Due to the global integration of domestic markets, the gradual process of economies becoming inter-linked and inter-dependent, the rising weight of influence of emerging economies and the arising conflict of interests, WTO has been under the scanner; its role, its impact and even its relevance has come to be debated across nations.
Set up in 1995 after a series of Uruguay Round negotiations (1986-94), the organization which was initially thought to be a triumph of international law over anarchy in the field of trade affairs, has with time, arrived at a position where it holds its relevance in its inclusion as headlines like “Doha talks failed again”. Is it now about the ideology on the basis of which it was formed? Or because of the ineffective implementation of guidelines derived from that very ideology? Is it a structural fault rooted in the basic aim or functional fault in the working of the organization?
On the ideological basis, WTO defines its main function ‘to ensure that trade flows as smoothly, predictably and freely as possible’1. Broadly, it is based on the theory that the economy will achieve efficiency in the abolishment of the impediments imposed on free trade.
The efficiency of free-trade model might be a temptation to believe that it is the best mechanism of achieving efficiency. But, not all seem to have succumbed to this temptation. There have been criticisms questioning the above stated principle. While the left sees the WTO as a near perfect example of clique of stronger nations forcing agreements over less developed nations, the right wing attack the WTO on the grounds that it’s an unnecessary entity. Crudely, they believe if the WTO were really designed to encourage trade, it would force member nations to drop all protective measures and allow ‘true’ free trade, rather than facilitating tariff negotiations. Critics of free trade are mostly the NGOs. “Enormously rich charities have now turned to agitating about trade issues with much energy but little understanding. These and others are now very big businesses, and like corporations they are under pressure to diversify into new areas of public policy in search of growth, regardless of expertise, as they pursue fundraising opportunities. But they are more dangerous when they speak from incompetence, since they wear halos that the corporations do not. They argue that free trade is not sufficient for growth; we also need other supportive policies. By and large, yes. But then again, it does not follow that freeing trade is no better than not freeing it”.2
Proponents of protectionism claim that with the state's intervention, the end of achieving fairness is solved. For example, restricting imports can seem an effective way of supporting the local industries (based on the infant industry argument). I feel that this argument misses to take an overall view in consideration. Actually, if by restricting imports say, of agricultural commodities, we are protecting the farmers in our own country. It seems fair enough; but now, will it be fair for society as a whole? Consumers will have to pay more for expensive food, which will put pressure on wages in all sectors owing to wage-price spiral. Not only will their purchasing power drop but also the variety of goods will shrink drastically that would have been higher in the absence of any restriction. As a result, the bias will creep in against other sectors in the economy and the purpose of achieving fairness will itself be defeated. When exposed to foreign competition, domestic industries get an incentive to innovate and perform. It might not seem that appealing in the short-run but in the long run the competitiveness will eventually lead to development of industries within the country. Otherwise, "the result is that the infant does not learn and grows up wearing protectionist diapers into premature senility"3.
It is also feared that imports might lead to increased pressure on 'infant industries' unable to compete, thus leading to laying off workers and thus, job losses in the domestic country. But, a study4 of correlation between volume of imports and unemployment rate of 23 countries suggests that imports and the unemployment rate might have been linked from 1970 to 1990, imports are no longer linked to job losses. Many other factors are tied to sustainable job creation. Thus, it can be well argued that it is only the fear, not strong empirical evidence that resists one from accepting the benefits of a free trade. Especially, for the market phobic proponents who prefer to be at an obtuse angle vis-à-vis the positive effects of lassiez-faire economy, more exposition is required so that the pro-market principles are interpreted in the true sense and not just to label it as “unfair”. And thus overall, I find it better to call the ‘ideological criticisms’ as ‘misunderstandings’ about WTO.
On the ideological level, everything might seem like a sweet, simple story interrupted by frivolous fear-driven arguments. But in fact, hue and cry has well been in place regarding the improper implementation of trade guidelines by bias against developing countries. It is often argued that developed countries argue for abolishment of impediments on trade like tariffs in developing countries, without abolishing their own. Definitely, such strong protectionist forces have been at play. In response to the 2009 crisis, U.S. included protectionist provisions. France has also been appealing against imports and outsourcing as “economic patriotism”. As a result, the functioning of the organization has faced severe criticisms. At the same time, the critique that it has not been able to deliver a fair process has been countered well by Narlikar “This was a valid criticism of the WTO ten years ago, It is an outdated and irresponsible critique to launch against the organization today. “
The effort in the direction of achieving the desirable state of no bias might have been helpful, limited development has been made in this direction, preventing me from calling it an achievement. So far, a free trade regime has only been a lip service by the developed countries and has not been achieved in spirit.
Another point as a criticism to WTO’s functioning is that the time taken in negotiations and forming consensus is excessively large. What also needs to be noticed is that it is because of the rise of the voice of the weaker nations that the negotiations are not agreed upon, or 'forced to agree upon’. No doubt, delaying can never be a solution. However, in the long-run, the greater representation of developing countries, not only on papers but in being is a good sign for world development.
An often-heard accusation is that WTO system treats trade as the priority, at the expense of environmental and humanitarian objectives. This is untrue. Though it is not an aid agency or an NGO but a TRADE organization, it has worked towards benefiting the world through its developmental work in developing countries. For instance, in the last week of November 2012, trade diplomats from 13 Asian economies participated in a workshop in New Delhi to discuss best practices for dispute settlement6. In addition to the efforts by the trade organization, similar efforts are required from the non-trade institutions of society also. George Soros clearly explains where the fault lies: “The trouble is not really with the WTO but with the lack of similarly powerful and effective institutions devoted to other social goals.”7
As seen in the past decade, the ambition of WTO of having a free trade regime remains a fantasy. Though it fails on the implementation of the guidelines of achieving efficiency as well as equity, it deserves applause for the sound ideological basis. Hence, the suggestion that it should be dismantled altogether should be dismissed and efforts should be taken in the direction of the effective functioning and implementation.
Newfarmer, R. and Sztajerowska M. (2012), “Trade and Employment in a Fast-Changing World”, in OECD(2012)
Narlikar 2008, as quoted in ‘Is the WTO still relevant?’ Sophie Meunier, Princeton University (2009)
www.wto.org > wto news> 2012 press releases
George Soros, ‘Fixing, not Sinking the WTO’, Project Syndicate
Indo-American Economic Relations & Impact of Obama’s Second Term
The India-US strategic partnership is a broad-based one and has matured over the years, with a bipartisan support for the relationship. During his first term, President Obama declared the U.S.-India relationship “a defining partnership of the 21st century”. Now, it is up to him to continue working toward this vision by reigniting the key foundational element, U.S.-India trade and commercial ties. As the world’s second-most populous country and on track to become the world’s third-largest economy, India will be an important ballast to the U.S. “rebalancing” strategy, and bilateral economic relations will yield substantial growth opportunities for both nations.
With Barack Obama re-elected as the president of US, India needs to watch his stand on FDI, immigration, outsourcing and overall relations. While corporate India and public at large are happy with Obama winning the second term, will the president match up to India’s expectations?
The Indian outsourcing industry is still growing fast. Revenues for India’s information technology and outsourcing industries are expected to cross $100 billion this financial year, up almost 15 percent from a year ago. The industry gets more than half of its revenue from the US as the companies in this sector employ most of their staff in India, where the costs are lower (an employee in US is three times more costly than one in India). The slow pace of economic recovery in the US and the high rate of unemployment over the last few years saw Barack Obama taking a tough stance against Indian outsourcing companies in his first term because Indians are often perceived as the ones to be taking away jobs from the West. Barack Obama'svictory in the 2012 US presidential electionshas made India’s $100 billion IT services sector edgy. Job creation emerged as a top priority in the presidential campaign. Obama announced a string of measures such as tax breaks for the companies who are ready to invest only in the United States to create jobs within the country. However, the issue of outsourcing might be mere election propaganda and it may not actually affect his policy decisions since even US companies have made profits by outsourcing. In realistic terms, the country is facing shortage of skilled technical employees, triggering the need for such workforce from India.
The US in the past few years has tightened its visa policies as well. Rising visa costs, coupled with rejections and delays have adversely impacted the employment prospects of Indians going there. Firms will find it difficult to secure US visas for their staff during Obama's second term in Office.
In the grand scheme of the U.S. labor market, however, most Indian immigrants are job creators. They are entrepreneurs or people who add to the U.S. economy with their skills, rather than "job-takers"—low-skill immigrants whose primary contribution to the economy is to take existing low-skilled jobs, which they are willing to do for a lower price than Americans.
The picture is positive for India's software product industry. Obama is a big supporter of start-ups. There could be more capital available to Indians because capital movement cannot be geographically restricted. India has a lot to gain by supporting his policies and our industry must do its bit by facilitating job creation in America and encourage joint partnership in healthcare utilities and education. A strong America will generate more FDI (Foreign Direct Investment) and create more global jobs, which would benefit the world.
The Indian Rupee has been valued pretty low for some time now. The causes being many, including India’s growing troubles over corruption and inter party mudslinging. With Obama being re-elected, it is projected that the Dollar may continue its upward growth and the Rupee to be pressurized lower. However, this can be averted. Bilateral trade was expected to cross the $100-billion mark in 2012 in a range of sectors like higher education, homeland security, cyber security, green energy and climate change, women's empowerment, science and technology, healthcare and innovation. India counts among the top 10 fastest-growing sources of FDI into the US. Indian companies across the US are operating in a range of sectors such as pharmaceuticals, healthcare, financial services, manufacturing, telecommunications, iron and steel, information technology and media and entertainment. These companies are not only investing and generating revenue in the US, but critically, are saving and creating jobs. India's IT industry alone employs some 35,000 US workers with R&D activity on the upswing. Indian companies have brought in $30 billion in investments into the US economy in the last five years and paid $15 billion of taxes and also contributed $3 billion to social security. Also, Indian students, the largest from any country in the US after China at 1,05,000 in 2009-10, add to domestic university strength and contribute to local economies as well. These positive trends are likely to continue during Obama’s administrative term. Obama’s win will ensure continuity of his economic policies and programs, which will also help in putting the world economy back on track. If the US administration ensures more economic engagement with India, it will help both the countries in grappling with the slowdown. The real challenge for Obama is to overcome the fiscal cliff soon in order to boost the US economy. In the process, IT sector will grow and India is bound to get a fair share of the growing market and its related benefits. The IT sector will require competent manpower, talent and skills which to some extent will give India a chance to supply. Indian IT industry’s fundamentals are strong and the economy is likely to grow with the adoption of new technology.
Obama is also supportive of China playing a bigger role in Asia and looks at Beijing as an important partner, which is specifically not good news for India. As far as nuclear deal and FDI policy are concerned, it will be in India’s favour, being a big customer.
As India increasingly diversifies its portfolio of trading partners, the U.S. share of global trade and investment with India is falling. Other nations are pushing ahead on their economic engagement with India. Today, India has investment agreements with over of 80 countries, including all major European nations, the Association of Southeast Asian Nations (ASEAN), Japan, and South Korea. Over the next four years the United States should step up its efforts to solidify its economic partnership with India lest it cede ground to India’s other trading partners and fall short of realizing the full potential of a truly “defining partnership.”
We have moved on allowing foreign direct investment in multi-brand retail, insurance, pension sectors but significant reforms in the financial and labour sectors sought by the US are still awaited. Obama, who had commented critically some months ago on the reforms slow-down in India, is likely to return to the theme, particularly as his focus on economic issues in his second term might become sharper in order to bolster the flagging US economic growth.
The role of the Indian and American national governments should largely be to allow specialization and comparative advantage to bring greater mutual prosperity. Services trade shows a reasonable match to each country's comparative advantage. The Indian performance in services trade is quite good, stemming in part from a less regulated labor market than is the case for manufacturing.Goods trade, in contrast to services trade, does not appear to reflect comparative advantage. This is because exchange is being dictated only secondarily by the preferences of individuals and companies. Trade patterns are warped by barriers imposed by governments. The best way to enhance bilateral goods trade is to bypass these two national governments. Indian states have their own trade barriers, but they can also act to offset national policies that interfere with their particular comparative advantages.
Closer economic ties in infrastructure sector can yield mutual benefits to both the countries. The Government of India is continuously reviewing its policies to create an investor friendly environment in sectors such as roads, ports and airports. Private sector participation in management, green-field airports, terminals and shipping berths and capacity augmentation has been initiated.
With Obama’s second term, we don’t expect any exceptionally adverse policy changes as he would work on the lines of his previous policies. But we definitely hope for a positive impact on the economic relations between the two nations as both are at stake. It will require a great deal of work for the office bearers of the two nations to lead India-U.S. economic relations forward. But the rewards will be vast.
THEY SAID IT !
‘The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” John Maynard Keynes
“Despite a voluminous and often fervent literature on "income distribution," the cold fact is that most income is not distributed: It is earned.”Thomas Sowell
“If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.”John Maynard Keynes
“Economics is extremely useful as a form of employment for economists.”John Kenneth Galbraith
“99 percent of all statistics only tell 49 percent of the story.”Ron DeLegge II
In Conversation with Dr. C. Rangarajan
Dr. C. Rangarajan is an Indian economist and a distinguished former Member of Parliament
and the former governor of the Reserve Bank of India (RBI). He is currently the chairman of
the Prime Minister’s Economic Advisory Council.
EB: There has been a lot of talk lately of India’s growth engine losing its steam. Growth rates have plunged as compared to previous years and things are looking grim with rating agencies revising the status of Indian sovereign bonds. According to you, at this point in time, in which direction should the trade off between inflation curbing and growth oriented policies be?
Well, the Indian economy has done well if you look at the last seven years. The rate of growth of the Indian economy in this period beginning from 2005-06 has been 8.3%. Growth has slowed down in the last two years. Partly this is because of external factors but it is also due to a variety of domestic factors. The output of some of the key industries like coal has fallen and this has affected the generation of power as
well. There have also been some price shocks because of the external factors. Moreover, the investment sentiment has also been affected for both economic and non-economic reasons. As we look at it, the most important thing is to raise the level of investment in the economy. The savings rate in 2007-08 was 36% and the investment rate was 38%. Even with an incremental capital output ratio of 4:1, we could get a growth rate of 9%. However, since then the savings and investment rates have fallen by almost three percentage points. Therefore, one of the things that we need to do in order to get back to the high growth path is to raise the savings and investment rates. I believe it would be possible to do so and to some extent taming inflation will also help. In the long run, I believe there is no conflict between inflation and growth. Over a long period, a stable price situation is conducive to faster economic growth. There could, however, be some periods of conflict between the two but we need to resolve it. I think the whole question of ‘either or’ is not the right way to look at it. We should control inflation and also aim at higher growth in the economy We should work on both fronts.
I would think that the growth rate of the Indian Economy in the current fiscal could be between 5.5 and 6 percent, perhaps closer to 6 percent. In the next year, it could be 1 percent higher than what we see in this year. Thereafter, I expect the Indian economy to pick up, move on at higher growth rate of 8 percent and subsequently we can get back to a 9 percent rate of growth also. In achieving this nine percent rate of growth, the external environment will also be important. But I see the economy moving to higher levels beginning the next fiscal.
EB: Do you think the Direct Cash Transfer scheme that has been introduced recently is a step in the right direction for the Indian economy at this point of time?
I think the direct cash transfer is a means of ensuring that subsidies reach the intended beneficiaries. Initially, direct cash transfer is being introduced with respect to the delivery of those benefits which have a direct cash component, whether it be disability pension, old age retirement pension or scholarships. These are already cash transfers. What we are now doing is to ensure that these cash transfers occur in the bank account of the beneficiaries to achieve two things: one, it reaches the intended beneficiary and two, there is a greater accountability. So, in that sense, I believe that the direct cash transfer, with respect to a number of schemes, is the most appropriate way to transfer subsidies.
EB: The government has been cutting its subsidies on fuel to control its fiscal deficit. Don’t you think that this will adversely affect the poor and lay a greater strain on their already limited resources?
Well, we can, in the case of some, provide subsidies. It is not as if we are not providing subsidies in all cases. In the case of LPG or kerosene subsidies are being provided. But in relation to other commodities, it is very difficult to provide subsidies on a large scale. Therefore, we have some idea of the extent of subsidies that can be given with respect to petroleum products and that subsidy will definitely be provided. However, beyond that, I think the prices will have to be adjusted.
EB: You were recently quoted as saying that the RBI should give preference to the non- corporate sector for new bank licences after the approval of the Banking Laws (Amendment) Bill. Why do you think this is important?
This is still under discussion. The point really is that certain amendments were required and felt necessary on the part of the Reserve Bank of India. Until we resolve all the issues, the priority can be given to entities that do not necessarily form a part of corporate business, because that discussion relating to corporate business will go on and RBI will come up with appropriate condition . So, what I was saying is only that at the moment, priority can be given to non-corporate business sector. If there are fit and proper entities in the non-corporate business sector that is, the financial sector, they may be given licences first. Regarding corporate business, it can be considered after the RBI comes up with appropriate guidelines.
EB: What do you think are the downsides of giving licences to the corporate sector?
Well, the problems that have been raised are that there could be conflict of interest and therefore we need to resolve or put in place the appropriate mechanism to prevent this from happening.
EB: The poverty line has currently come under a lot of criticism and its actual definition is a topic of debate. Do you think that there is a better way to identify the actually needy? There are two things; one is identifying the beneficiaries for the various programs. Now, this need not necessarily go by a particular definition of poverty. It will depend upon the particular program and its nature and there could be different criteria. But we need some definition for poverty line in order to indicate how the economy is behaving over a period of time in terms of the distribution of income. So one idea is, if there is a defined line of poverty then in relation to that defined line, we can see how the economy has behaved. Therefore, there are two different things, one, just as a matter of measurement within the economy, to find out the distribution of income in relation to a given line and this given line can be defined in a number of ways. Secondly, as far as entitlements are concerned, different programs can have different criteria. So, one can define a poverty line in relation to certain basic minimum needs and in terms of this poverty line, measure how the society has behaved over a period of time. At the same time, the entitlements for different safety net programs can vary; there need not be one single criterion by which different programmes are administered.
EB: What would be your advice to prospective economists and young students like the readers of Aapoorti?
I think India has a big future and the youth of today will be members of a growing and stronger India. In one sense, the future of the students depends upon how the economy behaves, but at the same time, they also have an opportunity to contribute to the way in which the Indian economy will behave. I would only say that the young should seize the opportunities that are available in the Indian economy and make their contribution towards building up a stronger and more humane India.
Note EB: Editorial Board
In Conversation with Dr. Isher Ahluwalia
Dr. Isher Judge Ahluwalia is a renowned Indian economist. She is a Member of the Eminent Persons Group on India-ASEAN (Association of South East Asian Nations) set up by the respective governments and is presently the Chairperson, Board of Governors, the Indian Council for Research on International Economic Relations (ICRIER).
EB: There has been a lot of talk lately of India’s growth engine losing its steam. Growth rates have plunged as compared to previous years and things are looking grim with rating agencies revising the status of Indian sovereign bonds. What is your take on this and do you still see India as an economic superpower in the future?
I have never thought of India as an economic superpower by 2020 or 2025. What I do see is, that India is making a transition from a low income to a middle income country and because of its large size, we will see India as the third largest economy by 2030, which means that we will have the third largest GDP in the world and we will have a tremendous market for both domestic and foreign investors, given the fact that the developed economies have a lower growth rate. Our second strength is the fact that we are at a stage of demographic transition where the percentage of the working population is increasing continuously. In China and some other major countries, this is not the case. India is the only major emerging country where the percentage of the working population will continue to increase for several decades and if we can empower this young population with education and requisite skills, then we will be in a very strong position to realize our economic potential.
EB: Do you think the Direct Cash Transfer scheme will work in the coming year in plugging leakages in welfare schemes? Opponents of the policy say that the money transferred may be misused thus nullifying the very purpose of the program. What is your take on that?
Our first concern is that when we subsidize any item, be it food, fuel or fertilizers, then our systems of delivery are such that in passing that subsidy to the right person, a lot gets siphoned off because of inefficiencies, delays and corruption . For every one rupee worth of food grains that you want to give to the poor, he gets only 15 paise. Some of that goes into buying, storing, transporting the grains while a large part is siphoned off by the intermediaries.
The second issue is that when you give the family money, the men may end up spending it on liquor or gambling. We need to develop a population with values which believes in depending upon itself. How far can you expect the government to solve all problems? We need to have family units, where parents give priority to feeding the children. Merely giving them food and not giving them these values will lead the families to spend everything other than the food, on things which are not the right priorities. There are studies that show that female heads of the family are much more inclined to look after the family welfare than male heads. So until the time when we can create a generation of men which can behave more like women, we have to somehow ensure that the money gets into the hands of the women heads and empower them. If women are economically independent, are in positions of power and have an equal say in family decisions, then we can save the aforementioned 85 paise, especially when these women can go to the banks and get their money. It surprises me that we do not get something as simple as this. It has worked in countries like Mexico, whose ‘Progresa’ scheme is all about Cash Transfers. Those indulging in corruption and adulteration will not be able to continue with their practices. To me there’s no question that Direct Cash transfers, especially into the hands of the women of the family, will go a long way in ensuring food security.
EB: It was recently reported that while Gujarat is a high-growth state, it's faring poorly on social indicators, such as poverty, hunger etc. Do you believe that these two factors go hand in hand in the short run? While it may be true that Gujarat has high growth indicators and low nutrition levels, look at other states’ hunger levels and compare. Is it true that the hunger level in Gujarat is higher than Bihar’s? I do not know but please check.
The challenge of poverty and hunger is very much there in our country. But unless you have high growth, where will you get the revenues required to alleviate these problems whether it is Gujarat or Maharashtra or any other state for that matter? The reason we have seen so much money being spent on social protection over the last 8-9 years of the UPA government is because these were the years of very high growth rates for the Indian economy and with high growth rates, the government could spend large amounts on health, education and poverty alleviation. But I think where they made a mistake was, that they just took growth for granted and did not realize that you also have to make sure that the conditions which create growth remain intact.
It is true that the external environment became adverse with the global slowdown but there were also a lot of internal economic lapses. Some measures, for example, retrospective taxation, were taken in the last budget, which hit at the confidence level of the investors.
The data shows that between 1993 and 2004, the percentage of people in poverty declined by 0.8% per year but between 2004 and 2011, the decline was 2% per year. Now, you could say that the cut-off should be higher. I have no problem with that. The poverty line may not have been rightly defined. If you want to see if the extent of poverty has changed over a long period, you have to fix a line to see how many people are crossing the line over time. There is no doubt that many more people have crossed that line in the more recent period. Growth by itself will not reduce poverty, growth will enable you to reduce poverty. If you do not have growth, you will have neither inclusion, nor employment.
EB: In the context of the last question, isn’t it true that long term effects of policy will not be taken into account in democracies like India where power changes hands every few years? That’s actually a very good question. It is true that in a democracy, the short-term takes precedence over the longer term. But a vibrant democracy is one in which people like you and me, the think-tanks of the world, the civil society, make the government accountable and therefore, put pressure on the government to ensure that it delivers. In our case, now that the younger people are increasing in numbers and are technologically empowered, you can have mass mobilisation through just a mobile phone. I think this is going to change the way governments think. This trend of demanding good governance will continue no matter which government comes. To some extent, anyone with money can create false movements because it is easier to do so using the technology. But at the same time, governments have to learn to effectively communicate, deliver and make their case. And I think that is where this government has been weak. They have done a lot of good work but they have not been effective in communicating with people. They have to account for a cumulative slide in governance in our country, which has reached the level where it has crossed the tipping point. The younger generation is less patient with the incremental changes.
EB: The poverty line has currently come under a lot of criticism and its actual definition is a topic of debate. Do you think that there is a better way to identify the actually needy?
One way of defining the poverty line is that you define a cutoff, and you say that people below that cutoff should be the target of welfare programs. I think that a lot of this debate is governed by people wanting to use the poverty line as a cutoff. The minute you say that the poverty line will not be the basis of your deciding who will get what subsidy, people will not get that agitated about the poverty line. The technicians have been defining the poverty line for a long time and many economists have been saying that poverty is not just consumption poverty or income poverty; it is also education poverty, health poverty and housing poverty. For example, it is not only the poor who live in slums but also the not- so-poor. This is because they can’t afford to rent a living space as the housing market is very highly distorted. For the last eight to ten years, when economists talk of poverty, they talk not only about income poverty but also about millennium development goals and social indicators. Perhaps the simplest way of defining the poverty line is to say that the bottom 30% or 40% of the population will always be called poor. Then you don’t waste energy on counting the poor, but you get on with the business of getting people out of poverty.
EB: There has been uproar over allowing Foreign Direct Investment in retail. While it is true that FDI will bring in the much needed foreign exchange for India but at the same time the profits that accrue to the foreign investors will lead to a simultaneous outflow of foreign exchange. Does this defy the purpose of the policy?
Look at what foreign direct investment in retail will do to the economy. In our country, 70% of fruits and vegetables go waste. By contrast, the retail sector in Malaysia and Indonesia, for example, is modern. You can walk into a store and nicely buy your vegetables and all. Different locations in Delhi have different prices for the same fruits and vegetables. To this day, when I go to buy my vegetables, I know my salwar kameez will be filthy by the time I have finished with shopping for my vegetables, walking through the biodegradable waste in the lanes. We must modernize retail, especially when women are joining the workforce. We don’t want to sit there and haggle and buy our vegetables like our grandmothers did. We want to walk into a store, see the things displayed nicely, and pick up what we want. And in the process, the fruits and vegetables that rot away, simply because there is no refrigeration, can be saved. Once you have refrigeration, the life of fruits and vegetables is enhanced. You can process them, add value to them, and create several employment possibilities.
A large percentage of the FDI in retail will have to be put into backend investments in logistics and refrigeration, modernizing our retail sector. Indian companies just don’t have that kind of money to invest in back-end investments. Suppose five years later, if these foreign companies were to go away, their investments would still be there and our economy would be modernized. So there’s no question in my mind that FDI in retail will be a game-changer. It will actually connect the urban and the rural sectors in a very modern way.
EB: We see some sort of a tiff between the stance of the finance minister and the governor of the RBI in relation to growth and inflation. According to you, at this point in time, in which direction should the tradeoff between inflation curbing and growth oriented policies be?
That sort of tiff is not only in India but everywhere, at every point in time. The RBI’s objective is to look after inflation and protect the value of money, and therefore, they keep their eye on inflation and exchange rates while the Finance Ministry and the Planning Commission are working to attain higher growth rates. Since lower interest rates create better conditions for growth, there is tension. The RBI would say that they are also for higher growth rates provided the government reduces its fiscal deficit. Higher fiscal deficits put upward pressure on interest rates. I agree with the RBI. If the Government does not cut the fiscal deficit and continues to borrow, then it is crowding out private sector investment. That is the real challenge. Both the Government and the Reserve Bank of India have to work together. Lowering the interest rates and curbing the fiscal deficit should go hand in hand, and if that happens, the growth rates will improve automatically and, demand side pressures on inflation will also go down.
EB:What would be your advice to prospective economists and young students like the readers of Aapoorti?
I would ask prospective economists to conduct research on issues relating to the challenges of urbanization in general and of urban service delivery in particular. We economists have focused our research on socio-economic issues but failed to look at the spatial implications of the development strategy. The Indian economy is going through a phase of significant structural transformation. Urban share of GDP is projected to increase from its current two-thirds to 75 per cent by 2030-31. Urban population is projected to increase from its current 30 % to 40 % by 2030-31.
The target in the 12th Plan is to have an average growth rate of 8 % over the five year period. Agriculture can grow at most at 4-4.5 %. Most of the growth has to come from the Manufacturing and Services sectors. In the past 10 years, growth came mostly from the Services sector, but efforts are being made to ensure that the industrial sector contributes its share to the growth story as well. Where will that growth be hosted? In the cities and towns of India. And just as the Green Revolution acted as the engine of growth in the 1970s and 1980s, likewise, for the foreseeable future, the cities of India will act as the engines of growth.
We economists often talk of improving the investment climate by reducing the transaction costs of doing business. However, even if minimize the cost of doing business by having a perfect government and a sound financial system, why would anyone want to invest in cities whose water and sanitation conditions are abysmal and which lack basic infrastructural facilities? The whole point of investing in cities is that they provide agglomeration economies. Instead, if we create congestion diseconomies, why will investors invest? Unless you improve the quality of life in the cities of India, you will not be able to achieve sustainable growth of 7%, leave alone 8%.
I want to bring the urban agenda to the mainstream of economic discussion in our country. I do not mean urban vs. rural. This is a political construct. What we need is rural-urban synergy. That is why FDI in retail is a game changer. It will not only change the urban facilities but also the face of rural India. The first chapter of the Report of the High Powered Expert Committee on Urban Infrastructure and Services which I had the privilege to chair, will tell you how the urban sector is connected with the overall structural transformation of the Indian economy. The political economy of our country has remained focused on the rural for a long period of time, neglecting the growth of the urban India. It is high time that we looked at the challenges of urbanisation and the connection between the rural and the urban sector.