Dr Bharat Jhunjhunwala
NDA has clearly opposed FDI in retail in its election manifesto. This is welcome but there is a need to go much farther. Actually there is a large degree of convergence in the economic thinking of the two alliances. Both embrace the free market and are inclined to roll out the red carpet for big companies. Difference arises on two counts. One, NDA is more focused on domestic big companies; while UPA is more favourably inclined towards MNCs. Two, NDA wants to jumpstart the grassroots developmental activities by providing good governance and infrastructure while UPA wants to distribute relief to them directly through programs such as MNREGA.
NDA relies more on domestic big companies. It has opposed MNC entry into FDI in retail. This indicates a tilt towards domestic companies. UPA, on the other hand, is more inclined towards MNCs. Perhaps it believes that MNCs have better managerial and technological skills and the country will lose out in their absence. The real reason, however, may be leakages. The UPA Government has taken no effective steps in the last ten years to bring back Indian wealth stashed away in Swiss Banks, or to stem the outflow through hawala taking place continuously. Anecdotal evidence indicates a huge increase in illegal outflows from India during the last 10 years. UPA’s penchant for MNCs arises from the need to attract foreign capital to compensate for outflow of domestic money. NDA has lesser need of FDI because it is more focused on good governance and does not appear to have an interest in promoting leakages.
The second difference between the two is on how to reach fruits of development to the common man. NDA is votary of ‘development.’ It is focused on providing good governance and also increasing public investment on infrastructure. It believes that this will lead to an all-round increase in economic activities and the common man will be spontaneously able to engage in business and other activities and improve his standard of life. This is very uncertain in my assessment. Problem is that capital is cheap. Companies can borrow at near zero rates of interest in the US, Japan and Europe. It is profitable for big companies to use automatic machines. Result is increase in unemployment. Large numbers of weavers have lost their livelihood because textile mills of Surat are producing cheap cloth. The impact on the common man then becomes twofold. Entry of big companies leads to loss of employment while provision of good governance and infrastructure leads to increase in the same. The net impact is not necessarily positive. It is quite likely that increase in employment due to big companies may be more. A study by V V Giri Institute of Lucknow has brought to light the fact that nearly one-fourth of all youth are unemployed presently. They are so dejected that most have stopped looking for work. Thus NDA’s approach may fail to deliver. This would be replay of ‘India Shining’ of 2004. The improvement in governance and infrastructure did not reach benefits to the common man and led to the NDA losing power. Same is likely to happen to NDA II, if it comes to power.
UPA’s approach is more direct. It wants to impose taxes on the big businesses and use the revenue to directly provide relief to the common man through programmes like MNREGA, loan waiver and Indira Awas. There are two problems here. One problem is that energy of the recipient is turned towards begging instead of ‘developing.’ Thus a virtuous cycle of grassroots production and consumption is not triggered. A Chinese saying goes that it is better to teach a man to fish instead of giving him fish to eat. UPA wants to give fish to eat. The second problem is at the level of economics. The ability to raise revenues for programs like MNREGA depends upon the profits made; and tax revenues collected from big businesses. This, in turn, depends upon the demand in the market. Difficulty is that automated production by big companies leads to job losses and, therefore, to lesser demand for goods in the market. A classic example is failure of the small car Nano. Users are quite happy with the vehicle yet there is less demand because people do not have income. As a result, big companies cannot make huge profits and the collection of tax revenues by the Government is less. No wonder UPA has to take recourse to increased borrowing. This creates another problem-of inflation. The Reserve Bank prints notes in larger numbers to make it possible for the Government to borrow. This printing of notes leads to inflation. So UPA has only jumped from the frying pan into the fire. It has tried to solve the problem of unemployment by starting MNREGA but unwittingly got mired into inflation. The benefits reached to the common man by provision of employment have been cancelled by increase in prices. UPA does not appear to recognize that there is no such thing as a free lunch. It believes that it can spend tax monies to provide relief without raising the necessary revenues. That said it must be recognized that UPA’s approach does lead to direct improvement in the standards of common man. The wage rates have jumped from about Rs 100 three years ago to Rs 300 presently wholly courtesy MNREGA. So the common man is better off but both the common man and the economy are hit by inflation.
I think both NDA and UPA models need to be reworked. The common problem is that automated production by big companies is throttling the opportunities for small businesses and also numbers employed. It appears to me this can be managed by segregating the economy into two sectors-an ’employment’ sector; and a ‘profit’ sector. Certain manufacturing activities like weaving have a large employment potential and a not-so-large profit margin. These activities should be encouraged only in the labour-intensive small scale sector. Large textile mills should be taxed heavily. Then alone it will be possible to increase productive employment opportunities for the common man.
The NDA model needs to be reworked to ensure speedy and certain reaching of benefits to the common man. It will not do to rely on the infamous ‘trickle down’ theory which lies at the back of NDA model. The UPA model needs to be reworked to prevent leakage of national wealth so as to reduce the need to print money.
(Author was formerly Professor of Economics at IIM Bengaluru)
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