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2012: Another annus horribilis, like the one before

December 27, 2012 18:04 IST

Despite what the World Bank and IMF trained gnomes in North Block, South Block and Yojana Bhavan say, the numbers of the poor is rising alarmingly, says Mohan Guruswamy.

A year ago, at about this time, India's GDP was expected to grow at 8.2 per cent. Instead it is growing at 5.3 per cent. A shortfall of 2.9 per cent between hope and reality.

In money terms that shortfall translates into about $53 billion in nominal terms or $131 billion in PPP terms. In terms of Indian rupees, a denomination we seldom use in the rarefied circles of high office, this means a shortfall of around Rs 2.86 lakh crores in nominal terms or Rs 7 lakh crores in PPP. That is the "presumptive loss" to the GDP if you want to use a CAG made famous term.

If that is what the people lost, the central government's nominal loss in terms of taxes foregone would be about Rs 29,000 crores. This year the Government of India was hoping to collect Rs 6.64 lakh crores as taxes. (And the States would have collected almost another similar sum.) This means the presumptive loss of tax revenue is 4.5 per cent of the budget estimates.

Now however small the percentages may appear, these are not small sums of money and India cannot afford to forego them. Add to this the shortfall due to the expected 2G spectrum sale, the failure of the ONGC stock issue, and much lower collections from PSU disinvestment, you are looking at a really huge shortfall in central government collections.

Since interest, salaries and to some extent defence allocations are inviolable, the hit is borne by deep cuts in social spending and capital expenditures.

Already our capital expenditure to budget ratio is an abysmally low 9 per cent. Social welfare spending, however little may trickle down, impacts on the poor and needy.

Despite what the World Bank and IMF trained gnomes in North Block, South Block and Yojana Bhavan say, the numbers of the poor is rising alarmingly.

Rising poverty

At the time of independence India had about 320 million people. It has that many poor people alone now. It does not matter of the BPL estimates are 30 per cent or 25 per cent.

The simple fact is that in absolute terms the number of poor people is on the rise and the various governments have not shown the inclination to stem the tide.

We can see the tide in terms of the massive influx of economic migrants into other parts of India from Assam, Bengal, Bihar, Orissa, eastern UP and the tribal regions. Over three quarters of our tribal people still exist below the poverty line, giving them stark choices.

Either migrate to the cities or revolt against the iniquitous system. They do both. Yet our middle and upper class seems only focused on the migration of Bangladeshis into India.

The establishment can take credit for successfully putting blinkers on us to look in one direction. Growth in India is led by government spends and investments. When that drops, growth drops. Little wonder there is so much gloom and pessimism enveloping the nation. This mood is universal now, from the biggest captains of industry (Ratan Tata $100 billion) and the smallest of farmers (the average size of a farm holding has now fallen to 0.63 acres).

Optimistic man

The only man who constantly pops up like an optimistic jack-in-the-box to proclaim a message of hope and improvement is Dr C.Rangarajan, the chairman of the Prime Minister's council of economic advisors.

Rangarajan's optimism stems from the simple fact that he is not looking at the numbers in front of him as often as he is eyeing Chidambaram's chair in North Block. Particularly enticing when South Block is just across the street. So close, yet so far!

When PV Narasimha Rao jettisoned the Nehruvian model of economic development with its emphasis on rigid central planning, state control over all resources, and bureaucratic control over all allocations; one would have thought that the only other model available then and now, one that combines liberal economics, vigorous political debate and decentralised government, what we got was one just shorn of Industrial Licensing.

Craftily it was passed off as liberalisation when it was actually imposing a crony capitalistic model so "successful" in practice by the Asian tiger economies like South Korea, Thailand, Singapore, Taiwan and Malaysia. And of course China. This model was essentially one of the state patronizing industries with public resources to benefit a few while national accounting toted up GDP gains.

While this model did transform these countries and China into industrial powerhouses deriving the major part of their GDP from Industry, with some very spectacular transformations like in China where a hugely expanded Manufacturing base now accounts for almost 52 per cent of GDP, in India it resulted in Industry stagnating, Agriculture contracting and Services hugely expanding.

Today the GDP profile of India resembles that of a post-industrial society, the irony being that India never really even began industrialising. But "industrialists" who managed huge acquisition of state owned natural resources, long-term concessions and huge lines of credit from state owned banks prospered.

We don't say it officially, but Income Inequality is now estimated to be closer to 0.50 than the official 0.32. The ultimate irony being that instead of India becoming the destination of foreign capital, foreign financial capitals became the destination of Indian capital.

While the cumulative FDI from 2000-12 was about $170 billion, rising to as high as $34 billion in 2011, it has almost halved on a month-to-month basis in 2012.

FDI outflow

However in the last five years India has also seen an outflow of about $97 billion. Now consider this. Mauritius alone accounted for 44 per cent of India's FDI, and Singapore a further 9 per cent suggesting that much of this FDI was actually not foreign, and was just some money being round tripped back to home.

Some other round tripping methods are even more ingenious. The Economic Times recently reported: "Despite a slowing world economy, India's exports are booming. After growing 38 per cent in 2011, they are growing even faster this year - by 46.4 per cent in June, 81 per cent in July and 44 per cent in August. This beats even China hollow.

Cynics say this is too good to be true. Earlier, crooked businessmen took black money abroad by under-invoicing exports. Could they be bringing back their black money as over-invoiced exports? Does this explain the export boom? Very possibly, according to a new report from three researchers at Kotak Securities. They looked at export data from company reports of the BSE 500 (the top 500 companies of the BSE) and compared these with official data for 2010-11.

For engineering exports, official data showed a huge increase of $30 billion, but engineering companies of the BSE 500 showed an export increase of only $1.38 billion. Who accounted for the balance of over $28 billion? Minor companies? Ghost companies? Large private companies owned by big businessmen but not listed on the stock exchanges?"

Clearly more money is flowing out than in, and sometimes it comes back as tax exempt imports and FDI routed from Mauritius. According to Global Financial Integrity from 2001-2010 illicit capital exports from India amounted to $ 123 billion.

This is money earned from crime, corruption and tax evasion. Add all this together, the illicit capital export, under-invoicing, fake purchases of overseas assets and companies, retention of export revenues and the purchase of gold ($69 billion last year) and you have a clear picture of what is happening. India is now a major exporter of capital.

The inability to attract a good part of this or even some of it back as FDI, as in China, speaks of the growing unattractiveness of the Indian economy to Indians themselves. It has been a long cherished myth that MNC's are the major sources of FDI.

Actually it is the home country that always supplies the bulk of FDI. Clearly Indian businessmen are voting with their feet by stashing their wealth overseas. People like Ratan Tata make no bones about what they feel of the "silly taxes" that make investment so problematic in India.

And do you think this CII/FICCI friendly PM has done anything about it? No. He dithers, like he does over everything.

PM dithers

While it is not that he cannot understand that growth cannot happen without investment, it might still be appropriate for dwell a bit on a few simple economic ratios.

First is the Gross Savings to GDP ratio. This is the sum of voluntary and involuntary savings or, if an economist has to describe it, gross national income less total consumption, plus net transfers.

This ratio has fallen from 37 per cent to 34 per cent in the past three years seriously impairing our national ability to invest. China's Gross Savings/GDP ratio has remained a steady 53 per cent over the years.

The next ratio to keep an eye on is the Tax/GDP ratio. The main business of the government is to collect revenues, mostly in the form of taxes, to spend on the well being of the people. India's Tax/GDP ratio of 16 per cent is among the lowest for a major economy.

Despite the robust increase in tax collection in 2010-11, the Centre's collection accounts for just about 10 per cent of GDP. Together with states' collection, tax revenues of the government account for just about 16 per cent of GDP. That compares very poorly with the tax-GDP ratios of developed nations.

For instance, the tax-GDP ratio for the UK is 34.3 per cent, for Germany 37 per cent and about 24 per cent for the US. China collects a little over 21 per cent. The nation needs to urgently continue reforms of its taxation regime to not only widen the net, so as to bring more people and businesses into it, but also to reduce evasions.

Last year the Finance Ministry actually sent out circular seeking suggestions on reducing the incidence of taxes. I replied that if the government knew what it is supposed to do, it should be seeking suggestions of how to increase tax collections. I never heard from them again. We also see a trend of tax evasion in the huge illicit exports of capital. Has the government paid any heed to this? It doesn't seem so. The third ratio, probably the most import one for us, is the Investment/GDP ratio.

The finance ministry has a self-extolling web page that mentions a ratio of 37.6 per cent. What it doesn't say is that it is a full 11 per cent behind China's ratio, and even less than Vietnam's. As a matter of fact the Investment/GDP ratio for Developing Asia as a whole is 42.14 per cent. And our ratio has risen by just about one per cent in the past half a decade.

The relationships between these ratios are self-evident. Without Savings you cannot make Investments. Without more Taxes you cannot increase Savings, beyond a point. Without more Investments you cannot create enough jobs. At last count India is adding 12 million persons to the work force each year. In 2000 India had jobs for 396.76 million in the formal and informal sectors. This rose to 457.46 in 2006.

This is not an inconsiderable achievement. But the catch in this is that the growth of the formal sector was from 54.12 million to 62.57 million, while that of the informal sector rose from 342.64 million to 394.9 million. In other words for every one job in the formal sector we added more than six in the informal sector. This clearly suggests that the informal sector, as the much bigger employer - at least in the short to medium term - needs to be supported and protected. Now let us understand what the informal sector is.

The official definition recommended is: "The informal sector consists of all unincorporated private enterprises owned by individual or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than 10 workers."

And the informal worker is defined thus: "Informal workers consists of those working in the informal sector or households, excluding regular workers with social security benefits provided by the employers and the workers in the formal sector without any employment and social security benefits provided by the employers."

Retail workforce

In this informal sector, retail alone employs 55 about million, most of them people who would have preferred jobs in the industrial sector. But are forced to serve in the retail sector because India has refused to industrialise by preserving policy relics inimical to it.

Now what does this government do. It touts FDI in Retail as its major achievement. That it could co-opt neo-Luddites like Mayawati and Mulayam Singh to support its resolution favoring it could be considered a major achievement, considering that we are expected to believe the CBI functions as an independent agency.

That is not the issue here. Manmohan Singh himself said ten years ago, when he was the Leader of the Opposition in the upper house that he opposed FDI in Retail as it displaced more workers than it created jobs for. The BJP led government was in favor of the entry of Walmart and others then.

Those of us who believed this was indeed so and that big box retail should be allowed in gradually, as in China and other similarly placed countries then applauded his sagacity and foresight. As is typical in India, when the roles were reversed the Congress and BJP exchanged positions.

The visiting Chairman of Walmart himself gave India a fine demonstration of how Walmart gave America value for its money at the lunch for journalists hosted by the US Embassy shortly after his happy meeting with Manmohan Singh. He waved his little black wallet at everyone saying: "We sell this piece, sourced from India, at $17 a piece in the US. Our competitor sells it for $70."

Walmart's bottomline

Now that is still value for money, considering that Walmart in all probability would have bought that wallet for not more than the equivalent $3. No wonder its consistently big bottom-lines had made its founder Sam Walton the richest man in the world and Warren Buffet its most happy investor. In its quest to give India too value for its money, Walmart will no doubt scour the manufacturing centres of the world and give the Indian consumer goods that are value for money.

Right now this means lots of Chinese goods. One must wonder what this will do to our manufacturers of consumer goods? And to our informal sector? In this past year India ran up trade deficit of $184.9 billion. At same time exports have registered a drop of 5.95 per cent in dollar terms, and after the Indian Rupee has effectively devalued by over 20 per cent in just the past year.

While much of the rising trade deficit can be attributed oil prices and the slowdown in the USA and EU, and general global slowdown, the predicament with China is largely self-inflicted with a huge imbalance in China's favour. For every dollar's worth of exports to China, India imports three, toting up to a deficit of up to $40 billion in the year to March 2012, or about two per cent of GDP.

China now accounts for almost a quarter of India's total trade deficit and over half if oil is excluded. Another way to view the wound is to realize that this $40 billion trade imbalance is almost as large as the Indian government's fiscal deficit! Given this the government's big reform idea is to allow large monopsonic buyers and giant retailers like Walmart, Tesco and Carrefour to set up shop here, without any caveats to curb their imports from China, when it is now known that more than half their manufactured goods are sourced from Chinese sweatshops?

As Nick Robbins wrote in the context of the East India Company, "By controlling both ends of the chain, the company could buy cheap and sell dear". In this case it means profits for the Americans, jobs for the Chinese.

The best thing we can say about 2012, from the nation's point of view is that it is ending. We don't know what surprises Manmohan Singh will spring upon us in 2013? Till then ignorance is bliss.

The writer can be contacted at: mohanguru@gmail.com

Mohan Guruswamy