The economy was doing badly in 2002; I had criticized the government's economic policies that were making things worse. In this column, written in Business Standard of 8 October 2002 after Yashwant Sinha's complaint of animus, I made the same criticisms constructively and without referring to any minister.
INDUSTRY IS LEAVING INDIA
“My personal view is that we have
lost our ability to be the factory of the world, for a variety of reasons. The
cost of manufacturing, power, fuel, infrastructure costs relating to logistics,
getting the product to the marketplace, taxes on raw materials – all of those
things put together create an environment where, in fact, manufacturing
products are at a disadvantage on a global basis. So long as India was
protected by high tariffs, Indian products appeared to be competitive. To give
you an example, we are about to embark in Tata Steel on taking ferro chrome ore
to South Africa, refine it and sell it to Japan because the power costs in
South Africa are 50 cents a unit and in India it is something like five times that.”
This in my view was the most
chilling part of the somber interview Ratan Tata gave to Business Standard (30 September). The ferro-chrome is Indian; this
raw material is going to be transported abroad for processing. And it is not
just ferro-chrome. For the expansion of TCS, the Tatas are banking on the
Chinese market. The Tatas are India’s oldest industrial house. Whilst A V Birla
very sensibly diversified away from India during the licence-permit raj, the
Tatas stuck to India during the worst days, except for a handful of hotels
abroad. When it comes to nationalism in action – not just in words – no one can
beat the Tatas. And this is the group that sees no future for manufacturing in
India. Even when Ratan Tata talks of expansion, he is not thinking of green-field
investment; he wants to acquire working businesses.
It is not simply the Tatas. Most
major business houses are looking for investment opportunities abroad; and
virtually none are thinking of green-field investment in the country. Some of
the investments abroad are to feed or to be fed by their Indian enterprises.
For instance, the A V Birla group has bought a pulp plant in Canada to feed its
viscose units here, and Sterlite has bought an Australian copper mine to feed
its smelters in India. Some groups have invested in business abroad which would
be impossible at home – for instance, an international trading company an
Indian businessman is running out of Shanghai. But in many other cases,
investment abroad is an alternative to investment at home: the same financial
resources could have been invested here.
It is paradoxical that this comes
at a time when we have the most industry-friendly government in our history.
The Tatas were shunned by the Congress governments; today, Ratan Tata sits on the
Prime Minister’s Council of Industrialists, and has his ear. The government has
kept import duties high, and has imposed anti-dumping duties whenever domestic
industry has asked for them. It has not allowed its financial institutions and
banks to collect debts from industry too energetically. Why then are
industrialists – even those who support the ruling party – running out of the
country?
My explanation is that this
country is in the early stages of the Dutch disease. It is earning too much
foreign exchange, chiefly from information technology. The surfeit of foreign
exchange has led to the overvaluation of the Rupee, and made the other
industries uncompetitive.
But Tata and other industrialists
have always favoured microeconomic explanations; they have stressed the high
cost of certain inputs – especially power and transport. And micro-explanations
can apply to industries. Thus, even if the exchange rate policy were correct
and overvaluation of the Rupee were avoided, if electricity remains expensive,
the share of power-intensive industry in GDP would be less in India than in the
world at large. So power-intensive industries will suffer if power is more expensive
in India than abroad; and transport-intensive industries will suffer if
transport is more expensive than abroad.
There is a third factor not
mentioned by industrialists, but nevertheless important. Labour will be more
expensive in India if goods and services used by labour are expensive and
thereby raise wages. This is what the ratcheting up of foodgrain prices by
means of government purchases does: it raises the cost of labour, and reduces
employment. Industrialists also think that labour costs are too high in India,
and demand the loosening of labour laws. That will certainly reduce their
labour costs, but it will also reduce industrial employment. A better
alternative would be to reduce the cost of consumer goods and services – and
especially of foodgrains, which are the largest item in the industrial worker’s
budget.
Thus if India is to become the
manufacturing powerhouse of the world, it is necessary to reduce the costs of
power, transport, and foodgrains. In power we have had extremely strenuous
reforms that have achieved very little. The latest reformer was Suresh Prabhu,
who failed for no lack of effort, and was finally removed by Remote Control for
irrelevant reasons. But even Prabhu did not grasp the basic point about power –
that we do not need regulators, MOUs and so on, we need competition in power. I
had asked him to pass a one-line law, saying anyone may sell power to anyone
else; if that were done, Indian industry would generate power for itself and
for everyone else at the lowest cost, and the rest of the system would fall in
line. But nothing can be achieved as long as the states have monopoly control
over power.
In transport, the government’s
cross-and-diamond programme is a good one. But costs would come down even more
if the railways were divided up and made to compete amongst themselves. That is
what the old railways in the British days did; both the Great Indian Peninsula
Railway and the Bombay, Baroda and Central India Railway ran between Delhi and
Bombay for instance. Once they are made to compete, they will shed labour and
reduce costs.
In foodgrains, government price
support and purchases must be abandoned. Our foodgrains were actually cheaper
than abroad in the mid-1990s; then the United Front and the National Democratic
Alliance government made them uncompetitive by raising the minimum support
prices. The high import duties, which were only imposed in 2001, need to be
removed; whatever protection is to be given should be given through
devaluation. If a buffer stock must be maintained for economic security, the
size of the buffer stock should be defined, and private stockists should be
given low-interest loans to maintain such a stock.
Thus, a small number of
politically favoured programmes have made the entire Indian industry
uncompetitive, and a small number of reforms can set them right: let there be
free trade in power, divide up railways and make them compete amongst
themselves, and replace the public distribution programme with a privately run
buffer stock programme. And to keep the entire industry and agriculture
competitive, replace import duties by exchange rate management.
