Tuesday, November 22, 2011

Manmohan Singh's role in India's economic ruination

#POST 0031

It was the excessive spending of the 1980s that eventually led to a balance of payment crisis.
By the 1980s, the Indian government had become dependent on foreign aid and loans. If it was not the US, UK or the former USSR that the government approached, it was the World Bank or the International Monetary Fund.
These loans made it worse for the economy as the Bretton Woods system had set up the World Bank and the IMF in such a manner that the former colonial powers would benefit from the resources of the developing countries.
Aid was always “tied aid” and was contingent upon purchasing goods and services at arbitrarily high prices from specific American and European corporations and non-profit groups. Many times, these goods and services were of little use and even frivolous in nature.
Thus the corporations and non-profit groups in the West received the money from aid programmes while the recipient nations received only goods and services. However, the recipient nations had to repay these loans in cash to the IMF despite IMF not being the source of the money. This was an onerous task since the nation never received any money that could be used to invest and grow the economy.
In addition, the IMF always violated the principles of the free-market system and forced the recipient nations to hold their interest rates and exchange rates at artificial levels that stifled economic growth but ensured that the interest paid to the IMF had a high value.
The conditions removed all risks for the corporations benefiting from the programmes and at times even forced the recipient government to use public funds to guarantee profits for the corporations. These measures typically devastated the economies of the countries that received IMF loans.
Many times, American politicians pressured the unwilling leaders of developing countries to sign up for IMF loans as they viewed the loans as opportunities to transfer American taxpayer money to certain corporations.
Thus the Bretton Woods system merely legitimised the 18th century ‘mercantilism’ with the addition that the American taxpayers as the major donors to the aid programmes were also victims of the system.
The economists who advised the IMF and the World Bankclaimed that excessive spending on imported consumer goods would make India a wealthy country and that India should spend beyond its means. Professors from Harvard University and Columbia University claimed that spending sprees, inflation, being in debt and running up deficits were the keys to economic prosperity.
The Planning Commission followed these prescriptions during the periods of the Sixth and Seventh Five Year Plans and India saw high inflation and an influx of consumer goods. Manmohan Singh, who as the governor of the Reserve Bank of India was responsible for the inflation, was the secretary of the Sixth Plan and headed the Seventh Plan.
The Sixth Plan promised to tax, ban, control and regulate a number of economic activities and asserted that “the commanding heights of the economy must continue to remain with the public sector”. In the document containing the Seventh Plan, Manmohan Singh called the planning process a “precious gift of Pandit Jawaharlal Nehru to the people of India”. Predictably, the socialist system combined with the binge spending led to a balance of payment crisis.
The first signs of the crisis were visible when India’s current account went into deficit after the the Sixth Plan. By the end of the Seventh Plan in 1990, a desperate India sought yet another IMF loan.
It would be wrong to blame only the Bretton Woods organisations and their partners for preying on conditions favourable to them.
The conditions in India had been created by politicians who were willing parties to the transactions with the IMF and who pursued socialism with a great zeal. Rajiv Gandhi as prime minister continued the socialist policies of his mother and his grandfather and stated at the Qinghua University, “The focus of our socialism is the uplift of the poor, succour to the weak, justice to the oppressed and balanced regional development. To attain these ends, we believe the State must control the commanding heights of the economy...”
As the 1991 elections approached, the manifesto of Rajiv Gandhi’s Congress party promised another heavy dose of socialism. 

As India resigned itself to its plight, an unexpected sequence of events would propel Narasimha Rao to power and he would then set in motion the changes in the country’s economy.

While many people have credited prime minister PV Narasimha Rao’s vision for India’s economic reforms, others have claimed that the government was merely following the diktats of the IMF. 

To understand the reform process, it is important to note that it consisted of two prongs — liberalisation and globalisation. The ministry of industries handled liberalisation, and the finance ministry took care of globalisation. The policies related to globalisation were based on IMF conditions and were in the interests of IMF’s partner firms.
Manmohan Singh’s first speech as the finance minister focused so heavily on pleasing foreign firms that he mentioned the words ‘foreign’ or ‘international’ over 30 times while there were no references to benefits for India. His sole reference to the removal of licences in India was related to removing import licences to help foreign firms enter the country. As a surprise inclusion in the cabinet, Singh was clearly unaware of Rao’s plans to move away from socialism and expected to merely implement the IMF policies. In his budget speech, Singh declared, ‘Markets can only serve those who are part of the market system. We need direct credible programmes of direct government intervention focusing on the needs of these people.’
Among other enablers of the globalisation process were Raja Chelliah and Jagdish Bhagwati. Chelliah helped restructure the tax system and was working with the IMF when the Rao government came to power. He advised the government to expand the tax base when people were already overburdened by various taxes including the notorious inflation tax. The aim was to service foreign debt, a euphemism for paying IMF.

Bhagawati of the Columbia University openly represented the interests of international organisations and equated free trade with trade managed by these organisations. At one time, his writings on property rights, inheritance laws and appointments in the private sector had read like inflammatory communist pamphlets, but he changed his tune after he started working for mercantilist organisations like the IMF, General Agreement on Tariffs and Trade and WTO. He claimed that holding one’s savings in gold was a ‘social waste’ and opposed people buying homes. Instead he said India needed to import consumer goods from the West. Even his suggestion to privatise PSUs was dubious as his aim was to raise money to pay foreign organisations.
The cynical policies of the globalisation process resulted in several controversies. One policy guaranteed 16% profits to several foreign power companies that invested in India. Another policy attempted to impose unfair patent laws upon the country by forbidding farmers from sowing seeds from the previous year’s harvest of certain crops and mandating them to purchase seeds on an annual basis from MNCs that were World Bank partners.
The firms in the West would also own the rights to turmeric, neem and other Indian food and medicinal items. Sanity returned only after farmers destroyed a unit of Cargill Seeds.
Meanwhile, the liberalisation agenda was starting to take off under Rao, a shrewd politician who had taken control of the Congress. He retained the industry portfolio and the new industrial policy removed the requirement for many types of licenses.
The first effects of the liberalisation program soon became visible across the economy. With new competition, the Indian automobile industry quickly improved the quality of its vehicles. The software industry became an oft-quoted example for positive effects of the lack of controls. It benefited by both liberalisation within India and real free trade at the global level that was not under the management of international organisations. Soon, other sectors followed suit.
While Rao took the first steps in reforming the economy, the process intensified under Atal Behari Vajpayee, leading to the widespread improvement in the lives of Indians. These changes showed that removing controls at the national and international levels were beneficial to the economy. More than 50 years after the British left the country, the economy had finally taken off and India had arrived on the world stage.

No comments:

Post a Comment