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Foreign investment

Four features of Finance Minister P Chidambaram’s budget stand out. First, thanks to its obsession with reducing the fiscal deficit, the budget fails to raise social-sector expenditure – just when that’s badly needed, especially for the sake of the poor. Second, the budget doesn’t sufficiently stimulate growth. Third, India is likely to witness relative stagnation and high inflation (stagflation). Finally, the government’s pro-foreign capital bias has become more brazen.

Chidambaram has mocked at food security by raising the food subsidy by a laughable Rs500 billion over last year’s revised estimate of Rs850 billion – when a quantum leap is needed to make affordable food grains available through a universalised public distribution system. The new target won’t even keep pace with inflation, but will ensure that half of India’s children remain malnourished.

The budget for the National Employment Guarantee Act, once considered the United Progressive Alliance’s flagship pro-poor programme, has been frozen at last year’s level (Rs330 billion), well below its peak allocation (Rs400 billion), and marginally above last year’s Rs293-billion expenditure. This represents a decrease in real terms.

Chidambaram has betrayed the promise to raise public health spending in keeping with the 2016-17 target of tripling it as a share of the GDP. It has been raised by a paltry eight percent, less than the inflation rate. Starving the public healthcare sector will result in the poor being driven to expensive private providers – and hence to impoverishment, ill-health and misery.

This miserly approach is also evident in other schemes, such as the Pradhan Mantri Gram Sadak Yojana. The only exceptions are schemes such as scholarships and monetary assistance to pregnant women, which can be brought under the cash transfer project called “Direct Benefit Transfers,” based on the Aadhaar number generated by the Unique Identification Authority. The authority’s budget has been raised by a hefty 40 percent.

Overall, Chidambaram has embraced fiscal conservatism just when slowing growth, rising inflation and a widening current-account deficit all demand more public spending which draws in private investment and stimulates the economy. This spells indiscriminate spending cuts. The petroleum subsidy will be cut from Rs968.80 billion to Rs650 billion, raising transportation costs and adding to the effects of cuts in food and fertiliser subsidies.

The budget will also reduce spending on irrigation, road construction, rural development, education, industry, and science and technology, by about one-fifth.

This fiscal fundamentalism is dictated by conservative views prevalent among credit-rating agencies, multinational companies and Indian big business. It’s driven by an urge to attract private investment at any cost, in particular foreign, coupled with a reluctance to spread the tax-net and raise the tax-GDP ratio, which has fallen to a low of ten percent, “one of the lowest for any large developing country” and well below the 2007-08 peak (11.9 percent).

India’s upper crust are among the lowest-taxed people anywhere, with a top income-tax rate of just 30 percent, and an average of under 20 percent-compared to 50 percent-plus in the UK, Spain, Belgium or Sweden. Only three percent of Indians pay the income tax; and there’s no inheritance tax or death duty in this severely skewed society, marked by grossly unequal opportunities.

Chidambaram has wasted another chance to correct this imbalance. He levied a ten percent surcharge on incomes above Rs10 million. But just 42,800 individuals declare such incomes, according to him. The surcharge will yield less than one percent of the projected total revenue increase. So much for “soaking the rich”!

The official pro-rich bias is revealed in forgoing Rs573.630 billion in revenue in 2012-13 through various tax write-offs and exemptions. This is larger than the entire fiscal deficit. Which means the deficit is primarily attributable to concessions made to the rich; but the poor must bear the burden from reduced social spending and higher indirect taxes on mass-consumption commodities like kerosene, clothing and footwear.

The budget shockingly reveals an even more perverse feature of the Indian economy: pathological dependence on foreign investment. Regarding the current-account deficit (CAD), Chidambaram said: “[W]e have to find over $75 billion to finance the CAD. There are only three ways before us: foreign direct investment (FDI), foreign institutional investment (FII) or external commercial borrowing… India… does not have the choice between welcoming and spurning foreign investment. If I may be frank, foreign investment is an imperative.”

This is shocking for a large, poor developing country. Equally disturbing is the underlying premise that India cannot aggressively promote exports or reduce imports to cut the CAD. In any sensible scheme of things, foreign capital must be one of many subsidiary investment sources, the main source being domestic savings.

Making foreign investment an “imperative” regardless of the costs means capitulating to the insistence of potential investors on “fiscal prudence” (read, austerity and low public borrowing), and for a never-ending set of “reforms” to favour investors by liberalising and deregulating sectors of economic activity, and relaxing environmental, labour and social standards.

India has been doing just that-witness the opening up of multi-brand retail, aviation and direct-to-home services to FDI, in addition to petroleum, power and real estate. But super-greedy capital always wants more. Chidambaram has pampered foreign capital and invited suspect investment through tax havens or double taxation-avoidance treaty centres like Mauritius, which launder and recycle money spirited abroad by Indian businessmen.

In the budget speech, Chidambaram had said it wouldn’t be enough for foreign investors to present tax residency certificates to claim treaty benefits. They must prove they actually earned the income. This “spooked” the markets. The Sensex lost 291 points. The next day, the government caved in by “clarifying” that a TRC would be enough, no questions asked!

Relying on foreign investment would be especially foolhardy today. FDI flows are ebbing rapidly because of the post-2007 Great Recession. The McKinsey Global Institute has just released a report, which says the global financial crisis has “upended many of the world’s assumptions about the inevitability of growth and globalisation.”

In 2012, the report estimated, global capital flows were 13 percent lower than in 2011. And while higher than during the depths of the crisis, they are still 61 percent below the 2007 peak. Global financial assets – or the value of equity-market capitalisation, corporate and government bonds, and loans – have grown by just 1.9 percent annually since the crisis, down from average annual growth of 7.9 percent from 1990 to 2007.

“Cross-border capital flows have collapsed,” says the report, “falling from $11.8 trillion in 2007 to an estimated $4.6 trillion in 2012. Western Europe accounts for some 70 percent of this drop … Emerging markets weathered the financial crisis well, but their financial-market development has stalled since 2008. As of 2012, their financial depth is on average less than half that of advanced economies (157 percent of GDP, compared with 408 percent of GDP), and this gap is no longer closing.” India too is affected by this trend. FDI inflows into India slumped by 43.3 percent in April-November 2012 compared to the same period in 2011. To bank on FDI in this situation would be suicidal. But the UPA seems blind to this reality.

The writer, a former newspaper editor, is a researcher and peace and human-rights activist based in Delhi. Email: prafulbidwai1@yahoo.co.in

Praful Bidwai, "Foreign investment," The News. 2013-03-11.