By Gopal K Agarwal,
In the times to come, the future of politics will be influenced more by economics than anything else. With economics being so important in the politics what is needed is a position paper on major issues. But with economics there is always a dilemma, a trade off. Economics is critical negotiations and therefore requires an analytical approach with a long-term vision, with well-informed people at the same level of understanding. The strategy and concept of development have to be formulated through democratic means. Development models based on consensus and participation minimize strife and civil unrest.
Whenever there is a crisis, economic nationalism takes centre stage over political nationalism. World is in conflict. Every nation is watching its own interests, Economic well-being of its own people is taking precedence over global concerns. Some myths have to be shaltered, economic policy of the country has to take into consideration the futuristic aspirations of our own people. We don’t need to follow what the western world did and taught us some twenty years back, when even our food is not secured and our farmers are committing suicides. There are some serious issues having far reaching consequences in the country. We have to analyze them. The issue of foreign direct investment (FDI) and exchange rate management are very closely intertwined to each other, accumula generating widespread debate the world over.
The policymakers are concerned that economic rivals are using exchange rates to their advantage and searching for ways to preserve domestic growth and employment. Brazil has specifically described this as an exchange war. There is a fear that investors will flee America’s low interest rates and weakening dollar and flow into their markets, overheating their economies. Many countries have embraced some forms of capital controls to reduce incoming short-term investment. Brazil has increased the tax on money flooding into its bonds and South Korea is also talking of the need to check speculative foreign capital inflows.
The issue of exchange rate management is a matter of great concern. Many countries like Thailand, Brazil, China and Europe are trying to devalue their exchange rates to help their exports. The entire world is pressurizing China to let its undervalued currency to appreciate Beijing having accumulation of large foreign exchange reserves through persistent surplus in its capital account, does not want to move in this direction.
The deposits which are generated out of this FDI and FII tic flow’s and kept with the RBI is a liability for the country and are in the form of a debt and are wrongly designated as reserves ca’s and therefore are a misnomer.
Secondly, they are mostly kept in the form of dollars and other European currencies, if their currencies are devalued by these respective countries, we are ultimately a looser.
The rate of inflation in our country is very high and to secure domestic saving, which is the backbone of our capital formation, we have to keep interest rates high. The domestic economy is in resilient mood due to high demand push in comparison to recession in many parts of the world. Both these factors are attracting FDI as well as FII funds flow. With the Indian economy forecast to grow more than 8.5% on rising incomes eed and abundant loans, global investors prefer India. India is one of the few Asian economies that do not depend on exports in eat comparison to China which is highly dependent on exports.
FII inflows in India are expected to reach the landmark of $25 billion in 2010. FII’s have already poured about $18 billion in Indian stocks so far this year surpassing the $17.9-billion record in 2007. With the Sensex. racing towards all-time high, foreign investors are pouring money in funds focused on Indian stocks. This is hot money creating lot of volatility and instability in the economy and cannot be considered to be very good for the country.
FDI is mainly beneficial to MNCs. The manufacturing units set through FDI are owned by MNCs having majority stake. The profits of this manufacturing unit belong to them. Secondly, they have invested in a currency assets which have a potential to appreciate. They will also get higher returns simply because of the high rate of interest. Thirdly, the so-called reserves of our country are parked with their parent country having control over these reserves. A simple process of devaluing their own currency can reduce the value of these investments. What does the domestic country get? Only. good wages for the services rendered. This also makes our product cheaper in international markets and therefore helps international communities to fulfill their demand for consumption. According to WWF commissioned report, countries like Australia, United States, Canada etc. have a very high level of consumption of natural resources having heavy global footprints. These are therefore termed as unsustainable Economies.Whatever benefit we may have in the future will also be taken away from us. Historically, we have our experience with USSR. In our trade with USSR. Rouble was the denominating currency and our agreement stated that all bilateral payment will be in Rouble denomination.
The Rouble value was not determined by market forces but was fixed. We were buying all defense equipments, oil etc in Rouble denomination, when Russian economy got burst we should have been benefited by paying in Roubles as per our agreement, but being the level of corruption that we have all liability was converted into rupee denomination Historically, this transaction has the distinct legacy of being the single largest donation by a poor country to a rich nation. Hat’s off to then Prime Minister Smt. Indira Gandhi’.
The two financial crises that the world passed through recently have many lessons for us. Earlier in the South East Asian crises, real asset bubble was built up through massive funds flow and bank lending based on the securities of these assets and currency exposure by international investors like Warren Buffett etc. combination of these factors suddenly destabilized the whole economy in a synchronized manner. The recent financial crises in the west was the other way round where bubble was built through large scale deficit financing and indiscriminate printing of currency by US and then subprime domestic lending to fuel consumption. It was in the US interest to release this bubble, and was done through loose bankruptcy laws. The world lost trillions and trillions of Dollars in the form of reserves.
We are mortgaging our present for the future. In a new global hunger index by the International Food Policy Research Institute, India has been ranked way below neighboring countries like China and Pakistan and is at 67 rank The index, rated 84 countries on the basis of three leading indicators- prevalence of child malnutrition, rate of child mortality, and the proportion of people who are calorie deficient. In India, the Index scores is driven by high levels of child underweight resulting from the low nutritional and social status of women in the country. The report points out that India alone accounts for a large share of the world’s undernourished children. India is home to 42 per cent of the world’s underweight children, while Pakistan has just 5 per cent. Among other neighboring countries, Sri Lanka was ranked at the 39th position, china at 9, Pakistan at 52nd and Nepal at 56th. Bangladesh listed at the 68 position. The economic performance and hunger levels are inversely correlated.
In the midst of rising food inflation, this situation is very serious and the government does not seem to be at all worried on this count, indulging in massive wastage of scarce resources in organizing events like Common Commonwealth Games, getting carried away by international propaganda of India as an Economic Superpower of the future. The nation is bogged down by many unattended problems like Naxal unrest. Kashmir logjam, where the intellectual bankruptcy of our own people is cating into our roots, creating vested interest outside the national interest. Yes. India can become economic superpower, but with determined will.
(The writer is National Convener, BJP Economic cell.)
