Tuesday, October 14, 2014


In this year-end survey of the economy, I predicted Dutch disease. Growth did slow down in the early years of the millennium; but as soon as Congress defeated BJP and came to power in 2005, growth rebounded and rose to the historically highest rate of 8 per cent. As Gujaratis say, the crow sat down on a branch, and the tree fell. This column was published in Business Standard of 26 December 2000.


Two years ago, the sensex was at 3200. I thought everyone was writing down Yashwant Sinha. He had made an awful budget in 1998, and would be under some compulsion to do better in 1999. And he had got rid of Montek Singh Ahluwalia, and brought in Vijay Kelkar. Vijay too would want to make an exemplary first budget. Finally, Sinha would have to rescue US-64, and the days when he could have rescued it without helping its competitors were past. On those considerations, I made a heavy investment in shares a week before the budget; within a fortnight I had made 15 per cent, and in a year, about 50 per cent. Today I am 25 per cent down on my original investment. So I am forced to conclude that Sinha was worth only a short-term bet.
Whilst political parties may make short-term bets, we all have to live into the long term. Sensex is hovering around 4000. Industry is doing badly, but it cannot do much worse. Is it then time to invest further? What are the prospects of Indian industry over the next five years?
There can be no doubt about the government’s industry-friendliness. The Prime Minister consults industrialists through his advisory council, and grants them audience whenever they wish. N K Singh has acquired a legendary reputation as trouble-shooter for industry. The finance minister mingles frequently with industrialists at their get-togethers. Following their example, most ministers are also responsive to industry demands. They do not always prevail against the interests of their own ministries or enterprises; but despite this weakness, this is probably the most  pro-industry government since independence.
It is also a very proactive government. It is intent on doing “second-generation” reforms. What does this mean? That they are the children of the first-generation reforms? That the latter were reviewed, and the next steps identified on the basis of what went wrong and what remained to be done? Maybe. Vijay Kelkar had drafted a white paper on second-generation reforms. But it was buried as soon as he was kicked upstairs. Second-generation reforms are an improvization; the government ventures wherever its soaring imagination takes it. Are they reforms? Take its word for them.
The government tackles each problem in the most direct, forthright manner. Are share prices are down? Reduce taxes on dividends. Is the steel industry complaining of low import prices? Impose an anti-dumping duty. Are cheap Chinese goods flooding in? Make them bear ISI certification.
Proactive, pro-industry, direct and decisive: the government will do whatever industry tells it to do, and do it fast. And yet - and yet - I feel apprehensive about the country’s prospects. Why? Because industry thinks of its own interest, not of national interest. And because national interest may require something opposite to the interest of particular industries.
Industry says, protect us against foreign competition. We have lived too long in a protected environment; we need time to learn how to compete with industry elsewhere. But, mark first, this is what industry has been saying for nine years - ever since the first reforms struck. During these years it has received pretty heavy protection. The protection has been going up since the BJP came to power - witness the plethora of anti-dumping duties. Even if industry is protected for the next century, it will continue to say, give us more time. And an industry can never become internationally competitive when it is living behind tariff walls of 40 per cent and more. For even if it were not present, a 50 per cent tariff would bring into existence an industry whose costs are up to 50 per cent higher than those of imports. Friedrich List floated the idea of infant industries - industries that needed time to grow up and face import competition. But that was in the 1830s, when mechanized industry was just emerging, when Britain had a considerable lead, and when it was difficult to get the technology, equipment and skilled manpower for mechanized industry. We are talking today of Indian industries that have been running for over 30 years, that have skilled workers, and that can easily access equipment and technology from all over the world - if only they could use these profitably. As long as they are protected, they will remain confined to the Indian market, and will only survive by the favour of a protectionist state. And the Indian state loves to protect, for protection puts industry under the obligation of politicians and bureaucrats. Now that industrial licensing and import licensing are gone, this lever of obligation has become very important to those who live as parasites on industry’s largesse.
Protection raises prices of industrial goods and penalizes industry’s customers - including agriculture. The obvious remedy is to remove that protection. But politicians find it even more obvious to protect agriculture. It is coming; wheat, rice, vegetable oils, onions will all bear as heavy duties as industrial goods.
Whatever is protected will be more expensive in this country than abroad; it will not be exported. So what will be exported? Hitherto the answer has been, goods that use cheap labour, such as garments, cut gems, and granite. But now a new star has risen - software. It too uses cheap Indian labour; but its export potential is mind-boggling. If projected at past rates, software exports will exceed all our current account requirements - all payments for imports of goods and services - by 2008. By 2013 they will exceed GDP.
That cannot happen; a part cannot exceed the whole. Much before it happens, GDP will increase in dollar terms. The dollar value of the Rupee will rise. And as it rises, all Indian goods and services will become more expensive relative to imports. They may do so even faster if software export earnings cause inflation in India.
Appreciation as well as inflation will make software production in India less profitable; the attractiveness of producing it elsewhere in the world will increase. Software is a unique industry; neither the companies nor the people who produce it have to stay in India. Other countries will welcome them with open arms. The industry will just pack its bags and leave.
That will end the threat of appreciation and inflation, and of more and more industries becoming uncompetitive. But it will also deflate the one force that promises higher growth in this economy - software exports. After that, back to the neo-Hindu growth rate.

That is what lies in our future. But is it the future? Or has it arrived already? Is the Rupee overvalued? Are the duties too high? Have the two together already made swathes of industry uncompetitive? The slowing industrial growth rate, the general pessimism in industry, the complaints about Chinese imports, all suggest that we are in the initial stages of the Dutch disease. That is why I would not invest in Indian industry. Even if Yashwant Sinha comes up with a dream budget. Even if - especially if - the government fulfils industry’s every wish.