Perpetual Reform Machine

Financial and economic reforms in India started in 1991 when the country faced BoP crisis. That is, the country started out on the path of reforms with a gun to its head, aimed at by multi-lateral agencies like the IMF.

Tell me what was the last time you heard of reforms of the finance dominated economic system coming to an end? Never. You will never hear that. Reforms are a perpetual motion machine, notwithstanding what you may have learned in physics, thermodynamics particularly.

“Reforms are still-borns.” “Reforms have slowed down/stalled.” “Reforms have to be taken forward.” These are what we hear every day, repeat every day, on the front page of the pink sheets – anchored by head honchos like bank chairmen/presidents (Head of HSBC comes to mind) and corporate heavy weights. Of course, to join in the chorus, you have the ever-ready clan of economic and political talking-heads on TV (ironically not many of them may have even heard of the Chicago School, and would be able to spot the difference between John Maynard Keynes and Milton Friedman), talk-shops of industry lobby groups like CII, ASSOCHAM, NASSCOM, dinner parties of the well-connected, page 3 celebrities and the water-splashed Bollywood air heads at pool-side parties. Yes, on Indian economy, it is always about the unfinished business of reforms.

What are the general items of reforms the above refer to?

Ease of doing business leads the list. What the sophisticates mean by this is doing away with regulations. Why? We have to improve global competitiveness. In what? Race to the bottom.

For example, corporate tax rates have to be smaller than the smallest obtained across the globe, to attract investors. If you do Game Theory on this, I suspect that equilibrium will be achieved at zero rates of taxes!

Understanding taxes as the main item on the revenue side of government finances, this leads to the conclusion that fixing tax rates thus is akin to jettisoning sovereign economic policy to global finance capital. All in the name of globalization.

What exactly are the political leaders leading? A shell of a country. Global finance capital calls all the shots. If you have any doubts, refer to the brouhaha created last year about how the IT majors like Apple, Google, Amazon reduced their tax burdens by doing all kinds of magic tricks with their spreadsheets; having offices in a remote island of population of a single individual, to work on the spreadsheet.

Ireland had to hide its face in shame in how it succumbed to Google or Apple, I do not recall. The US too was red faced, with shame or in anger I do not know. India is waiting for its face to be blackened. With more reforms, nothing less.

Single-window clearance is the pet project of those with capital. The easiest way to increase the RoI of their capital. Returns come faster too. No environmental impact assessment. No EIRR, only FIRR. Economic benefits, to include social benefits, just do not matter.

No social impact assessment, slowing down the process of getting the project off the ground, impediments to land acquisition, creating much harm to Indian industry, ergo to the Indian economy. A US Supreme Court verdict took the most extreme view in an eminent domain case. It ruled that an individual’s property can be acquired by the government for the public purpose of building a mall! Yes, it declared that a mall will augment tax receipts of the local body and hence satisfy the public purpose requirement. That is, finance capital works its influence at the level ranging between sovereign and municipal governments. Nothing is sacred.

The environment has to be investor friendly. That is, agreements between the government and private parties, going under the innocuous sounding name Public Private Partnership (PPP) – some partnership this – must be heavily tilted in favor of the investors. If even in this situation arbitration cops up, it can be no more than a one-session affair, with confirmed decisions, in favor of capital. Corporates will be allowed to rejig their financial model as and when their RoI falls below a threshold value. They will not be held to their risk analysis that has gone wayward. The contract in PPP holds no sanctity.

Labor laws, the ones that make it easier to fire and hire (note, fire comes ahead of hire!), de-legitimize labor unions and so on. India is going very slow.

Digressing slightly, public sector bank employees are getting 15% pay rise as per the agreement worked out between the unions and the government. There is nary a mention of how this could feed into wage-price spiral leading to inflation. Why I mention this is, in all the discussions on controlling inflation thus far, the head line item was inflation risks through MGNREGS. I do not know about you, but to me something does not compute here.

Now, we come to subsidy. Of course, reforms have to continue to tackle subsidies. Of what kind? Of the kind that goes to those who are at the bottom of the economic pile. Subsidies to those who have it? By some reckoning, subsidies to the rich are in multiples of those to the poor. Don’t worry. Such subsidies will lead to more efficient use of resources, contribute to the economy in a positive way (only in an aggregated measure, I hasten to add), whereas subsidies to the poor are parasitic.

On subsidies to the rich, let me merely point out that the land allocated to SEZs have been utilized for the stated purposes to the extent of not more than 50%. Something to keep in mind while talking about productivity of subsidies to investors.

I am not an economist, much less someone with his fingers in finance. So, you must take what I have written as nothing more than an inchoate response to what I read and hear, and understanding much less. Yet, I will tell you what bothers me most.

It is that one never gets to hear an analysis of what exactly have reforms, however incomplete they might be, have accomplished thus far, after all it is nearly 25 years since this age started. One of the things that the management types always ask is, “What have you done for me since yesterday?” I ask what reforms have done to the country over the past 25 years. I want to see both sides of the ledger.

Yes, some good must have been done. But, the whole thing could not have been an unalloyed golden crown studded with diamonds. There must have been some losers, some thorns. No, it need not have been a zero-sum game. But, there must have been some negatives. Why can’t we discuss these? Then, we may be able to take a rational decision on how to continue. After all, it is rational choice theory that the Chicago School endorses. Global finance cannot afford to say no.   

The gun is still at the head of India. But, I believe it has to be turned to be aimed at global capital. If we do not do this, India will be the world’s first perpetual reform machine.

Raghuram