Making India Work - for the Rich
Praful Bidwai
Multinational Monitor, July-August 1995
New Delhi - At the end of four years of neo-liberal economic "reform" under the
tutelage of the International Monetary Fund (IMF) and the World Bank, there is a
wide and growing chasm between elite and policymakers' perceptions of the Indian
economy on the one hand, and the common people's view on the other.
For the elite, the past four years are the beginning of a new era of
globalization and consumerism marked by the triumphant return of Coca-Cola, the
entry of Baskin-Robbins ice cream, Kellogg's cereals, Kentucky Fried Chicken,
Ray-Ban glasses and brand-name jeans, sustained by an unprecedented boom in
executive compensation and a new credit card cult.
For the mass of the population, the four years under Prime Minister
Narasimha Rao and Finance Minister Manmohan Singh have meant high inflation,
costlier food, rising unemployment, worsening poverty and growing destitution.
Nothing illustrates this chasm as clearly as the controversy over the
US multinational Enron. While the elites are claiming that there is growing
consensus across the social and political spectrum on India's post-1991 New
Economic Policy (NEP), a symbol of that policy, a power purchase agreement with
Houston, Texas-based Enron, is coming apart. The government elevated the deal -
under which the western state of Maharashtra would buy power at a rate
considered extravagantly high by power experts - to the status of a litmus test
of the NEP's success and of foreign investor confidence in India.
"We have never seen so many powerful politicians and business interests
making such a strong pitch for a single commercial deal", says Prabir
Purkayastha, an engineering consultant. Finance Minister Manmohan Singh, India's
Power Minister N.K.P. Salve, former Maharashtra Chief Minister Sharad Pawar and
ruling Congress Party politicians lobbied energetically for the deal. In late
June 1995, the IMF, the World Bank and the Organization of Economic Cooperation
and Development let the chief executive of Enron Development Corporation,
Rebecca Mark, address the country's principal donors and creditors at a meeting
of the India Development Forum in Paris. A statement from the office of US
Energy Secretary Hazel O'Leary warned that dire consequences would befall India
if the agreement is cancelled.
The Maharashtra government, pressured by popular opposition and
criticism from economists, energy planners and environmentalists, appears set to
scrap the Enron agreement as illegal, inappropriate and outrageously expensive.
With anti-Enron demonstrations erupting all over Maharashtra, a Maharashtra
cabinet subcommittee is expected to recommend that the deal be canceled or
substantially reorganized.
"Enron is only the first of the big battles we are likely to witness",
says Achin Vanaik, a political scientist, and a fellow of the Nehru Memorial
Museum and Library in New Delhi. "There is a growing and continuous conflict
between NEP supporters and the people who feel the 'reforms' run against their
interests, indeed are a disaster. NEP has produced very little growth, but a
great deal of inequality".
At the end of four years, the Indian economy is still growing at an
annual rate of between 5 and 5.5 percent, trailing the pre-NEP rate of more than
8 percent. The new economy also shows greater vulnerabilities: it is $24 billion
deeper in external debt, and more dependent on aid and investment package
bailouts.
"Stability" for whom?
Manmohan Singh pushed through severe economic measures to cope with the
short-term crisis of mid-1991, when India's foreign exchange reserves dipped to
a level where they could barely pay for three weeks' worth of imports.
"There were two aspects to Manmohan Singh's strategy of July 1991:
macro-economic stabilization and neo-liberal, pro-market structural adjustment",
says Deepak Nayyar, former chief economic adviser to the government. "Of these,
stabilization was clearly the more important. This has to do with reining in the
government's fiscal deficit, controlling inflation, raising the level of savings
and investment and stabilizing the balance of payments. It is only on balance of
payments (which went temporarily haywire in 1990-91) that there has been some
improvement. On the whole, the stabilization has been of very poor quality indeed".
Annual inflation has hovered above 10 percent. The government's fiscal
deficit, which averaged approximately 6 percent of gross domestic product (GDP)
prior to 1991, is still running at 6 to 7 percent, down from the 1991 peak of
8.2 percent. The savings rate has dropped from 24 percent to barely 20 percent,
while industrial investment has produced very little new growth. Capital goods
output is still below the 1991 level. Although the overall manufacturing growth
rate has picked up from 2 percent to as high as 8 percent, it is still below the
rate of the 1980s.
"Some of the structural causes that lay beneath the crisis of 1991
remain unaddressed", says Nayyar. "We still have not moved away from the narrow,
elite-consumption-led, import- and energy-intensive growth path that led to the
crisis in the first place".
Despite seven good monsoon seasons in a row, virtually unprecedented in
recent history, agricultural production has been sluggish. Daily per capita food
grain consumption has fallen from 510 grams to 465 grams. The consumption of
pulses - the main source of protein for the poor - has fallen more than 10
percent over the past five years. Manmohan Singh has pushed the price of
subsidized basic foods in the public distribution system (PDS) up to market
levels, resulting in an 85 percent price increase in the past four years.
"This is a particularly harmful trend", says Prabhat Patnaik, professor
of economics at Jawaharlal Nehru University. "Inflation always works to the
disadvantage of the poor in India, who have fixed incomes. It is
inequality-enhancing. But Singh's conscious policy of jacking up PDS prices and
thus destroying one of the few mechanisms that could protect some of the poor,
partially, against inflation has been doubly inequality-enhancing".
What this means for India's 380 million officially recognized poor is
spending more money to buy less food, reducing caloric intake and approaching
starvation in many cases. This food reduction has been accompanied by cruel cuts
in already meager spending on shelter, health and clothing. India's official
statistics lag behind reality, but the available numbers suggest that the
official poverty rate rose from 38 percent in 1989 and 1990 to 41 percent in
1991 and 1992.
The official computation of poverty is based on caloric intake of 2,400
per person per day in the rural areas and 2,100 in the urban areas. It involves
assumptions about income, spending, prices and quantities of food, based on
aggregate data for all of India. Eminent economists have argued that these data
do not accurately depict the Indian countryside. Nilakantha Rath, coauthor of a
pioneering study of poverty, estimates that disaggregated numbers would show
that the true poverty ratio for rural India would be as high as 60 percent.
Quashing competition
If the government's macro-economic mismanagement has hurt the poor, its
structural adjustments policies have had similar effects. The dismantling of
licensing and investment controls and the lifting of barriers to foreign capital
have not encouraged competition or greater efficiency and productivity. Instead,
businesses have taken advantage of the new permissive atmosphere to form cartels
and corner markets.
In the soap and cosmetics industry, for instance, two of the biggest
producers decided competition was not for them. Hindustan Lever Ltd., a
subsidiary of Unilever, and Tata Oil Mills Co., belonging to the House of Tatas,
India's second-largest conglomerate, have merged. So have Procter and Gamble
India and a division of Godrej Soaps, one of India's top five toiletries
industries.
Such mergers embarrass even Michael Porter, the Harvard Business School
management guru, who has denounced them as anti-competitive. Porter has been
equally critical of the government's approval of a request from Parle, India's
biggest soft drinks manufacturer before Pepsico entered the country, to sell its
brands to Coca Cola. What critics denounce as cartelization, however, Indian
policymakers tout as a healthy index of globalization and mature corporate
competition.
The government condemns government
Anti-competitive behavior also has taken its toll on public sector companies
such as Air India (AI), the country's government-run international airline. AI
has been subject to foreign cartel pressure, and the airline's market share in
the country's international traffic is now down to 16 percent, way below
Lufthansa and British Airways. Baldev Raj Nayar of McGill University, in
Montreal, Canada, has just completed a study of aviation in India that finds
that the government has discriminated against Air India in favor of foreign
airlines. Similarly, the government could have rationally regulated domestic
aviation while reforming Indian Airlines (IA), the domestic public sector
carrier known for its poor service, and dismantling its monopoly. Instead, the
government allowed fly-by-night operators to come in, form a cartel, grab the
most profitable routes from IA and indulge in predatory pricing.
Prejudice against the public sector is widespread among India's
policymakers, even though the Indian public sector has a record that is
consistent with the private sector's. "The public sector has really become the
favorite whipping boy of the elite", says K. Ashok Rao, president of the biggest
public sector officers' and engineers' union. "There is certainly a case for
public sector reform through making managements of public industrial
undertakings more autonomous of bureaucrats", concedes Rao. "But what the
government is doing is selling large chunks of public sector equity to foreign
and domestic banks and all manner of investors, wholesale É And it is selling
them cheap".
The result is an undreamt of business bonanza. A report of the
comptroller and auditor general of India found that the government undersold the
stock of several public sector firms by as much as $1 billion over a two-year
period. In some cases, such as the Steel Authority of India Ltd., a highly
profitable and technologically sound company that competitively exports steel to
First World markets, the government shares were sold at one-third to one-seventh
of their market value.
This revenue has been used not to strengthen public enterprise but to
finance the growing federal deficit, now running at an unprecedented level of
3.4 percent of GDP. "This is just one index of the double standards employed by
our policymakers who, after the current fashion, talk glibly about efficiency
and a lean government", says Nayar. "The truth is that the government is
anything but lean and has very little control over its own finances".
In 1991 and 1992, when Manmohan Singh savagely cut real spending on
health, education and social service programs by between 20 and 80 percent, he
added 45,000 new jobs to the central government's payroll. In 1995, the number
of jobs in the central government is expected to increase by 67,000. The
government has also withdrawn considerable support for India's public research
and development (R&D) laboratories, a network of more than 80 institutions, some
of which have earned international reputations. Importing technology to replace
homegrown varieties will undermine an indigenous R&D effort that once allowed
Indian industries to pursue a relatively autonomous development path.
In a major reversal two years ago, New Delhi capitulated to Northern
pressure and altered India's patent protection system that encouraged the
development of energy-saving, cost-efficient processes for pharmaceutical and
chemical production. As the government moves to implement the intellectual
property agreement of the Uruguay Round of the General Agreement on Tariffs and
Trade (GATT), it is proposing new patent rules which will give greater
protection to multinational corporate patent holders, further eroding India's
comparative advantage.
Groveling for pennies
As Indian industry is refashioned in the interests of global capital, the
government has become desperate to attract foreign investment. It has spent more
energy courting multinational capital than on streamlining its finances, or
promoting the small industries, farms or artisanal workshops that employ 500
million people. Nonetheless, India has only drawn a total of $2.5 billion in
foreign investment since 1991. This amount accounts for about two percent of
aggregate investment in the economy. This year, the foreign investment inflow is
expected to be on the order of $1 billion - a third of the level flowing into
Vietnam and less than 3 percent of what China attracts each year.
Except energy sector investments, the quality of investment - mainly
into industries such as food processing, cosmetics and clothing - is poor and
supports few dynamic spin-off industries. The energy sector, however, has its
own problems. India is offering oil and gas fields that its own Oil and Natural
Gas Commission has discovered to multinational energy companies to exploit.
As Indian industry has weakened, approximately 200,000 workers have
lost their jobs, some 125,000 workers in the industrial portion of the public
sector alone. In response to these heavy structural adjustment costs, the
government promised a comprehensive program to build a "safety net". The
government set up a World Bank-financed National Renewal Fund (NRF), to retrain
workers and to create alternative employment and develop new technologies. But
the NRF is no more than an inefficient means of financing voluntary retirement
schemes for relatively small numbers of workers. A study by the Maniben Kara
Institute of Labor Studies in Bombay has found that only half of the workers
laid off under the NRF program find new employment. The others simply join the
ranks of the 20 million to 25 million people who are chronically unemployed.
Singh has not keep his promises to help the rural unemployed. He boasts
that spending on special employment schemes has doubled in three years. But
federal spending on the social sector has remained almost stagnant at about 1.5
percent of GDP.
Unintended consequences
Structural adjustment has also had regionally destabilizing and harmful
environmental effects. Since major investment decisions have been left to the
market, and the market is a regional cherry picker, India's poorer states have
been starved of investment. A handful of states like Maharashstra, Gujarat,
Karnataka and Delhi account for the bulk of all new investment, while the other
regions stagnate. "This growing dualism will tend to sharpen ethnic, regional
and linguistic conflict", predicts Achin Vanaik. "This can only add to
heightened social and rich-poor tensions in this deeply hierarchical and
increasingly unequal society".
NEP's environmental impacts are at least as threatening. In the name of
liberalization, Singh abolished regulatory licensing in all but 18 industry
groups. Even where licensing has been retained, the government lacks the data
with which to monitor proposals for occupational health and environmental
safety. The principal agency gathering such data, the Directorate General of
Technical Development, has been abolished. In practice, almost anyone can set up
any industry anywhere, without the need for a credible environmental impact
audit.
India is quickly turning into a major dumping ground for the North's
wastes. According to Greenpeace, India imported 5 million kilograms of metal
waste and 2.85 million kilograms of metal scrap from Australia in the first half
of 1994. Last year, Australia exported 346,000 kilograms of used lead-acid
batteries to India, almost three times what it exported in 1992. India imported
74,000 kilograms of plastic waste in 1993, almost 25 times the amount imported
in 1990.
India receives huge quantities of toxic waste from the United States,
Canada, Germany and Britain. In 1993 alone, the United States shipped more than
7.8 million kilograms of plastic waste, 26.8 million kilograms of tin waste,
917,000 million kilograms of lead ash and 14,500 kilograms of lead-acid
batteries to India.
From January to May 1993, Britain shipped India 250,000 kilograms of
ash, 2.5 million kilograms of copper waste and 500,000 kilograms of lead waste,
plus 1.1 million kilograms of other metal wastes. Canada contributed 960,000
kilograms of copper waste, a million kilograms of lead waste and 106 million
kilograms of copper waste in 1992.
US exports of scrap metal to India weighed 1.7 billion kilograms in
1990. A year earlier, Germany sent India 2 million tons of metal wastes.
The waste imports symbolize what globalization and liberalization
really mean to India. India has compromised its sovereignty, accepted World
Bank-International Monetary Fund prescriptions and blindly followed free-market
policies, with no critical evaluation of their consequences. In return, it has
received paltry amounts of foreign investment along with plenty of debt and more
poverty, destitution and toxic waste.
Copyright 1995 Multinational Monitor
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