Calcutta Notebook


Twenty five years ago DR Manmohan Singh had presented his maiden budget ushering in economic reforms. India is said to have made huge strides since then. But chinks in the armor are appearing now. There is a need to review the entire approach fundamentally. The reforms had two components—internal and external. Internal reforms consisted of disinvestment in Public Sector Units, dismantling of government control on the sale of coal and other commodities, removal of government control on the pricing of new capital issues, and the like. These have undoubtedly provided benefits to the economy. Energy of businessmen has been let loose and they are producing goods of international quality. The picture in respect of external reforms is less clear.

The two components of external reforms are free trade and patent protections. The government has reduced the import duties on almost all goods drastically. Foreign goods are entering Indian borders unfettered nowadays. Now people have access to cheap LED bulbs made in China and garments made in India have access to the markets across  the world. This has proven to be a double edged sword though. No doubt businesses have benefited from exports to the developed countries like Europe and the United States. This has led to the creation of jobs in certain sectors in India. On the flip side, cheap goods produced in China have got free entry into India. The entry of these goods has taken away jobs of large number of Indian people.

The final impact of free trade can be gauged by looking at the reaction to free trade in the developed countries. Both the candidates for the United States Presidency have expressed reservations regarding free trade. Democratic candidate Hillary Clinton has said that it is necessary to renegotiate the free trade agreements with Mexico and Canada. Republican candidate Donald Trump has asked for a review of all the free trade agreements made by the United States and even threatened to rescind them unilaterally if the opposite party resisted renegotiation. Britain has recently voted to leave the European Union. The British people found that the benefits from free trade did not percolate down to them. There was a huge influx of workers from poorer countries of the European Union like Poland and Hungary. This led to lowering of wages in Britain.

India's position with respect to China is similar to the Britain's position with respect to Poland. Cheap workers from Poland entered Britain in large numbers. Cheap goods from China have entered India in large quantities. The wages of the British people came under pressure from the influx of less paid workers from Poland. The wages of Indian workers has come under pressure due to the import of cheap goods from China.

Businesses nevertheless stand to benefit from free trade. They get an opportunity to sell their goods in the markets across the world. India is supplying auto components to auto manufacturers to the five continents today. The Multinational Corporations have benefited even more. They have got protection for their patents and are able to sell their goods at monopoly prices across the world. But the common man has benefited less. American and British people are not getting higher wages. Indian workers too are not getting higher wages. The monthly wage for an unskilled worker in Delhi has remained in the range of Rs 5,000 to 8,000 for the last five years even though inflation has more than doubled. This means the real income of the workers has declined. This is the situation despite businesses making huge profits, making larger tax payments and the Government using these revenues for running welfare programs like MNREGA.

The final tally is that the Indian people stand to make small benefits from availability of cheap imported goods from China and increased employment from exports to the developed countries. They stand to lose more due to the loss of jobs due to import of cheap goods from China. They further stand to lose from the patent protection provided to the corporations of the developed countries. They are buying medicines at exorbitant prices, for example. Free trade ushered in by Manmohan Singh has delivered for the upper classes. They are able to get French wine and Swiss chocolates at their asking. But the common man has gained little.

The way forward is to push for domestic reforms and withdraw from free trade. Let us take a step backwards. The situation before the reforms of 1991 was that the bureaucracy was meddling everywhere. Businesses were not free. At the same time India had erected import barriers. Import duties were very high. The cost of production in India was high because of bureaucratic meddling and this was sustained because cheaper goods were not allowed entry through imports. The benefits of protection were appropriated by the bureaucracy. High prices of goods in India enabled them to collect corruption money in licensing etcetera.

Then Manmohan Singh implemented economic reforms. The government liberated domestic businesses from bureaucratic meddling. This was the beneficial part. But India also opened itself to cheap imports. The entry of cheap goods led to lower prices in India and translated into low wages. At the end of the day, economic reforms have not delivered for the common man.

The way forward is to push yet more strongly for domestic reforms. Make it easy for businessmen to do business. At the same time provide protection from cheap imports. There is no possibility of wages of Indian workers increasing substantially until the authorities accept free trade. It is a hard truth that free trade involves a global race to the bottom. The country with lowest wage rate will win and all the countries of the world will have to move towards those low wages. Therefore, restrictions on free trade are necessary if India has to secure a substantial improvement in the wages of domestic workers.

The old formula of the BJP was "internal reforms first, external reforms later". The combination of domestic reforms and protectionism alone will provide relief to the people. It is time to review approach to the economic reforms.

Vol. 49, No.6, Aug 14 - 20, 2016