Vol. 6 | Issue 4 |July 2012
economy m g devasahayam
A Rootless Wonder!
A prosperous agriculture and a thriving manufacturing sector is a sine qua non for the sustenance of the service sector, not the other way round.
When the plight of hungry French peasants due to high prices and scarcity of bread was brought to the notice of Queen Marie Antoinette, she is reported to have condescendingly said: “Qu’ils mangent de la brioche”, literally meaning “Let them eat cake”. The subsequent French Revolution and the fate of Marie Antoinette is history.
Discoursing on India’s ascending poverty and descending economic growth, Kaushik Basu, Chief Economic Advisor, gave a similar solution: “Bring in the Walmart pronto.” Incidentally, Basu is also Professor of Economics at the Ivy League Cornell University in the US, the land of Walmart! He has no concern for India’s languishing agriculture (primary sector) and stagnating manufacturing (secondary sector). Instead, he pitches for the tertiary services sector: “A couple of big bang reform moves like allowing FDI in multi-brand retail and insurance could lift the investors’ mood even if the economy is showing signs of slowing down.”
According to him, the largest beneficiary in allowing FDI in multi-brand retail will be the farmers who are waiting with bated breath for this to happen! So too will be the small producers for whom the ‘global market’ will open up when these MNC retail chains set up shop in India! As an ‘economist’, he should know that the relationship of such MNCs with farmers and small producers will be that of an ‘oligopsony’, with a few buyers and a large number of sellers. For consumers, it will be one of ‘oligopoly’, with few sellers and a large number of
buyers. Such a lethal combination will kill entrepreneurship and employment in the small and unorganised sector, numbering over 40 million, besides throwing small farmers out of farming!
Perhaps, this is what Basu and his ilk want and Commerce Minister Anand Sharma has backed it up stating that as soon as the Presidential election is over, he will implement the ‘FDI in retail’ reform that has been approved by the Cabinet, but put on hold due to protests in Parliament! Some Congress Chief Ministers have already started beating the drum!
Is it mere coincidence that ever since the economist quartet of Dr Manmohan Singh, Dr Montek Ahluwalia, Dr C Rangarajan and Dr Kaushik Basu took over the reins of the Government, the economy has been ‘growing’ upside down? Or is it deliberate? One wonders! The economy of a populous and rural-based country like India is similar to a tree: it should have deep roots (agriculture), strong trunk/branches (manufacturing, both large and small) and a well spread-out canopy (services). But in the last few years, the roots have lost their depth, the trunk has become weak and branches have withered. Only the canopy is growing thick and green at the expense of the roots, trunk and branches. This has been done deliberately to facilitate MNCs and FDI tycoons to come into India and earn their fortunes by picking the low-hanging fruit!
If the Government is really sincere about transforming the economy and putting it on a high growth trajectory, the path lies in promoting agriculture and manufacturing through transparent governance and better infrastructure, and not in increasing foreign investment in retail trade, insurance and other service sectors. Sustained growth is not possible without healthy and growing farming and manufacturing sectors. Indeed, India’s overdependence on the service sector and the neglect of its agricultural and manufacturing sectors is the major cause for the deceleration in growth. But the worthies in the Government want more of service sector and less of agriculture and manufacturing. Pray, for whom are they working?
Let alone deepening the roots, agriculture, it is actually being uprooted to facilitate a parasite and predatory economy that stands on borrowed stilts (FDI) and not on its own legs. This is a vast subject and calls for a detailed discourse.
Today, the manufacturing sector faces two major constraints: physical and government infrastructure. These two are, in a way, related and can reinforce each other. In the last few years, India has neither invested sufficiently nor introduced good management practices in physical infrastructure like electricity, roads, ports and railways. This has resulted in huge shortages in electricity supply relative to demand, leading to hours of load shedding, power holidays and even closure of several manufacturing units. Some large enterprises have opted for captive electricity generating plants, resulting in high costs and making their products globally non-competitive. But, small and medium enterprises cannot afford captive power units and they are the main victims of power shortage.
A similar situation in roads, ports and railways is hampering the development of the manufacturing sector by increasing the cost of logistics and transportation. Corruption and bad governance has made the situation worse. It is common knowledge that only a fraction of the investments on roads and other infrastructure projects actually reach the targeted projects. This leads to the second set of constraints for manufacturing growth, namely, a governance infrastructure reeking with corruption.
High levels of corruption in addition to pushing up costs also adversely affect the quality of investment. It is now well established that corrupt countries mainly receive investments from other corrupt countries, which does not result in technology transfer leading to global competitiveness. Thus, bad governance affects both the quantity and quality of investment. Moreover, even medium-sized Indian enterprises are now investing in other countries and import products from their foreign units into India.
Last year, the FDI outflow from India was more than 60 per cent of the inflow into India. Reports indicate that this year it could be equal to or even more. Further, while the manufacturing sector dominates Indian investments abroad, foreign investments in India are mainly in the service sector, construction activities and real estate. This alarming situation cannot be reversed without major initiatives to eliminate rampant corruption and carpet-bagging.
In the last few years, major scams have broken out in resources sectors that are mainly owned by the Government, like real estate, mining and ores, and spectrum. Quite a lot of individuals and entities who have obtained Government permission to enter and exploit these resource sectors have amassed billions of rupees. In other words, under the existing business environment, the path to amass wealth is not through manufacturing but through exploitation of resources under Government ownership. This is the kind of ‘parasite/predatory’ economy that the economist quartet have ushered in. This must change and change drastically.
A high growth rate for the Indian economy cannot be sustained without a deep-rooted agriculture base and a vibrant manufacturing sector. A policy aimed at GDP growth based mainly on attracting investment in the services sector such as FDI in retail and insurance will not succeed.
Actually, a prosperous agriculture and a thriving manufacturing sector is a sine qua non for the sustenance of the service sector, not the other way round. It is time we go back to the roots, lest the economy itself gets uprooted. g