2 percent of the GDP in the next financial year 2018-19.
We can now see that the Finance Minister is speaking in two contradictory voices in the Budget. On the one hand he is aware of the negative consequences of globalization-imports are increasing and our capital is fleeing. On the other hand, he is running behind the same globalization-reducing fiscal deficit to attract foreign investment. He is not only trying to ride on two horses at the same time-he is trying to ride on two horses facing opposite directions at the same time. He will fall.
The coming of foreign investment is not in the hands of the Finance Minister. This decision is made in the Head Offices of the Multinational Corporations. The Finance Minister can open the economy for them, but he cannot make them invest just as one can lead the horse to the water but cannot make it drink. However, the decision to borrow and invest more is in the hands of the Finance Minister. He should have noted that we have reduced the fiscal deficit from 4.5 percent a few years ago to 3.5 percent today, yet foreign investment has not come in torrents. Pray! What makes him believe that further reduction of the fiscal deficit from 3.5 percent to 3.2 percent in the coming year will lead to huge inflows? Therefore, he should have openly proclaimed that the mantra of controlling fiscal deficit is not applicable to an honest government like his, abandoned the World Bank prescription of controlling fiscal deficit, borrowed heavily, invested heavily and led India to a growth rate of 12 to 15 percent.
In this context we must see the wide acclaim of the speech that Prime Minister Modi gave at the World Economic Forum at Davos, he said: “we have also undertaken bold FDI reforms. More than 90% of the FDI approvals have been put on the automatic approval route. As a result of these changes, there has been a sharp rise in FDI in the past three years-from 36 billion US Dollars in 2013-14 to 60 billion US Dollars in 2016-17… Therefore, my advice to you is that: If you want wealth with wellness, work in India; if you want Peace with Prosperity, live in India; if you want Health with whole life, be in India.” The Prime Minister failed to mention that outflow of capital from India had also increased as was noted by the Finance Minister. Here we have our Prime Minister trying to sell India to the same foreign investors who have not invested in India despite reduction of our fiscal deficit from 4.5 percent to 3.5 percent!
It is time the Government recognized that western powers acclaim not those leaders of the developing countries who work for the interests of their people. They acclaim those leaders that sacrifice their domestic economy at the altar of the Multinational Corporations. Gandhi was not given the Nobel Prize because he was a “nationalist,” while Tagore was given the same honour because he was an “internationalist.” The Prime Minister should beware of the acclaim given to him for opening India to the world; and the Finance Minister should beware of riding on two horses, for he will surely fall.
(The author is formerly Professor of Economics at IIM Bengaluru)


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