Kaushik Basu's useless suggestions to prop up the Indian economy
I was dismayed to read the lead article in The Times of India today (TOI, June 16, 2012). The article: Let's not overreact by India's chief economic advisor Kaushik Basu (available here: http://bit.ly/KzAhKA) in reality makes a fervent appeal to allow FDI in retail. To bolster the sagging economy, he has only two suggestions: 1) to open up for FDI in retail, and 2) to cut bureaucratic red tape. And both are useless suggestions.
First, let us look at one of his flawed arguments. He praises Indian policy makers for providing the enabling environment for FDI outflow. He says:
"India has in recent times become a fairly large exporter of investment. Historically, we placed severe restrictions on the outflow of FDI. Up to the early 1990s, overseas investment by companies was restricted to a paltry $2 million in a block of three years. This made global investment by Indians unviable. In two important policy moves, in 1995 and 2002, this was liberalised. And Indian entrepreneurs have been quick to seize the opportunity. In terms of value of net overseas purchases, Indian companies now rank fifth in the world, after USA, Canada, Japan and China."
On the one hand, policy makers, economists and business journalists are blaming the prevailing 'policy paralysis' for the flight of capital from India, here is Kaushik Basu appreciating the move that allows India Inc to invest abroad. In fact, as I said earlier in one of my blogs, the Reserve Bank of India has allowed India Inc to take out as much as 200 per cent of their economic worth for investing overseas. More sops/concessions are to be thrown in. This is happening at a time when most TV anchors rue over the declining foreign investments. I don't understand the economic justification for luring FDI and FII investment by providing national treatment to foreign companies, while at the same time allowing Indian money to be invested abroad.
Having said that, I had expected Kaushik Basu to come out with some plausible suggestions as to how to ensure food for 320 million people who go to bed hungry, and at the same time ensure drastic reduction in the levels of malnutrition. Economic reforms unleashed in 1991 haven't been able to make any dent on poverty and hunger (poverty too has grown) despite the claims of the Planning Commission. What is the use of the economic reforms if the population of hungry and malnourished continues to grow? Can any economist justify this?
Regarding FDI in retail, I would like to draw the attention of Kaushik Basu to two of my presentations. Let him answer my analysis: Allowing Retail FDI in India: Lies, lies and damn lies, and if possible also view this video: www.youtube.com/watch?v=SPElhVyOJM8 There are several others who have challenged the claims made by Kaushik Basu and others, but perhaps India's chief economic advisor's commitment is towards bailing out the American economy.
Talking about bureaucratic red tape, I am amused to see him quoting the US defence secretary Leon Panetta. It is the US which has ensured that the WTO Agreement on Agriculture is so designed that it does not open up the US domestic sector to imports. After arm-twisting the developing countries to accept the final draft, it now wants more market access. It is the US which has refused to cut down on huge agricultural subsidies. In fact, after losing the WTO dispute on cotton subsidies to Brazil, it has provided US $ 147 million of subsidies to Brazilian farmers. This is a bribe paid to by US to Brazil so as to ensure that Brazil does not take countervailing steps. More than worrying about bureaucratic red tape, if Kaushik Basu had raised the issue of level-playing field in WTO Agreement on Agriculture, Indian economy would have easily looked up. Studies show that if US was to remove its Green Box subsidies, its agriculture would drop by 41 per cent or so thereby enabling developing countries to export food and food products to America. India would be a gainer.
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