Calcutta Notebook


It has been 18 long months since the BJP Government came to power. Undisputedly there has been a reduction in corruption—at least at higher levels. It will take some time for this culture of honesty and efficiency to percolate down. Consequently, most people including this writer had expected the economic growth to pick up. That, however, is not happening. The government is claiming increase in growth rate to seven percent. But the ground reality is opposite. Every businessman is saying that turnover is down by 20-30 percent in comparison to the last year. Reason for this low growth despite better governance is that wrong policies promoted by the World Bank are taking India down into the dark hole.

The level of bleeding of government revenues has drastically come down. That would have led to higher growth rate. But the Government has simultaneously reduced public investment in infrastructure. In the result the improvement in growth due to good governance has been cancelled by the reduction in growth due to throttling of public expenditures.

The Government has already brought fiscal deficit under control. But that has not led to higher growth. This experience is not limited to India. Other countries have had a similar experience. Many governments have fallen after applying this policy promoted by the International Monetary Fund, World Bank and the United States Government. In Latin America alone Argentine, Brazil, Chile, Ecuador, Uruguay and Venezuela had applied this policy in the eighties and nineties but economic growth did not follow. There was deep social unrest and the people threw out these governments. Today Leftist leaders are in power in these countries.

It is necessary to note the origin of this policy of controlling fiscal deficit and inviting foreign investment in order to understand its repeated failure. This policy was bom in a meeting of the World Bank, International Monetary Fund and the US Government in early eighties. This mantra is known as the 'Washington Consensus' since the meeting was held in Washington. Problem at that time was that the Latin American governments had been given huge loans by the World Bank, the IMF and US commercial banks. But the leaders had siphoned off that money into Swiss Banks leading to bankruptcy of the borrowing governments. Those loans were turning bad. The US government wanted to help the US commercial banks to recover their loans. It was necessary to resuscitate the borrowers for this purpose. But giving more loans by the World Bank or the IMF was not found to be viable because that would only be changing the hats. The countries would borrow from the IMF and repay the commercial banks. Then they would not be able to repay the loans to the IMF.

It was decided, therefore, that the developing countries would no longer be given further loans with ease. Instead they would be asked to control government expenditures by controlling fiscal deficit and open up their economies for foreign direct investment (FDI). Loans will be given by the World Bank and the IMF only if they allowed FDI to come in. Benefit for the US banks was that the borrowers could use the money received from FDI to repay the loans. Let us say Brazil is under huge debt. Opening to FDI will lead to the MNCs bringing in dollars. Brazil could repay the loans taken from US. Banks with this money. Additional benefit for the western countries would be that their MNCs would be able to enter the host countries. The strategy worked for the US. The Latin American governments repaid the loans taken from the US commercial banks but sank deeper into the stranglehold of the MNCs. Their economic growth rates collapsed and there was huge social unrest. However, the Western countries were doubly benefited. They were able to put the noose of FDI around the necks of the borrowers and also get repayment of their non-performing loans. No wonder the nineties are called the 'lost decade' of Latin America; and "golden" period for the Western countries.

The mantra failed because control of fiscal deficit did led to only a marginal increase in FDI. A substantial increase in FDI would have perhaps jumpstarted growth. But that did not happen. Reason was that foreign investors found East Asia and China more attractive than Latin America despite the implementation of the Washington Consensus by those countries. Thus, the Latin American countries were doubly hit. They made cuts into the public investment that was taking place in order to control the fiscal deficit. But FDI did not come in torrents as projected because the foreign investors went to East Asia and China. More-over, the limited investment that happened was capital-intensive and did not create many jobs. The people were angered. They threw out the governments that towed the World Bank and installed Leftist ones.

The fundamental problem with the Washington Consensus is that increase in private investment remains uncertain. Modi may cut public investments to control fiscal deficit but private investment may not come in such large quantities to compensate for reduction in public investment. This danger is acute in the present situation of a global slowdown. Europe is in crisis as indicated by the troubles in Greece. The US is living off borrowed money. It is not likely that foreign investors will come in a big way when their home economies are in trouble. That will lead to less public and private investment and push the economy down the dark hole. The correct policy is to improve the quality of government investment. India needs more reforms of public investments; not reforms to attract FDI at any cost.

The way forward is to put the FDI proposals through a tight scrutiny to determine whether it brings any frontline technologies. The negative financial impacts of FDI by way of profit repatriations are compensated by the positive impacts of technology transfers. FDI proposals that bring no technology should be discouraged. The Government must impose conditions of reinvestments of profits in the country in all FDI proposals. Then profit repatriations will be less and negative impacts will become manageable. The FDI proposals should also be scrutinized for possible round tripping. The Government is committed to controlling black money. People in the know of things say that large amounts of FDI coming is actually Indian money sent out via hawala. This only adds to figures without adding any content. The Government should adopt such a nuanced policy towards FDI.

Vol. 48, No. 26, Jan 3 - 9, 2016