Making a mess of globalisation

By Prem Shankar Jha

The growing confrontation between the BJP and the RSS chief, Mr. K. S. Sudershan, over the country's economic policy reflects the widening gap between the parent body of the Sangh Parivar and what was once only its parliamentary front organisation. But it would be a mistake to think that this conflict is a political one alone. Tempting as it is to dismiss Mr. Sudershan's sudden attack as the last gasp of an outmoded economic chauvinism, behind his trenchant revival of the Swadeshi Jagran Manch's call for 'Swadeshi' lies a fear that has struck a resonant chord in Indian industry. This is a fear of the unknown.

For the past nine years, India has been removing barriers to trade, foreign direct, and foreign financial investment in the belief that an open, market-guided economy will be far more efficient than the old command economy, and will automatically yield a more export-oriented, and therefore sustainable growth. So far this belief has been vindicated by the performance of the economy. India has clocked a steady growth of over six per cent, experienced no sudden spurt of inflation and taken all kinds of shocks - the East Asian and Russian crashes, rising oil prices and gold import sprees - in its stride. But to a large extent this was because India was able to continue sheltering its domestic market while gearing itself up to exploit the world market.

That is what Japan, South Korea and Taiwan had done in the Sixties and the Seventies and China is still doing today. In less than a year's time, this happy state of affairs will come to an end. India will move from what has been called the East Asian model of growth to what is called the Southeast Asian model, that is, one in which the domestic market is protected only by tariffs and that too fairly low ones, except on agricultural products.

The trouble with this is that while the model worked well for Southeast Asia at least till 1997, even after nine years of liberalisation there is virtually no sign that it will work for India too.

The most telltale discrepancy between the Southeast Asian experience and ours is in foreign direct investment. Not only has FDI in India not taken off, but in the past three years it has fallen relentlessly. This is not solely because India exploded a nuclear bomb in 1998. FDI approvals had begun to fall a good deal earlier.

Second, the balance in the FDI is an unhealthy one. Whereas in Southeast Asia, it was evenly distributed between export-oriented manufacturing, infrastructure and real estate (at least till the property bubble began to expand in all these countries and suck in disproportionate amounts of money in the mid-Nineties) in India in volume terms what little FDI India has received has been skewed heavily towards infrastructure.

But infrastructure investment produces non-tradable goods and services for the most part. So the servicing of the loans has to be done by exporting from the tradable sectors, that is, agriculture, industry and tradable services.

In a world where almost 70 per cent of 'international' trade takes place between branches and subsidiaries of transnationals and their long standing independent partners, there is a limit to how much infrastructure FDI India can service if it does not simultaneously attract investment into export industries or its firms do not enter into stable long term tie-ups with major sellers in the global market. That is what India has failed to do so far.

The little FDI that has come into the manufacturing industry has been of the most unhealthy kind for it has come almost entirely to exploit the domestic market. In the process, it now poses a dire threat to indigenous industry.

A large part in the first year came into the expansion of the shareholding of foreign promoters in order to recapture control of their long dormant subsidiaries in India. Most of these shares were sold to them at bargain basement prices ranging from 8 to 30 per cent of their market value. These companies were, by definition, producing only for the home market. Nothing therefore changed, except that the consumers got a slightly better product and some wholly Indian owned competitors went into liquidation.

Then came the great automobile boom, but here too almost by definition the manufacturers were interested only in fighting for the domestic market. A few of them are exporting components from India and the two Korean companies, Ford and GM are doing most of the manufacturing in India. As for the rest, they are simply assembling cars in India, from CKD imports for sale in India. Nowhere in all this is there a glimmer of a hope yet of a transnational-led export boom.

The bulk of the foreign investment that India has received so far has not been FDI but portfolio investment. Except in the year after Pokharan-II, the net inflow has been positive and this has boosted our foreign exchange reserves.

But somewhere along the way our Government forgot that portfolio investment is by nature predatory. It enters the secondary share market, not the primary, and it is in India to make a quick buck.

What is more, foreign currency reserves built on the basis of FII inflows are not really reserves but liabilities. In India's case what the Centre for Monitoring Indian Economy calls vulnerable liabilities exceeded its foreign currency reserves on March 31, 1998 (the last year for which data are available) by $2 billion. It is unlikely to have improved much since then.

Strangely enough, this fact did not register on the WTO disputes settlement board when it dismissed India's request to defer removing all quantitative restrictions on imports, on the grounds of balance of payments difficulties - but then what could the WTO do when every Indian Finance Minister had announced India's 'comfortable foreign exchange position' with a flourish of trumpets from Davos to Washington?

Today Indian is on the verge of opening its entire domestic market to the whole world at a time when five years of dismal experience has shown how relentlessly the Indian market has become a target for dumping. Industrialists have long complained about it but now a report by the Planning Commission, no less, has confirmed that dumping has not only occurred on a large scale but in several sectors, notably steel, organic chemicals and bulk drugs, India has been flooded by cheap products from China and Eastern Europe, to the point where it has significantly slowed down industrial growth.

The Government has acted with commendable speed to renegotiate agricultural tariffs to protect farmers and the dairy industry. But the real danger is to industry. And here India has a deliciously bitter irony - one the Japanese pointed out to the Americans as far back as 1985: While it is America that has forced India to open up its markets in the hope of expanding its exports, it will be China that will gain from its diligence.

China has already made serious inroads into the Indian market in intermediate products. Between 1994-95 and 1999-2000, imports of organic chemicals increased by almost 150 per cent; of inorganic chemicals by almost 300 per cent; and of bulk drugs by 180 per cent. Small wonder then that of the 41 anti-dumping duties that India has levied in 1999-2000, 20 have been on Chinese firms.

But this may be only a precursor of the torrent that will rush out of China when the Indian QR dam finally bursts on April 1 next. For then it will be textiles, garments, bicycles, electronic goods, you name it. And the torrent will not damage only a handful of large Indian companies that have the capacity to withstand the pressure of the floodwaters and the resources to carry out their own anti-dumping research. It will hit thousands of small and medium sized companies that simply do not have the resources to even collect the data needed to lodge an anti- dumping case (this is usually 60 per cent of the total cost of the investigation) and a cash base that will not be able to withstand more than a few weeks of lean order books.

The threat India faces is therefore very real. But the solution is neither to retreat into autarchy as Mr. Sudershan proposes, nor to keep whistling in the dark and hoping it will all work out if only we do not all panic, as the Government seems bent upon doing.

The real answer is to use the nine months that remain to build up a really strong anti-dumping secretariat outside the Government, staffed by four to five hundred economists, management graduates and computer whiz kids, funded by the Federation of Indian Chambers of Commerce and Industry, the Associated Chambers of Commerce and Industry of India and the Confederation of Indian Industry, the various regional chambers of commerce and industry, and the small industry associations, to collect and continuously update every shred of data on international costs and profitability in the production of the several hundred consumer goods that will be freed from QRs next year. Some of this is undoubtedly being done, but would not it be nice if, for a change, our economic journals informed us systematically about what it was and where the lacunae still lay.

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