Calcutta Notebook

B J

Indian economy remains placid despite a hugely positive sentiment. Policy paralysis is gone. Officials are taking decisions. Corruption is somewhat under control. Businesses do not have to grease the palms of Union Ministers to have their investment plans approved. Yet there is no Investment. Reason is that there is no demand in the market The farmers of Palanpur and Hooghly are not finding buyers for potato at even Rs 5 per kilo. In such a situation provision of a cemented village road, internet connectivity and prompt approval of loan for tractor are of no avail.

Modi is not recognizing that the Chinese economy is slowing precisely because of such a reduction in demand from the developed countries. Cleaning up of corruption has made things worse. It has contributed to the slowdown. President Xi Jinping has hit at corruption at top levels. General Xu Caihou was member of the Politburo of the Communist Party. He is accused of accepting bribes. Chongqing governor Bo Xilai was thrown out. Roughly 182,000 government servants have been disciplined for corruption. The major focus, however, has been on 45 top-ranking officials, or "tigers," as they are called, as opposed to the smaller "flies." According to a report in The Economist, demand for brothels, mistresses and casinos has fallen on hard times. Even the demand for condoms has fallen. Five star hotels and other luxury goods suppliers are facing tough times. Government officials are no longer able to spend their ill-begotten monies. Still, corruption is a tiny contributor to the general slowdown. Qinwei Wang of Capital Economics estimates it may have contributed to a reduction of mere 0.1 to 0.2 percent in growth rate.

Why should control of corruption hurt at all? Control of corruption helps when the economy is buoyant but hurts when it is in a recession. Let us say there is demand for potatoes in the market. Farmers are inclined to install a bore well and buy a new tractor. Corruption at the bank hurts in this situation. The farmer is dissuaded from making the investment because the bank manager wants a cut. The impact of corruption is entirely different when the economy is in a recession. There is no demand in the market. Grease money helps in such a situation. Officials create demand for luxury hotels and casinos. Corruption helps create demand in this situation. Reduction in growth rate of China due to control of corruption is due to this underlying lack of demand.

Chinese strategy was to export cheap manufactured goods to the Western countries; and the Government made huge investments in infrastructure for making these possible. The cheap exports, however, led to closure of manufacturing in the developed countries. That led to a general economic slowdown, a decline in wages, and an increase in employment in the developed countries. Slowdown in the developed countries has led to demand for goods from China not expanding. This has led to stagnation in manufacturing in China. In the meanwhile local Governments had borrowed heavily to build highways and townships for factories that were expected to be set up. They had taken huge loans to build this infrastructure. The factories never materialized. So they have empty industrial parks on their hands. Now these Governments are saddled with huge debt. These are the real causes of slowdown of the Chinese economy. Control of corruption had made things worse.

The business interests of Chinese leaders appear to have contributed to the making of this disastrous policy. Zhou Yongkang, China's security chief and member of the Politburo Standing Committee had strong ties to the oil and energy industries. In October 2012, The New York Times reported that former Premier Wen Jiabao's relatives controlled financial assets worth at least US$2.7 billion with interests in mobile services, jewelry and insurance. These financial dealings appear to have prompted the Chinese leadership to embrace the disastrous path of exports of manufactured goods.

Modi story is similar. Stagnation continues after the BJP Government has come to power. There is no demand. Positive sentiment has not helped. Businessmen will invest when they see market for the goods they will produce. A property dealer from Delhi told this writer that property prices fall whenever BJP comes to power. Corruption money flows smoothly no longer. Yet, the small increase in growth rate seen in the recent months may be due to improved governance generally. That is good news! But precisely here lies the danger. This small increase may prompt one to ignore the basic problems with the developmental model. The "Make in India" campaign seeks to duplicate the same investment-led model that which has landed China into trouble.

It is well known that some important members of Modi's cabinet have extensive financial dealings—in power sector, in particular. "Make in India" is being pushed, it seems, because there are huge rents to be extracted in manufacturing industries. Coal and natural gas blocks can be allocated, land can be acquired, and river water can be abstracted at throwaway prices by these business interests under the cover of 'Make in lndia'. Such rent extraction is not possible in services sector hence Modi Government is ambivalent on the same. The Chinese leaders having business interests have pushed that country into the ditch of manufacturing exports. Modi is taking India along that same disastrous path.

There are inherent limits to consumption of manufactured goods by the developed countries. How many bed sheets will the American consumer buy? Therefore, need of the hour is for Modi to place more money in the hands of the poor people who are clamouring for increased consumption. Modi must abolish the various subsides and pay the amount directly into the bank accounts of all citizens of the country. That will create demand at the grassroots. Positive sentiments will then translate into investment.

It may not be out of place to recall the sensational play 'Ghasiram Kotwal'. A cruel Kotwal accused an innocent trader of theft and ordered that his hand be cut off in punishment. The honest sepoys dutifully carried out the sentence. The poor trader may have possibly saved his arms if the sepoys had been corrupt. Honest Cabinet and Secretaries are, therefore, wonderful if the policies are good. Good Governance can be devastating if the policies are bad. 'Make in India' will be implemented with a gusto and take India down speedily.

Frontier
Vol. 47, No. 40, Apr 12 - 18, 2015