Hit by sagging growth and rupee free-fall, largely as a result of its own faulty policies and tardy implementation, the Government is slowly returning to the bad old days of a closed economy
In terms of their impact on people and on the economy in the immediate future, it is unlikely the capital controls and foreign-exchange restrictions announced earlier this week will have much of an impact. After all, for most Indians, the fact that they can convert only US$75,000 worth of rupees into foreign currency each year and send it abroad — and that this is much lower than the US$200,000 limit that existed previously — means very little.
That Indians have been banned from buying property overseas or that Indian companies can now invest only 100 per cent of their net worth — rather than 400 per cent as was the case — to make acquisitions or set up units abroad, will also concern only a small quantum of citizens.
Yet, these decisions are of enormous symbolic value. Along with the red signal to the import of gold coins and medallions and the extra duties imposed on the import of gold that is used as raw material by the jewellery-making industry, they indicate a regression to the 1970s. They also suggest influential parts of the Indian bureaucracy and the DNA of the Congress remain wedded to a Fortress India approach and a deep distrust of global economic currents. They are comfortable with a socialist state, which then breeds a society of smugglers.
An optimum and ideal system of free and open trade does not exist anywhere in the world. Human history, especially post-Cold War human history, till the financial crisis of 2008, has been an effort to build as fair and free a system of trade as possible and politically feasible. This flowed from recognition that controls and trade barriers provided short-term benefit to some sectors and businesses but damaged others, and the overall economy, in a broader reckoning.
Take the import duties in gold. These will increase costs for Indian jewellery makers, which are a big source of employment in the manufacturing sector. Finished jewellery from Thailand, Italy and other countries will become much more competitive when compared to domestically-produced jewellery, especially in the coming Diwali season. How will this help the economy or save foreign exchangeIJ How will this help protect jobsIJ Is the Government not losing from the right hand what it is desperately attempting to hold on to with the leftIJ
The ban on Indians buying property overseas is of a similarly populist nature. In keeping with the UPA Government’s Daridra Narayan rhetoric, it will be painted as a progressive measure, designed to stem a drain of wealth and to stop wealthy Indians taking away precious money from India to buy homes overseas. As statistics published by The Indian Express point out, in the past year Indians spent only US$77 million on buying property abroad. Indeed, in exploiting the US$ 200,000 per individual per year ceiling, the entire quantum of money remitted abroad over the year was US$1.2 billion. In contrast, the foreign exchange reserves are in excess of US$250 billion. So what are we talking aboutIJ
Measures to block the drop in the ocean will not stop the ocean filling up. The run on the rupee, the lack of confidence in the Indian economy and the state of the current account deficit are not being caused by a flight of capital on account of Indians who want to buy apartments in Dubai or london. The problem is far deeper. Overseas investment is just not coming in. As the Union Minister for Commerce admits, even after tweaking the FDI in retail norms multiple times — to the degree that most analysts are thoroughly confused by now — big retail giants are still holding back, unconvinced about the policy or its implementation or simply business conditions in India.
This sentiment mirrors domestic consumer confidence. People are not spending. Big corporations are flush with cash but desisting from setting up new facilities or expanding capacities, unsure about demand in the medium term, about the supply of coal (for power plants), of iron ore or bauxite (for steel or aluminium plants) or of land acquisition for about any legitimate purpose. The UPA Government caused much of the mess in these areas, for instance in the obstructionist regime of the previous Environment Minister. Today it is paying the price. Capital controls tackle a tiny symptom, leaving the affliction absolutely untouched.
The issue of Indian companies investing abroad also requires careful study. In the first decade of the 21st century, Indian business corporations sent US$80 billion out of the country in the form of outward FDI. This phenomenon seemed to peak in the years between 2007 and 2009. In 2007-2008, inbound FDI — investment coming into India — had climbed to US$34.7 billion and by 2008-2009 to US$35 billion. The quantum of outbound FDI reached US$18.8 billion in 2007-2008. In 2008-2009, it was marginally lower at US$7.5 billion. In effect, for every two dollars overseas investors put into the Indian economy, one dollar was sent out by Indian companies in the form of investments in foreign countries.
This represented the high noon of Indian integration with the global economy. Such a scenario would have been unimaginable in the 1990s, and was helped and encouraged by the NDA Government and the first UPA Government, including by Mr P Chidambaram in his previous incarnation in the Finance Ministry.
Why did this money go outIJ There were three reasons. First, like individuals, corporations sought to spread their risks across markets and countries. Second, policy bottlenecks and rent-seeking by public officials in India made investing abroad an attractive alternative, though of course it reflected the unfortunate reality that India was underperforming in terms of the investment that an economy of its potential should have got. Finally, it spoke for a bold new phase in Indian business, as it went out and tested its risk-taking appetite and entrepreneurship in far-off continents.
In a sense, this showcasing of India’s private sector prowess also became emblematic of the emerging ‘New Delhi model’ of a liberal democracy and liberal economic policies delivering robust results. It was telling that the spurt in India’s outbound FDI was taking place in the absence of a sovereign fund controlled by the Government or a hereditary ruling family — as is the case in some countries — or agencies of the state that saw investment overseas as a force-multiplier for foreign policy rather than as a straightforward commercial decision, as is the case with China.
In India, a sovereign fund would inevitably have been run by a joint secretary in the Ministry of Finance and left vulnerable to his or her subjective influences. Well-meant investment decisions that went wrong — and this does happen — would have drawn censure from a screeching media and from accountants at the CAG office. Facilitating outward investment by private corporations overcame many of these possible pitfalls. That is what makes the resurfacing of capital controls all the more distressing.
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