Globalization: India's Adjustment Experience

Globalisation

Globalisation India’s Adjustment Experience

Biplab Dasgupta

SAGE Publications New Delhi

n

Thousand Oaks

n

London

Copyright © Biplab Dasgupta, 2005 All rights reserved. No part of this book may be reproduced or utilised in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without permission in writing from the publisher. First published in 2005 by Sage Publications India Pvt Ltd B-42, Panchsheel Enclave New Delhi 110 017 www.indiasage.com Sage Publications Inc 2455 Teller Road Thousand Oaks, California 91320

Sage Publications Ltd 1 Oliver’s Yard, 55 City Road London EC1Y 1SP

Published by Tejeshwar Singh for Sage Publications India Pvt Ltd, phototypeset in 10/12 pt Palatino Linotype by Star Compugraphics Private Limited, Delhi and printed at Chaman Enterprises, New Delhi. Second printing (with corrections), 2006 Library of Congress Cataloging-in-Publication Data Dasgupta, Biplab. Globalisation: India’s adjustment experience/Biplab Dasgupta. p. cm. Includes bibliographical references and index. 1. India—Economic policy—1991 2. India—Economic conditions—1947 3. India—Politics and government—1977 4. Globalisation. I. Title. HC435.3.D35 337.54—dc22 2005 2004030475 ISBN: 0–7619–3305–0 (HB) 0–7619–3306–9 (PB)

81–7829–429–X (India–HB) 81–7829–430–3 (India–PB)

Sage Production Team: Anupma Mehta, Shweta Vachani, Radha Dev Raj and Santosh Rawat

Contents List of Tables

6

List of Abbreviations

8

Preface

12

Chapter One: Introduction

15

Chapter Two: Multilateral Agencies

32

Chapter Three: Multinational Companies

60

Chapter Four: Patent Policies

78

Chapter Five: Environment Policies

94

Chapter Six: Agricultural Reform

109

Chapter Seven: Industrial Reform

129

Chapter Eight: Monetary and Banking Reform

148

Chapter Nine: Fiscal Reform

163

Chapter Ten: Trade Reform

186

Chapter Eleven: Public Sector Reform

209

Chapter Twelve: Labour Market Reform

238

References and Select Bibliography

258

Index

272

About the Author

283

List of Tables 5.1 Nine Major River Links 5.2 Major River Basins in India

103 104

6.1 Per Capita Net Availability of Cereals and Pulses in the 1990s 6.2 Gross Area under Major Crops 6.3 Net Availability, Procurement and Public Distribution of Foodgrains per Head

115 116

7.1 Status of Reference Registered by the BIFR 7.2 Industrial Sickness: Sector-wise Classification

145 146

8.1 Domestic Saving and Investment for Various Years

150

9.1 Government Tax Revenue as a Proportion of the GDP in the 1990s 9.2 Revenue from Corporation Tax 9.3 Income Taxation 9.4 Expenditure and Wealth Taxes 9.5 Gift and Service Taxes 9.6 Plan Expenditure 9.7 Subsidies on Various Items 9.8 Number of Income Tax Assessees in Various Years 9.9 Fiscal Deficits

165 165 166 166 166 167 167 168 176

10.1 Exports and Imports 10.2 Selected Indicators of External Trade 10.3 Selected Indicators of External Trade as a Percentage of the GDP 10.4 Expected Growth in Software and Service Industry in India, 2001–2008

116

195 197 197 200

List of Tables

10.5 India’s Software Exports as a Percentage of the Total Exports of India 10.6 India’s Software Export Revenue as a Percentage of Indian Software Industry Revenue 10.7 Revenue of Software Industry: India and the World 10.8 Marine Exports (Particularly Shrimp Exports) in Various Years 11.1 Disinvestment in India in Different Years 11.2 NALCO’s Financial Parameters

7

201 202 203 204 220 236

List of Abbreviations AAIFR ADR APEC ASEAN BALCO BHEL BIFR BJP BPCL BWIs CAPC CAP CCR CERD CFCs CMIE COFEPOSA CYMMIT DFIs EBITDA EC EFF EFTA EMR ERM EU FAO FCI

Appellate Authority of Industrial and Financial Reconstruction American Depository Receipts Asia Pacific Economic Co-operation Association of South-East Asian Nations Bharat Aluminium Company Bharat Heavy Electricals Ltd. Board for Industrial and Financial Reconstruction Bharatiya Janata Party Bharat Petroleum Corporation Ltd. Bretton Woods Institutions Costs and Prices Commission Common Agricultural Policy Cash Reserve Ratio Charter of Economic Rights and Duties of States Chlorofluorocarbons Centre for Monitoring Indian Economy The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act International Maize and Wheat Improvement Centre Development Financial Institutions Earnings before Interest, Taxes, Depreciation and Amortisations European Community Extended Fund Facilities European Free Trade Association Exclusive Marketing Rights Exchange Rate Mechanism European Union Food and Agriculture Organisation Food Corporation of India

List of Abbreviations

FDI FERA FIIs GATS GATT GDP GNP GSPs HPCL HYV IBRD ICICI IDA IDBI IFCT ILO IMF IOC IPCL IRDA IRRI IT ITO JCI JDB KDB KVIC LDCs LJMC MAHYCO MEPs MFA MFIL MLB MNC MODVAT MRTP MUL NAFTA

9

Foreign Direct Investment Foreign Exchange Regulation Act Foreign Institutional Investors General Agreement on Trade-related Services General Agreement on Trade and Tariffs Gross Domestic Product Gross National Product Generalised System of Preferences Hindustan Petroleum Corporation Ltd. High-Yielding Variety International Bank of Reconstruction and Development Industrial Credit and Investment Corporation International Development Assistance International Development Bank of India Industrial Financing Corporation of Thailand International Labour Organisation International Monetary Fund Indian Oil Corporation Indian Petrochemicals Corporation Ltd. Insurance Regulatory and Development Authority International Rice Research Institute Information Technology International Trade Organisation Jute Corporation of India Japan Development Bank Korean Development Bank Khadi and Village Industries Commission Less Developed Countries Lagan Jute Machinery Co Ltd. Maharashtra Hybrid Seeds Company Members of European Parliament Multi-Fibre Agreement Modern Food Industries Ltd. Money Laundering Bill Multinational Corporation/Company Modified Value-added Tax Monopolies and Restrictive Trade Practices Maruti Udyog Ltd. North American Free Trade Agreement

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Globalisation

NAV NDA NEP NGOs NPA NPE NRI NTBs NTPC NWDA OECD ONGC OPEC PDS PFP PSU R&D RBI RIS SAFTA SAIL SALs SAP SAARC SCOPE SDRs SEBI SECALs SEI CMM SFCs SIDBI SIDCs SLR TCDC TEC TPRM TRIMS

Net Asset Value National Democratic Alliance New Economic Policy Non-governmental Organisations Non-performing Assets New Political Economy Non-resident Indian Non-Tariff Barriers National Thermal Power Corporation National Water Development Agency Organisation for Economic Co-operation and Development Oil and Natural Gas Commission Organisation of Petroleum Exporting Countries Public Distribution System Policy Framework Paper Public Sector Unit Research and Development Reserve Bank of India Rural Infrastructure Services South Asian Free Trade Agreement Steel Authority of India Ltd. Structural Adjustment Loans Structural Adjustment Programme South Asian Association for Regional Cooperation Standing Conference of Public Enterprises Special Drawing Rights Securities and Exchange Board of India Sectoral Adjustment Loans Software Engineering Institute Capability Maturity Model State Financial Corporations Small Industries Development Bank of India State Industrial Development Corporations Statutory Liquidity Ratio Technical Co-operation among Developing Countries Taxation Enquiry Committee Trade Policy Review Mechanism Trade-related Investment Measures

List of Abbreviations

TRIPS TVA UN UNCTAD UNICEF UPOV UTI VAT VER VSNL WDR WIPO WIPRO WTO

11

Trade and Intellectual Property Rights Tennessee Valley Authority United Nations United Nations Council for Trade and Development United Nations Children’s Fund Union for the Protection of New Varieties of Plants Unit Trust of India Value-added Tax Voluntary Export Restraint Videsh Sanchar Nigam Ltd. World Development Report World Intellectual Property Organisation World Intellectual Property Rights Organisation World Trade Organisation

Preface This book grew out of several articles I have written on India’s globalisation since 1998, that is, since the publication of my book, Structural Adjustment, Global Trade and the New Political Economy of Development. In fact, when I wrote the book, India was very much on my mind and I began writing another book, which was on the adjustment experience of India since 1991. But one thing led to another, especially since I noticed similarities in the application of structural adjustment everywhere, be it Thailand or Pakistan, the book that emerged was a study of the phenomenon at the global level. The book on India had to wait. Now I have completed the sequel to the 1998 study of structural adjustment on the basis of the Indian experience since 1991. The book illustrates several points of the 1998 book using the concrete Indian experience. It raises many issues pertaining to the question of globalisation with respect to India, for example, also the role of multilateral agencies and of multinational companies, and the policies with regard to patents and the environment. It conducts a study concerning India in terms of the various reforms carried out since 1991, including those relating to agriculture, industry, monetary aspects, fiscal balance, trade reform, public sector reform and labour market reform. In the meantime, I retired from the position of Professor of Economics, Calcutta University in 1998 and soon joined the Planning Unit of Jadavpur University as its Head, from where too I retired at the age of 65 years. This book could not have been completed without the support of Jadavpur University and the fellows of the Unit. In particular, I am grateful to Ms Sangeeta Kundu for helping with typing and bibliographical material; to Sri Chandrasekhar Hajra for general help and for parts of Chapter

Preface

13

Eight; and Ms Anupa Chakrabarti’s extended help for the chapter on software exports and the welfare state. Outside the Unit, Ms Nandita Bhattacharya, Secretary, Faculty of Arts, was a constant source of inspiration for the book. Several members of the Department of Economics, Faculty of Arts, helped by offering comments on various parts of the book, especially Debesh Chakrabarti, Biswajit Chatterjee and Ajitava Roychowdhury, Sugata Marjit and Bipul Malakar. Outside Jadavpur University, Pabitra Giri, Bhaskar Mukherjee and Mahalaya Chatterjee of the Centre for Urban Economic Studies of Calcutta University read various chapters of this book and offered their comments. I am grateful to Barbara Harris-White of Queen Elizabeth House, Oxford and Birkbeck College, London, and to Pabitra Giri and Ratan Khasnobis of the Department of Business Management of Calcutta University for organising seminars on various parts of this book. I also offer my gratitude to a number of people for permitting me to publish various articles on structural adjustment that I have written since 1998 including the following in particular: l l

l

l

Planning Commission, 2001, Towards Hunger-free India; Dutta, Dilip (ed.), 2000, Economic Liberalisation and Institutional Reforms in South Asia; Damodaran, Vinita, and Maya Unnithan-Kumar (eds), 2000, Post-colonial India; and Institute of Applied Manpower Research, 2002, Reform and Employment, New Delhi.

1 Introduction This book is a sequel to the author’s 1998 study of structural adjustment at the global level (Dasgupta, 1998). It narrates India’s experience with structural adjustment since 1991, when it was first introduced in the country in the first annual budget speech of Dr Manmohan Singh as Finance Minister, under Prime Minister Narasimha Rao, eleven years after it was first introduced globally by the World Bank (Balassa, 1981). The policy makers in India, therefore, had the opportunity to learn from the experience of other countries operating under structural adjustment, particularly those in sub-Saharan Africa (Barrat-Brown and Tiffen, 1994) and Latin America, before launching it in India. There is, however, no evidence that such an attempt was ever made. No one in the government tried to find out what those countries meant by what they described as the ‘lost decade of the 1980s’. The government also had the option of finding out why the East Asian countries succeeded while India failed, though both followed similar policies of import-substituting industrialisation and self-reliance for a long time. There is no evidence that the experience of the East Asian countries with high growth was ever studied. We begin this study with the 1990–91 crisis which led to the signing of an agreement on structural adjustment.

Background to the Crisis of 1990–91 July 1991 was not the first time that India had applied for loan from the International Monetary Fund (IMF). In 1981, almost immediately after her ‘second coming’ as the Prime Minister of

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Globalisation

India, Mrs Indira Gandhi applied for a structural adjustment loan of five billion dollars. It was a large loan, in fact, one of the largest in the early days of structural adjustment which began in 1980, and contained all the familiar conditionalities of a structural adjustment loan. Although the government of the day denied having signed the agreement with IMF with all its well-known conditionalities, no secret remains a secret in India for long. A journalist from The Hindu (now its editor) even managed to lay his hands on a copy of the agreement along with its conditionalities. The loan was very big, and perhaps a smaller loan would have been sufficient. The last few tranches were not even taken. In those early days of structural loans, it was possible to bypass one conditionality or the other with impunity (Gwin, 1995). Judging by the GDP, industrial and agricultural growth rates, independent India had never had it so good as in the 1980s, particularly during the second half of the decade. The ‘Hindu rate of growth’ of around 3.5 per cent was not only surpassed, but was sustained at 5.5 per cent throughout the decade (Krueger, 2002). The industrial growth rate averaged 8.5 per cent while agricultural growth, at 3.5 per cent, was quite high and led to the consolidation of gains made by the introduction of HYV-seed-based new agrarian technology. However, certain policy decisions were taken during this period, such as the domestic production of ‘white’ goods (e.g., refrigerator, television, video, washing machine, and so on), which catered to the needs of the affluent section, with credit from private international banks, that contributed both to this high growth and to the eventual crisis in 1990–91 (Dasgupta, 2000a). The World Bank persuaded India to take loans from it, which shot up from Rs 1 billion in the mid-1980s to Rs 26 billion in a matter of just five years. By the end of that decade, foreign borrowing had touched nearly Rs 100 billion, and the debt-service ratio had reached an alarming figure of 30 per cent (Dasgupta, 1998). When Chandrashekhar, supported by the Congress party, was the Prime Minister, the government again applied for an IMF loan. However, this loan did not carry the usual conditionalities because it was given from the reserve tranche of the IMF. But when the Chandrashekhar government wanted loans from England and Japan, the Indian government had to offer its gold and foreign exchange reserves as security to show that the government was

Introduction

17

able to repay the loan. The fact that the government had to carry these reserves in the hold of the ship which was taken to the shores of England and Japan, was by itself unusual and proved, according to the international community, the low loan-repaying capacity of India at that time. This new source also made the task of debt management difficult as compared to a small number of large loans from Western countries and international institutions like the World Bank. There were now a large number of smaller loans, which matured at different points of time throughout the year. As for the oil balance of payments accounts, though oil prices declined and stabilised at a lower level and domestic crude oil production increased substantially during the decade, no effort was made to adjust the yawning balance of payment gap during these years (Joshi and Little, 1995b). While the macro-economic indicators were, on the whole, healthy in the mid-1980s, these turned adverse and led to the crisis in the second half of the decade. The crisis of 1990–91 was prompted by the following: (a) the repayment needs for the 1981 IMF loan; (b) the large size of the private international bank loan, coupled with rising fiscal deficits that created uncertainties about loan repayment; (c) the Gulf crisis of 1990, that led to a sudden and massive escalation of the oil import cost, the disappearance of $2–3 billion of annual remittance from Indian workers in Kuwait, Iraq and other Gulf countries, and the heavy cost of airlifting of Indians residing in Kuwait; and (d) the heavy speculative outflow of NRI (non-resident Indian) funds held in India—up to $1 billion—within a short time, to East Asia. The crisis came about partly because of events that were outside the control of the government (such as the Gulf crisis) and partly because of a shift in the policy objective in the mid-1980s, when the government had decided to build the domestic consumer durables industry, for catering to the needs of the domestic elite, with money borrowed from privately owned international banks. We can also add that while macro-economic management was, on the whole, satisfactory during the 1970s and the first half of the 1980s, the system went out of balance during the second half of the 1980s as loans and debt service ratios soared, fiscal deficit widened and inflation reached new heights. All these were compounded by a sharp drop in India’s credit rating and the unwillingness of the private international banks to offer any more loans,

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Globalisation

thus repeating history (Adelman, 1972; Agarwal et al., 1995a; Joshi and Little, 1995a). When the new government was formed under Narasimha Rao as prime minister and Dr Manmohan Singh as finance minister, it found that the government had very little in the form of foreign exchange reserves. The government could import only for a few weeks, and did not even have the capacity to import for one month or beyond. Without wasting any further time, the government applied for a structural adjustment loan from the IMF and began fulfilling the anticipated conditionalities of the IMF (CMIE, 1991d).

Structural Adjustment in the Indian Context The New Political Economy The structural adjustment package was introduced in July 1991, almost immediately following the formation of a new government under Prime Minister Narasimha Rao. The government soon applied for a loan of $2.3 billion from the IMF and began fulfilling the ‘anticipatory conditionalities’, including two successive devaluations and withdrawal of export subsidies, to smoothen the passage of the application (Agarwal et al., 1995b). The annual budget of July 1991 fully reflected the structural adjustment package, which came to be known as the New Economic Policy (NEP). Every politico-economic step taken by the government was in accordance with the major prescriptions of the New Political Economy (NPE) (Dasgupta, 1997b), as the following summary will show: (a) that it is better to introduce reform following a change of regime. The new government introduced it almost immediately after coming to power; (b) that the blame for the economic ills of the past should be put on the previous regime. This was done quite successfully and in a politically clever manner, without ever referring to the IMF loan of 1981, and the taking of large loans from private international banks for meeting elite consumption needs, not to speak of external factors such as the Gulf crisis.

Introduction

(c) (d)

(e)

( f)

19

Nor was it ever mentioned that the Rao government was a minority government that was under the heavy influence of the party that Rao led; that the people should be asked to make sacrifices, as the pain of adjustment was an unavoidable price to pay for past malfunctioning of the government; that the pace of reform should be fast enough to prevent the opposition from coalescing. The pace of adjustment was terrific. By July 1991, a new trade policy and a new industrial policy had been announced, and before the year was over, the Narasingham panel presented its report on financial reform. The fiscal reform, under the guidance of Raja Chellah was spread over two budgets, while clear targets were specified for controlling inflation and fiscal deficit. Above all, the ideology of reform was widely publicised through the print and electronic media, through seminars and conferences, by way of massive and high quality advertisements, and in the form of street-corner hoardings exhorting the people to buy shares; that the potential gainers from reform should be politically organised against the potential losers. In conformance with the NPE, food procurement prices were revised upwards, the agri-food industry entered Indian agriculture with full force to create new production relations, and the trading community and stock market brokers were mobilised in support. The campaign against potential losers, such as urban dwellers, workers and bureaucrats, was not actively pursued because of political compulsions. Labour market reform, which included diluting labour welfare legislations, making dismissal easier, and allowing wages to move downwards freely, was also not undertaken for the same political reason; that the package should be ‘owned’ as an indigenous creation. Initially the government did claim that its NEP had been developed indigenously without any prompting from outside. Such claims—based on the fact that several important decisions, though conforming to the IMF conditionalities, were made prior to the signing of the IMF agreement—were made despite the fact that these actions merely anticipated Fund-Bank conditionalities and were

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Globalisation

undertaken to facilitate the passage of subsequent loan applications. Later, when the obvious similarity between the NEP and the globally applied structural adjustment package could not be concealed, the government again resorted to the TINA (there is no alternative) argument; (g) that technocrat-bureaucrats with experience of working with the World Bank and other international organisations and known for their integrity, should be made responsible for directing the reform, instead of discredited politicians with personal axes to grind. In the Indian case, the Finance Minister was picked from outside the arena of politics, and both he and the Finance Secretary had had long associations with the World Bank and other international agencies; (h) that the political leadership should be fully, and over a long term, politically committed to reform. In the first three years, the NEP was implemented with little political resistance, with the government ignoring the protest of the Left-wing parties. The support of the business community to the NEP was overwhelming, and share market activities showed a dramatic upward turn.

The Structural Adjustment Package The package introduced in 1991 was sarcastically described as the LPG model because of its incorporation of liberalisation, privatisation and globalisation as essential components. The same model is known as the Washington Consensus as the two Bretton Woods organisations located in Washington are in agreement on these. Liberalisation The essence of liberalisation is that economic management should be left to the market. The prices determined by the interaction of demand and supply forces, whether they be for commodities, labour power, capital, land, or foreign exchange, should be flexible in either direction and should be capable of clearing the market. The resulting allocation of resources, commodities, labour power, foreign currency, etc. would be optimal and efficient, while any

Introduction

21

deviation from it would entail avoidable social costs. In order to ensure that markets are allowed to undertake their jobs, all controls and regulations, as also measures that constitute barriers to entry, should be done away with (Balassa, 1981). It follows from this that the state should take a back seat in economic matters. Any intervention by the state—in the form of controls, subsidies, selective protection, etc.—would distort prices and make the resulting allocation inefficient, thus hindering economic growth. Controls, by restricting flows of commodities or capital, involve high social costs, distort priorities, and involve rationing in some form or the other. Further, controls create opportunities for rent-seeking and bribing on the part of licenceseekers or for the accumulation of social/political power. In the case of the less developed countries, such controls operate in favour of the better-off, mostly urban dwellers, including the bureaucrats, at the cost of the rural poor. For instance, food tends to be underpriced in order to satisfy the vocal and powerful urban industrial sector. Privatisation It follows from this economic philosophy that all public sector economic activities that are in operation should be closed down, phased out, trimmed or passed on to the private sector. Public ownership should be allowed only in cases of natural monopolies and strategic industries, such as in defence and research establishments, and should not be allowed to become a drain on the state’s resources. These would operate under a memorandum of understanding that delineates the state’s financial commitment and other responsibilities. The privatisation of such enterprises would improve their efficiency and bring in much-needed funds for reducing the fiscal deficit. Globalisation The third major objective of the NEP is globalisation. Here the core idea is that more trade is better for all the parties concerned— some may gain more from it than others, but all would eventually gain. Any action that interferes with the free flow of capital, goods and services would produce sub-optimal results. Import

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Globalisation

substitution and consequent protective measures, such as tariffs, controls and restrictions, raise the cost of domestic production. Such a policy discriminates against export items that could be traded in the global market on the basis of the country’s comparative advantage, by reducing their competitiveness. In this way, import substitution hinders exports, makes the economy inwardlooking and increasingly backward, and isolates it from technical and other changes taking place worldwide. Further, according to those who uphold the LPG model, the goal of self-sufficiency makes no sense in a closely integrated world economy, characterised by free buying and selling. A country should specialise in production and export only in those items wherein it enjoys a comparative advantage, that is, wherein given its factor endowments, it can produce best. Earnings from such exports should be able to pay for the necessary imports. In most poor countries, such a comparative advantage lies in labourintensive production including that of food products and textiles, and not in large-scale capital and knowledge-intensive industries involving long gestation periods such as steel, oil refining, petrochemicals or ship-building. Accordingly, those who take this view recommend only those technologies which involve lots of labour. While the main elements of the structural adjustment package, as introduced in 1991, will be discussed in detail in the rest of this book, here we outline some of the policy initiatives taken in 1991.

A New Trade Policy Two successive devaluation in two days were followed by a policy of phased rupee convertibility (except for capital account), the withdrawal of export subsidies, liberalisation of imports, tariffication of quantitative restrictions and a substantial reduction in tariffs in line with the levels in East and South-east Asian countries, and, ultimately, the signing of the Marrakesh GATT Treaty by India in 1994 and its joining of the WTO in January 1995 as a founding member. However, the ordinance that was promulgated to satisfy WTO entry conditions, of exclusive marketing rights, for companies with patent rights in other member countries and

Introduction

23

the opening of a mailbox to receive applications for patents that would be activated after 10 years could not pass the first parliamentary hurdle. But under the BJP government, these bills on patents and exclusive marketing rights were passed. Integration with the global economy was the declared objective of all three governments, that was to culminate in full convertibility of the rupee, extending to capital account (CMIE, 1991b).

A New Industrial Policy The share of foreign equity ownership was raised from 40 per cent to 51 per cent (and up to 100 per cent in some cases), while the approval of licence applications was reduced to a mere formality in the case of 34 major areas, including electronics, minerals, transport and chemicals. For all but a few areas, industrial licences were no longer necessary, and virtually the entire economy was now opened up to the private sector, both Indian and foreign. Policies such as those according priority to backward areas and small enterprises, as well as to agriculture and the socially weak sections, in credit allocation and investment were to be revised, while the goals of self-reliance and import-substitution were abandoned. The MRTP Act was made toothless, as no precise quantitative definition of monopoly was given in terms of the capital deployed, assets, turnover or any other criteria (CMIE, 1991a; Dhar, 2003).

A New Banking and Finance Policy The new policy package moved away from directed credit and investment, avoided the ‘crowding out’ of the private sector by curtailing lending to the public sector, and brought about a reduction in statutory liquidity ratios that favoured bank investment in the securities floated by public sector units. The report of the Narasingham Committee suggested the pruning of inefficient bank branches, ending of interest subsidy, permitting foreign and private Indian ownership in banks and insurance, and pledging no further nationalisation. A number of share market reforms were undertaken, including the legal setting up of the SEBI (Securities

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Globalisation

and Exchange Board of India), depositories of shares, and permitting foreign participation.

Fiscal Reform Following the recommendations of the Raja Chelliah Committee, the emphasis on customs and excise duties was reduced and a simplified tax structure with reduced rates and stricter enforcement, fewer slabs and better coverage, and compliance was recommended. Further, incentives were given to investment in the share market and the acquisition of wealth. The stress, while being on the reduction of fiscal deficit, was more on reducing public expenditure than on identifying new revenue sources except disinvestment of the public sector.

Public Sector Reform MoUs (memoranda of understanding) were signed with public sector units delineating respective financial and other obligations and emphasising PSU autonomy in raising capital, deployment of resources, recruitment of personnel and other management decisions. Public sector activities were restricted to 18 items, their subsidy levels were significantly reduced and their pricing policies were changed to cover costs as much as possible. Sick PSUs were subjected to BIFR (Board for Industrial and Financial Reconstruction) scrutiny that allowed for privatisation or liquidation, while the shares of a large number of PSUs were sold and their debts were put outside the framework of the central budget in order to show compliance with IMF conditionalities on the reduction of fiscal deficit.

Agricultural Reform Subsidies on fertiliser, irrigation, power, and interest were reduced, a trimmed and better targeted public distribution system (PDS) was proposed, procurement prices for agricultural crops were raised, export orientation was encouraged and there was a clear

Introduction

25

move away from the policy of self-sufficiency in food and agricultural inputs including seeds and fertilisers. Poverty was to be tackled by way of growth and better agricultural prices, while agriculture was to be modernised and industrialised. Extensive poverty alleviation programmes were not considered necessary any longer, as growth was expected to take care of that in due course. Foreign agribusiness firms were invited to take invest while the rhetoric of land reform was conspicuous by its absence.

Labour Market Reform A new policy on the labour market that allowed for downward flexibility of wages and the right of an industrial owner to hire and fire his personnel was proposed. This was undertaken during the 2001 budget and will be discussed in a subsequent chapter.

A Better Macro-economic Management This was sought by reducing fiscal deficit below 4 per cent of GDP within 3–4 years and by pushing inflation below 5 per cent, mainly by reducing government expenditure, restraining demand (at least in the initial years) and raising money by selling shares in PSUs. This was to be the key objective and a test of success for the new policy package. The second key objective was to create an incentive structure, through the reforms indicated above, that favoured production and growth, mainly under private management.

Second Generation of Reforms Near the end of the 1990s, the government at the Centre began talking about the second generation of reforms, as if these constituted a different package of policies. When the Finance Minister of India in 1998 talked about these second generation reforms in 1998, many wondered what he was talking about, because what he proposed in his budget was no different from what Dr Manmohan Singh had suggested in 1991. Maybe what he

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Globalisation

wanted was more or better reform on the same lines, but how could that constitute the second generation of reform? As far as it is known, ‘more’ is not synonymous with ‘better’ nor ‘better’ with ‘new’ in the English language. The only distinguishing mark of Yashwant Sinha’s budget of 1998 and the subsequent years was that it carried the imprint of what WTO had prescribed since 1995. In 1991, there was no WTO. The parents of the LPG reform proposed by Manmohan Singh were the Bretton Woods twins—the World Bank and the IMF, which initiated this reform worldwide in 1980. From the beginning of 1995, WTO, a new international organisation, was formed to oversee the Marrakesh Agreement of 1994, with India as one of the founders. Many of the prescriptions of WTO could be described as second generation reforms, as they were not included in Dr Manmohan Singh’s proposals (Dasgupta, 2001a). Globalisation is not bad per se. The fact that our world is getting smaller, and is becoming like one town or one village, is not a bad experience. In the late 1940s, it took several weeks to go to London by boat through the port of Eden and the Suez Canal; today we can reach there in nine hours. Today, flying by Concorde, one can reach New York from London after breakfast and then have breakfast again in New York. This is because the Concorde runs faster than the difference in time between these two places. The advent of computers and the technology for mass communications have revolutionised our way of communicating with the rest of the world. It is possible now to reach Paris, Washington, London and Tokyo, by e-mail or television without moving from your seat. These are important developments that should not be underestimated. (This was written before the Concordes went out of commission in 2003.) However, our opposition to globalisation, like Stiglitz (2002) does not stem from globalisation as such but from the way it is being conducted by WTO and others.

Change of Guard In the last few years of the first five-year period under structural adjustment, the government, forced by political compulsions,

Introduction

27

began soft-pedalling its reform. ‘Poor’ was rediscovered, a series of ‘lollipops’ (small budgetary amounts for the old, women, the disabled, and other weaker sections of the population) were declared, the process of dismantling of subsidies and disinvestment of the public sector was slowed down, the earlier decision to end priority sector lending and interest subsidy was not implemented, and the promise to strengthen the Public Distribution System (PDS) was made in place of the earlier resolve to prune it if not actually dismantle it. The private sector, mainly foreign, had been pressing for a change in labour legislation and for carrying out labour market reform, particularly the part that denied the employers the right to hire and fire and to close down. The first round of Structural Adjustment ran for five years up to 1996, when the ruling Congress party was defeated in the general election. A number of factors led to this defeat of the Congress party. When the globalisation policies were adopted for the first time, there was a great deal of support for them. Almost everyone was against the government’s role in the economy and wanted the market to decide on prices and the quantity sold. But public opinion changed against the multinational companies for a number of reasons. First, there was widespread condemnation of corruption in high places as was revealed by a number of documents. Second, when the multinational companies began playing an active role in the market, their mergers and takeovers frightened the indigenous companies, who started fearing that their companies too would be similarly taken over. Third, the beneficiaries of reform who gained from the higher prices of their products, were far outnumbered by those who suffered because of the reforms. The economic lollipops thus failed to save the government from electoral disaster in 1996. Planning, which has had a long tradition, was then shelved, as the department of finance became more important. The only task that remained under the purview of the Planning Commission was the allocation of support for states once in every year, according to a given formula. The United Front government, which ruled in 1996–97, comprised a coalition of secular and regional parties with some Left-wing participation. This government did not last long but like its successor, the BJP-led NDA government, the United Front government too pledged to continue ‘reform’ and to support globalisation.

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The Ninth Plan: A Mid-term Appraisal In 1998, the BJP, under the leadership of the NDA, took over the reins of the government, following the collapse of the United Front government. In due course, the BJP-led NDA government published a mid-term appraisal for the Eighth and subsequent fiveyear plans. It is clear that there was a consensus in favour of globalisation for several years, as both the largest parties were committed to reform and globalisation. But, ‘the pace of reduction of poverty was less than what was hoped. The acceleration of growth had not been uniform across states. The fiscal position of both the Centre and the states remained precarious. The pay increases implemented on the basis of the recommendations of the Fifth Pay Commission’s award had imposed a heavy burden on the governments, particularly in the states. The second generation of reforms failed to stimulate rapid economic growth in the country during the new century’ (Government of India, 2000b, p. 499). The document on the mid-term appraisal of the Ninth Plan thus expressed unhappiness over the failure to check fiscal deficits and the high figure of 69.3 per cent of the Government of India fund devoted to the payment of interests, as also the state of finance of the states. The document dealt with infrastructure development, particularly the power sector, for which it recommended a number of electricity regulatory bodies (ibid.).

The Tenth Plan The Tenth Plan covers the period 2002–3 to 2006–7. In his foreword to the plan document, the Prime Minister asked the Planning Commission to devise a plan that followed the following criteria: good governance, removal of restrictions on inter-state commerce and on entrepreneurial initiatives, and an effective delivery system. From the beginning of the new century, the Prime Minister of the country began talking about a 10 per cent growth rate of GDP. There was concern over the low growth rate of the Indian economy

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and the fact that the country could not become a developed country if the rate of growth remained low. There can be no doubt that a high growth rate is desirable, but the critical question is whether such high growth is also realisable. Coming from the Prime Minister of the time, who was a major politician and did not pretend to be an economist, this is understandable. What was less understandable was the chorus led by the Finance Minister who claims to be an economist. For any economy, the growth in GDP is crucially dependent on: (a) the incremental output-capital ratio, and (b) the rate of saving as a proportion of GDP. In the 1950s, the first ratio was close to 3:1, but now it is nearer 4:1, in other words, an input of the order of Rs 4 can fetch only Re 1 as an additional output. Given this, a saving/GDP ratio of 40 per cent was needed to realise a growth rate of 10 per cent which amounted to almost doubling of the existing savings rate (Kapila and Uma, (eds), 1996 and 1997; Prasad, 2003). However, the Planning Commission, while drafting the Tenth Plan, did not heed the advice of the Prime Minister and argued for an 8 per cent rate of growth. Even that would be difficult to achieve. The new government, led by the Congress party, which came into being after the 2004 election, also talked about an 8 per cent rate of growth. This was feasible only in 2003– 2004 as the rate of growth was low in the earlier years, but the rate of 8 per cent cannot be sustained over several years. At the very outset, the Planning Commission talked about the high rate of population growth and expressed its desire to maintain it at 2 per cent. On the other hand, the rate of job creation, which fell to 1.1 per cent in the 1990s, as compared to an average of 2 per cent, is likely to reach the average. Even that would leave a sizeable unemployment, which needs to be tackled. The composite incidence of unemployment and under-employment stood at 9 per cent of the labour force and 13 per cent of the youth at the beginning of the Tenth Plan. The declared priority of the government was to eradicate unemployment and under-employment. The BJP government had also envisaged food for all, but it also took into account the shift in the consumption pattern in favour of quality foods with high prices. A related issue was that of environmental degradation, particularly in the urban areas. The Tenth Plan estimated that more than 45 per cent of India’s geographical area was affected

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by soil erosion. The lack of adequate water supply is also a serious constraint which has to be dealt with. This should form a part of the development strategy of the Tenth Plan. Apart from raising the GDP rate of growth from the existing 6 per cent to 8 per cent at the end of the Plan period, the Tenth Plan emphasises the dwindling role of the government vis-à-vis the market, which would enjoy a bigger share of the spoils. It says: ‘An important aspect of the re-definition of strategy that is needed relates to the role of government. This re-definition is necessary both at the Central government level and also at state government level. An all-pervasive government role may have been necessary at a stage where private sector capabilities were undeveloped, but the situation had changed dramatically in this respect, as India now has a strong and vibrant private sector, according to this view. The public sector is much less dominant than it used to be in many critical sectors and its relative position is likely to decline further as government ownership in many existing public sector organisations, according to this view, was expected to decline substantially. Industrial growth, would, in future, depend largely upon the performance of the private sector and our policies must therefore provide an environment which is conducive to such growth.’

Conclusions Going by performance, under structural adjustment, India has done no better than the pre-adjustment decade of the 1980s, in terms of the overall agricultural and industrial growth, while the progress achieved in some areas, such as in the accumulation of foreign exchange reserves, remains unstable as it is based on insecure foundations, rather than on the sale of Indian exports. While India has not done as badly as sub-Saharan Africa, that is perhaps largely because the adjustment package could not be fully implemented after the first three years because of political opposition. India has done definitely much worse than the East Asian countries. It would have been wiser for India to examine what went wrong with its own interventionist strategy first, before launching a programme that sought its complete abandonment. Perhaps what is needed is the implementation of land reform, development of

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co-operatives and grassroot level representative institutions, a massive investment in health and education as well as in technology, a positive approach towards export promotion while following import substitution, and a time-bound protectionist programme, which could help India, a country with a much higher level of resource endowment, to replicate the East Asian success. Whether these measures are politically feasible is, of course, another question (Acharya, 2001). The broad issue of leaving everything to the market as opposed to a state which intervenes on economic matters is a major theme of this book, and occurs again and again throughout this book. In the May 2004 election, the BJP-led NDA government was defeated by the Congress and its allies, particularly the Left parties. As a consequence, the new government had to discard many of the elements of the globalisation policy, which were part of the globalisation programme of the 1991–95 government, such as the policy of disinvestment or the legislation on POTA, in order to enjoy the confidence of the Left parties. In this book, however, we will concentrate on various aspects of globalisation as highlighted by the BJP policies during the period 1998–2004.

Comments by Stiglitz Joseph Stiglitz wrote a book after resigning from the World Bank and as the Deputy Chairman of the Economic Advisors of the US President, wherein he narrated his experience with these two bodies and reached the conclusion that the poor countries were not benefiting from these two international bodies. What he said was nothing new, but Stiglitz being Stiglitz, because of his preeminent position, Stiglitz’s book and comments received worldwide publicity (Stiglitz, 2002).

2 Multilateral Agencies Three international agencies are active in the field of globalisation— the World Bank, the International Monetary Fund (IMF) and the World Trade Organisation (WTO). Of these, the first two have been a familiar sight since the conference at Bretton Woods in 1944. The last one, the most important from the point of view of globalisation, is of recent origin, and came into being at the beginning of 1995, following the decision to create such an organisation at the Marrakesh conference of 1994. Each of the three agencies follows the same economic philosophy of the market, and the first two have played a major role in their advocacy of the third. It is, therefore apt for this book to begin with an introduction of the three international organisations, which play an important role in making the marketplace the cornerstone of the country’s economic policies.

The IMF and the World Bank To start with, both these agencies operated, nearly exclusively, in the interest of the developed countries alone, contrary to their present position of operating exclusively in the less developed countries. As these agencies were not required to participate in the task of post-War reconstruction of Europe, (as with the Marshall plan of the United States taking care of this task), the word ‘development’ was added to the name of the World Bank or the International Bank of Reconstruction and Development (IBRD) almost as an afterthought. Of the two agencies, the World Bank

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specialised in project-lending to governments, while the main task entrusted to the IMF was the maintenance of the gold standard. During the subsequent five decades, both the organisations underwent a significant transformation in the scope and manner of their functioning. The Soviet Union and its allies opted out of both with the onset of the Cold War, following the conclusion of the Second World War. This, plus the fact that the voting power in these organisations was linked with the contributions or ‘quotas’ of the members, brought the twins under the clear domination of the rich, Western countries and imparted them a pro-market and anti-state intervention focus. Despite their sharing a common philosophy, the twins differed in the scope and time span of their programmes. The IMF’s main role was to function as the guardian of the gold standard, under which the value of a country’s currency was defined in terms of ounces of gold. Countries facing imbalances in their external account usually sought the IMF’s financial support to tide over temporary difficulties. If the imbalances persisted and reflected a fundamental disequilibrium, the IMF prescribed devaluation—to encourage exports at a cheaper price and to discourage exports now available at a higher price. In both the cases, the time span was short and the medicine was expected to work immediately. The organisation’s brief was specific and well-defined. From the early days, conditionalities had been a part of the IMF loans, but these were few and not rigorously enforced. The conditionalities were oriented towards improving macro-economic management and operated from the demand side (Bird, 1993). Those seeking long-term financial support for a project went to the World Bank, which acted as an international banker. It assessed the viability of a project in terms of the capability of the organisation implementing the project to repay the loan with interest, and offered loans on the basis of guarantees provided by the governments concerned. While the IMF was concerned with macroeconomic management and operated on the demand side, the World Bank’s concern was micro-, project-based lending. In its country reviews, the World Bank’s approach was supply-sideoriented, and it urged the governments to get the prices right, to make the private sectors the main actors in the economic scene, and to reduce the role of the state in the economy to the minimum.

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The World Bank now operates exclusively in the less developed countries, though historically that was not the case. With the emergence of an integrated global capital market, backed by modern means of communication, rich countries with good credit ratings face no difficulty in mobilising the required project funding from that source. Only countries with low credit ratings, that have no other source of funding, now come to the World Bank for loans as the last resort. Over the past few decades, both the IMF and the World Bank have undergone important changes. With the abandonment of the gold standard and the floating of currencies in 1971, the IMF’s role as a superviser of the gold standard came to an end. Its role as a world body also declined, as the rich countries found other ways of funding their deficits, e.g. from the global capital market. The last occasion when a rich country took an IMF loan was almost three decades ago when, in 1975, the UK and Italy were loanees. Since then, the IMF’s activities have remained exclusively confined to the less developed countries, a radical deviation from the original concept behind the creation of the IMF (Bird, 1993). Although the IMF regularly publishes world surveys, etc., it plays no global surveillance role in the world economy and carries no influence with the rich country governments (Killick, 1992a). Although Keynes, who participated in the famous Bretton Woods conference in 1944, suggested a soft loan window, to be operated through the United Nations, it came much later. The IDA (International Development Assistance), the agency providing such soft loans and accounting for around 12 per cent of all concessional assistance worldwide, is a subsidiary of the World Bank. The IDA offers loans at a low, subsidised rate, but both the quantum of loan offered through the IDA and the category of recipients are rigorously defined (Williamson, 1983b). While their global role has diminished with the dissolution of the gold standard in the 1960s, and the emergence of a wellintegrated global capital market in subsequent years, the importance of the twins has grown more than proportionately in the economic life of the less developed countries. The conditionalities accompanying their loans now shape the economic policies of the poor recipient countries that have virtually no influence over the decision-making process of the twin agencies.

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In their charters, these two agencies were recognised as international institutions affiliated to the United Nations, and were expected to send their reports to the Economic and Social Council of the United Nations (ECOSOC). Their heads were expected to attend the meetings of ECOSOC which, rather than either of the twins, was supposed to be the agency co-ordinating the economic activities of the nations, and was to play a role in the world economy that would be parallel to the role of the Security Council in political and military affairs. In practice, neither the World Bank nor the IMF ever played this subordinate role vis-à-vis ECOSOC, and in time, they came to loom much larger on the international economic horizon than the latter. Today, the Secretary-General of the United Nations is not even allowed to address the annual meetings of the Bretton Woods institutions. Through an informal understanding among the rich countries, the ‘hard’ instruments of development, such as finance, macro-economic policies, balance of payments and growth, are now the exclusive preserve of the twins, while they are happy to leave human and social issues for the attention of the UN agencies. With the beginning of the Cold War, the rich countries played down the role of the ECOSOC and patronised the World Bank and the IMF. While ECOSOC was perennially short of funds, the twins were generously funded by the rich Western countries. One reason for the favour shown to them was that the twins were seen as instruments in the Cold War and as being more amenable to their influence than the less orderly United Nations (Gwin, 1995). A related reason for the preference of Western nations for the World Bank and the IMF over ECOSOC was its decision-making procedure. Unlike the United Nations, wherein every country, big or small, has one vote, in case of the twin agencies, voting is linked to their contributions to the IMF, which again is linked to the size of their GDPs. Over the past five decades, the ‘quotas’ for various countries have been revised, with each revision raising the share of the rich countries. Such revisions are not simply based on key national and international economic variables, but reflect the bargaining strengths of various countries and groups of countries in the executive bodies of those organisations (Bird, 1993). At present, the G-7 countries (the USA, UK, France, Germany, Canada, Italy and Japan) account for roughly half the voting power and virtually control the organisation.

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The Presidentship of the World Bank and the post of Managing Director of the IMF are rotated between the United States and Western Europe on the basis of an informal arrangement, from which the less developed countries are excluded. These two agencies operate in close understanding with each other. In fact the article of agreement for the Bank makes its obligatory for its members to be members of the IMF too (Polak, 1994). The relationship between the two is governed by periodic concordats, e.g., those of 1966 and 1989, that delineate their respective jurisdiction, e.g., IMF leading on exchange rates, balance of payment problems and restrictive trade systems, while World Bank leading on development, financial institutions and capital markets (Mosley et al., 1991; Polak, 1994). The regular meetings of the Development Committee, involving senior officials of the two organisations and ministers of the member countries, is a forum wherein common issues are raised, discussed and resolved. Not that the members do not quarrel. From time to time, they engage themselves in ‘turf battles’ to protect their own territories or to advance into the domain of the other, sometimes surreptitiously, or in quarrels when something goes wrong in relation to a country, but these are not serious and are more in the nature of temporary matrimonial frictions (Polak, 1994). Each takes a representative of the other in its own country missions, and what follows, to quote Polak, is a ‘you twist their right arm and we’ll twist their left arm’ kind of co-operative strategy (ibid.). Since 1986, both have been working together with the country concerned to produce what is known as the Policy Framework Paper (PFP), which forms the basis of support given by either. The PFP projects the country’s major issues, the objectives and priorities of a three-year programme, and the broad thrust of macro-economic and structural policies, and makes out a case for external financing. In most cases, the less developed countries lack the competence to design and prepare a PFP, and quite willingly delegate this task to the IMF and World Bank staff (ibid., pp. 28–30). As the saying goes, ‘the IMF prepares the draft of the PFP, the World Bank concurs and the country concerned signs’ (Killick, 1992a; Lancaster, 1991; Mosley et al., 1991). Once the PFP emerges from a ‘joint’ discussion between the country and the two agencies, which implies that all the outstanding issues between them have

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been resolved, the approval of the loan application becomes a matter of formality. Although these two agencies deny operating cross-conditionally, the manner of formulation and implementation of PFP suggests a very high degree of co-operation on the conditionalities in a specific country case. In fact, a supplementary note sent by the World Bank to its board (and a corresponding one by the IMF to its board), in April 1992, states: ‘the Bank expects to receive a policy letter that sets out the government program for structural adjustment, set in a macro-economic framework which would be based on understandings reached with the Fund (as spelled out in the Letter of Intent for Fund arrangements).’ This, indeed amounts to an admission of de facto cross-conditionality (Polak, 1994). Further, an understanding exists that, for a country, structural adjustment would be preceded by a stabilisation package under the IMF umbrella (Mosley et al., 1991; Polak, 1994). While the IMF and the World Bank were set up to perform two distinct tasks, over time, they have come closer in their mode of functioning and treatment of issues. The IMF, which was supposed to be concerned with short-term remedies to tackle the balance of payment difficulties, has been offering ten-year term Extended Fund Facilities (EFF) since 1974, and structural adjustment loans since 1986, while the World Bank, specialising in micro-issues, has now graduated from project-based lending to lending of policy-based programme (structural adjustment loans—SALs) and sectoral adjustment loans (SECALs), is taking a close interest in macro-economic management, including the balance of payments (Killick, 1992a; Mosley et al., 1991). ‘With these shifts in policy, the former distinctions between the roles of the IMF and the Bank—macro versus micro, demand versus supply, adjustment versus development, financial versus real, programme versus project loans, short-term versus long-term— have been severely eroded’ (Polak, 1994, p. 7; Williamson, 1983a, p. 619). To quote Polak, ‘The conditionality applied by the two institutions in these lending operations, while not becoming identical, has converged into a large common area, and in general, the countries borrowing under these conditions have been the same’ (Polak, 1994, p. 11). When structural adjustment was introduced by the World Bank, in 1980, making a complete break with narrow, project-based

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lending, the argument advanced in support of such a change was in terms of fungibility, that is, project-based loans were often spent on activities that the governments would have undertaken in any case with their own money even without Bank lending, and the Bank provision for this only allowed the country concerned to spend on other activities that were not always in accordance with the World Bank’s priorities. Further, the task of project assessment was made difficult by the divergence of internal prices from their scarcity values or world prices. In this situation, the argument went, it was necessary to have an overall view of the country’s economy and to influence its overall policy direction (Mosley et al., 1991). A third argument was that the Bank, endowed with highly qualified staff, was seeking to make a more optimal use of its skill in planning design and performance assessment, by taking into account the entire economy of a country. Now that their activities and conditionalities have largely converged, and that they work in close cooperation in relation to a given country, a strong view is aired from time to time that the two bodies should be merged (Mosley et al., 1991; Polak, 1994). While bancor, the proposed international currency of Keynes, was never floated, in 1969, an amendment was made to the IMF’s Articles of Agreement to give it the right to supplement its existing stock of gold and dollars with its own Special Drawing Rights (SDR), an accounting currency with no physical existence, that was based on the weighted average of the values of a basket of currencies. Following this provision, SDR was created in 1970–72 and 1979–81. The value of outstanding SDRs accounts for about 3 per cent of the world’s non-gold reserves today (Polak, 1994). The IMF authorities wished to make SDR the principal reserve asset in the international monetary system, in view of its capital value and liquidity. However, after the collapse of the gold standard, reserve adequacy was no longer seen as a relevant issue and no fresh SDR allocation was made, while the dollar took over the function of reserve currency. As capital mobility permitted settlement of current account imbalances, credit-worthiness constraint became more important than reserve constraint (Williamson, 1983a).

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In recent years, with the global banking system failing to meet the balance of payment financing requirement, and the low credit rating of the less developed countries, interest has again been focused on the possibility of fresh SDR allocations. Such allocations were not to be linked to conditions or a fixed repayment schedule, and were to stand as a proxy for the long-standing demand to hold international reserves (Bird, 1993; Williamson, 1983a). Some believe that SDR should be regarded as an international public good, and be used to supplement foreign exchange reserves in poor nations. Some have even suggested the introduction of a special SDR issue to cancel all the debts of the poorest African countries. All these proposals have been heavily resisted by the rich countries as, according to them, the augmentation of international liquidity would not be in their interest (Bird, 1993). One proposal for SDR creation for financing development by routing it through the IDA was killed in 1986, when an interim committee of the IMF expressed its opposition to the use of SDR as a ‘means of transferring resources’ (Polak, 1994). The rich countries’ opposition to increasing international liquidity by way of SDR is based on the ground that sufficient liquidity already exists in the international market. The difficulties encountered by some countries, according to this view, are primarily a reflection of their lack of creditworthiness; and SDR allocation is not an appropriate tool for compensating them for this handicap which is, by and large, of their own making (Griffith-Jones, 1993). To summarise the discussion so far, we have two rich countrycontrolled institutions that are exclusively operating in the poor countries. In some instances, the IMF–World Bank teams visiting a country involve themselves in the details of budget-making, even going to the extent of ‘analysing the budget line by line’, to implement the cut in government expenditure. (Killick, 1992a). The question naturally arises as to the objectives with which these institutions operate in the less developed countries. To put it in another way, what is the political economy of structural adjustment? There can be three possible answers to this: (a) In their operation, they are inspired by a concern for the well-being of the less developed countries, or by a strong

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ideological commitment to a free market because of their belief that it is good for mankind; (b) their actions in the less developed countries are motivated by rational self-serving behaviour, to further the economic (and maybe also political) interests of the rich countries; and (c) the interests of the two—the rich and the poor countries— converge, and, therefore, while aimed at serving the interests of the rich countries, their policies also benefit the poor ones. Of these three possibilities, (a) would be irreconcilable with the New Political Economy (NPE), because of its emphasis on selfinterest as the motivating force that provides the theoretical basis for structural adjustment (Dasgupta, 1997a; Olson, 1982). And (c) appears improbable, given the known contradictions of interest between the two sets of countries on a wide range of issues. But if, for the sake of argument, one accepts that, in the long run, the interests of the rich and poor countries are compatible with each other, the fact would remain that, even in that situation, the self-interest of the rich countries would be paramount and its convergence with that of the poor countries would be a matter of coincidence. By all accounts, (b) would come closest to the New Political Economy (NPE). In the past too, the behaviour of these two institutions has been consistent with (b). Generally speaking, the interests of the IMF-World Bank management regarding any country complemented the Cold War requirements of the West (Bird, 1993; Killick, 1992a; Lancaster, 1991). There have been numerous examples of a hardened attitude on the part of these two institutions towards countries not favoured by the West (e.g., Chile under Allende or Ghana under Nkrumah). This hostile attitude changed dramatically after those regimes were toppled and were replaced by a pro-US government, e.g., Chile under Pinochet, or Ghana under Busia. The Soviet Union under Gorbachev was denied a loan, and was told by the G7 leaders that good policy was more important than money, but a more generous approach was adopted when the Soviet Union disintegrated, and Yeltsin took over the reins of Russia. The latter was promised a loan of $40 billion on the eve of a crucial election for the Presidency. Similarly, a massive loan package was put together for Mexico in a matter of days, during 1995–96, something that is unlikely to be done for India unless its foreign policy changes. The IMF-World Bank attitude

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towards the rich and the poor countries is explicitly asymmetrical, as also towards the Left-leaning and other deficit states (Killick, 1992a). In order to understand how the structural adjustment programme (SAP), came into being, and evolved as it did, we need to go back to the 1970s. The decade of the 1970s was one of massive economic upheavals, prompted by two oil crises—in 1973 and in 1979–80. The sudden and steep rise in oil prices created, on the one hand, an unforeseen opportunity for growth for a group of less developed countries exporting oil, and on the other, at least for a while, a feeling of despair in the West, as it entailed a massive outflow of resources from the rich countries located in that part of the globe. The oil-exporting countries, led by OPEC, were whole-heartedly supported by the other less developed countries (‘Nopecs’, to use the terminology of Hans Singer) on the basis of two major expectations: (a) that it would facilitate other groups of primary producing and exporting countries—specialising in copper, bauxite, jute, tea , etc.—in bringing about a similar reversal in the terms of trade through collective action, and (b) that a substantial part of the resources flowing into OPEC would become available to them in the form of a cheap loan. However, as it turned out, the OPEC model was not amenable to easy replication, as the other primary products were more easily substitutable, and the lack of contiguity and political–cultural cohesion made collective action politically infeasible (Barker and Page, 1974; Dasgupta, 1974). If these two sets of less developed countries had agreed to work on the basis of a common understanding, the problems of both could have been solved, perhaps at the cost of the developed West, by transferring the surplus investible fund from the former to the capital-starved less developed countries of the South. That was not to be, mainly because of the political economy of these oil-rich tiny kingdoms, dependent as their ruling elites were, for their political survival, on the military might of the West. The petro-dollar was recycled back to the West, much to the relief of economic managers there, more specifically to the private international banks located in the West (Mosley et al., 1991), while the oil-consuming countries faced a severe balance of payment crisis, only partly mitigated by a special IMF facility set up for compensatory and contingency purposes.

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This, again, created a new situation—the international banks were now flush with funds and were willing to lend to anybody. The less developed countries—mainly in Africa and Latin America—were now induced to borrow from these banks to ease their balance of payment difficulties. Within a few years, these banks, which were competing with each other to find borrowers, dished out an enormous amount of loan to a large number of countries, mostly poor and backward, ruled by authoritarian governments with virtually no popular participation in, or organised opposition to, administration, thereby throwing the usual conservative banking norms to the wind. The less developed countries, on their part, apart from various inducements, preferred this source of borrowing. Unlike the IMF, these banks asked few questions and were quick with their paper work (Polak, 1994). Quite a few of the countries borrowed more than was prudent in view of the precarious conditions of their own economies, their crucial dependence on only one or two export items with records of volatile price fluctuations in the global market, and low levels of macro-economic management efficiency. Between 1970 and 1980, public and publicly guaranteed loans to the less developed countries from these banks and other sources increased from $46 billion to $410 billion, that is by almost nine times (Lateef, 1994). The commercial banks insisted on repayment guarantees by the governments, and usually operated through loan syndicates, that worked with cross-default clauses to reduce the risk of nonpayment. The syndicates charged 1 per cent commission, and paid in advance, which was free from risk, which induced the syndicates in many cases to ‘push loans on to borrowers’ (Vas, 1994). The bank business appeared to be lucrative and risk-free, and every year between 1973 and 1980, many new European banks entered this field of international lending, thus intensifying oligopolistic competition among themselves. There was hardly any country in Africa and Latin America that did not take huge loans during this period, with many of them being lured by competing banks. Many countries borrowed with total indifference to their future repayment obligations or to the capacity of their economies to repay such loans. Despite the fact that the number of banks was growing under the influence of the petro-dollar, international banking was highly

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concentrated. The bonanza lasted only for a few years. While lending on a massive scale, the international privately owned banks were influenced by a herd mentality. Then, as it happens with international finance quite regularly, the same banks suddenly woke up, began calculating the risks they had taken, and became parsimonious with their money. This too reflected their herd mentality as they tried to extricate themselves from the less developed countries (Bird, 1993; Williamson, 1983a). Unfortunately, this coincided with a slump in the world demand for agricultural exports and their prices, landing many of the mono-cropping less developed countries into serious trouble. Ironically, this was the time when they needed most to borrow from these banks, but by then the traditional conservative attitude of bankers had returned. The international banks, rather than extending further loans, operated pro-cyclically, wanted their money back with interest, and were not willing to take any further risks in this volatile financial situation. The credit rating of the less developed countries took a nose-dive and further loans were denied (Bird, 1993; Vas, 1994). To make things worse, the coming to power of monetarist regimes in the West, particularly in the UK and the USA, under Margaret Thatcher and Ronald Reagan, respectively, resulted in a rise in interest rates accompanied by a fall in prices because of tighter monetary control, thus accentuating the debt burden as most loans were subject to variable interest rates. government-togovernment assistance was also severely curtailed, particularly between 1980 and 1986, to add to the growing burden of the less developed countries (Mosley et al., 1991). The inevitable debt crisis that followed, beginning with the public proclamation of bankruptcy by Mexico in August 1982, gravely undermined the international banking system, with a high and increasing risk of large-scale default on the part of the less developed borrowing countries. Initially, in the late 1970s, the idea of ‘structural adjustment’ was not meant for the less developed countries at all. The objective was to restructure the economy of the OECD countries, the most developed countries of the world, following oil crises, the emergence of huge deficits in the balance of payments of the United States and the expected dismantling of the multi-fibre agreement and the European Steel price ring. Only afterwards was the emphasis changed, and the burden of adjustment to the new world

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economic situation, arising from a variety of developments in the 1970s, was shifted to the not-too-broad shoulders of the less developed countries (Mosley et al., 1991). The formal, official, motive for providing structural adjustment support was to rescue the hard-pressed debtor countries, but a less charitable explanation is that the main concern of the BWI (Bretton Woods Institution) was to save the global private banking system from bankruptcy. To quote Polak, ‘In the first phase of this crisis, from August 1982 to late 1985 ....the primary concern of the major industrial countries was the protection of the international banking system’ (Polak, 1994, p. 12). Under this interpretation, the fund that was supplied by the IMF, through its ‘stabilisation programmes’, to the indebted less developed countries, was intended to ensure repayment of bank loans, so that the grave crisis facing the international banking system could be resolved. While the governments of the less developed countries were asked to give guarantees of the loans taken, no corresponding obligation was put on the developed country governments. ‘An asymmetry thus arose in debtor and creditor government actions, as regards private capital flows’ (Griffith-Jones, 1993, pp. 111–12). Structural adjustment accompanied debt rescheduling under international agreements, by waiving a part of the debt and stretching the rest over a longer period, which further guaranteed repayment. In both Paris Club and London Club meetings, held for this purpose, a precondition for rescheduling was that the country concerned would undertake a stabilisation programme and avoid defaulting on bank loan payments (Lancaster, 1991). According to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC, 1994), the debt rescheduling process under the guidance of the OECD countries was far from even-handed as the cost of the crisis was passed on to the debtors (ECLAC, 1994). Another study by the Overseas Development Institute concluded, ‘The Fund insisted that recipients of Fund loans remained current with their commercial debt obligations and hence, in some quarters, (was) viewed as a debt collector for the banks’ (Bird, 1993). The Brady Plan of 1989, involving a reduction in the real value of debt to banks, was accompanied with a strong commitment, on the part of the less developed country governments, to loan repayment; in the case of Mexico, this was

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reinforced by a further guarantee of the government of the United States itself (Lancaster, 1991). All these measures helped the private international banks to stave off the crisis. Further, the rescue operation was carried out on the basis of the nominal value of the debt, but the growth of a secondary market for the external debt papers showed ‘that the real value of the debt was much lower than its nominal value’ (ECLAC, 1994). Thus, the private international banks got much more than what their lending was worth at the market price, because of the support they received from BWI and the Western countries. There was another way in which they were overcompensated. The crisis they faced was, in a great part, their own contribution, as they threw traditional banking caution to the wind during the 1970s in their quest for profit (Sarkar and Singer, 1992). ‘Where it happens that the commercial banks rush in, tempt a country to over-borrow, and do not assure themselves that the borrowing country will be in a position to repay ... they deserve to forfeit a part of the value of their loans’ (Williamson, 1983b,). However, loan repayment by the less developed countries, with the support of the Bretton Woods institutions, was undertaken without any assurance that further loans from this source would be forthcoming. In fact, given their low credit rating, it is highly unlikely that, for a long time to come, the global banking system would take any notice of them as borrowers (Development Committee, 1993). Once they have landed in the lap of the IMF, few countries have managed to grow out of it. The IMF-World Bank programmes, once initiated in a country as a time-bound measure to solve all problems, tend to continue forever. Even if these programmes are interrupted for one reason or another, external or internal, the country reverts to them after a few years, usually after a coup or some other less orderly form of the change of guard. Evidently, the amount offered at a time has not been sufficient to meet the balance of payments and other needs of the countries concerned (Bird, 1993). The other motive, consistent with the self-interest of rich countries, could be the urge to find markets in the less developed countries, particularly for the multinational corporations (MNCs) based in the United States. The soaring US balance of trade deficits,

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particularly with Japan, Germany and China, which reached the exorbitant figure of $162 billion in 1987, impelled these MNCs to look for markets elsewhere, particularly in those countries where the government and the competition were weak. A measure of the success of the economies of the United States and some other Western countries is the fact that despite lending by these two agencies, there has been a consistent net outflow of financial resources from the countries operating under the structural adjustment programme since 1980. Between 1984 and 1991, the net transfer out of the less developed countries amounted to $20 billion per year. The IMF net lending was negative during most of the 1980s (Bird, 1993; Development Committee, 1992). Both the organisations incorporate the conditionalities in the loan package in the Policy Framework Paper (PFP), which, as noted above, though formally signed by the country concerned, is drafted by the BWIs. One reason why so much care is taken to formulate the PFP is linked with the IMF-World Bank idea of ownership of such programmes. The theory is that the success of a programme is closely correlated with the perception in the country that it was developed by it on its own, without outside interference. However, such a perception about owning a programme sponsored by either of the twins is qualified by the way the financial assistance is dished out. The total quantum of loan is usually sliced into a number of tranches, each specific to a time period, and the payment for each tranche is conditional on the fulfilment of the performance criteria specified for the preceding period (Mosley et al., 1991). In case of non-fulfilment of some or all of the performance criteria, following a discussion with the government, the twins usually take one of the following positions: (a) the performance is on the whole satisfactory, despite non-fulfilment of some criteria, and, therefore, the fund is released, (b) the fund is released, but with a warning, asking the government to adhere to the agreed norms if it were to receive payments for the following tranches, (c) the fund is withheld pending the fulfilment of conditions, (d) funding for this particular loan programme is allowed but no further loan would be considered for the future, and (e) the programme is scrapped.

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Whether publicly acknowledged or not, coercion is often used to make a country accept what, in the opinion of the country, is not in its interest (Killick, 1992a; Mosley et al., 1991). Needless to say, this coercion, an inherent element in a conditionality package, undermines ownership (Berg, 1991; Killick, 1992a). Some studies have commented on the arrogance of the IMF-World Bank staff visiting a country, their ‘take it or leave it approach’ and the ‘judgemental nature‘ of their reviews of the performance of that member (Cooper, 1983, p. 576; Killick, 1992a). Apart from coercion, the weak administration in most less developed countries tends to buckle under the pressure of mounting outside commitments, and permits them no sense of ownership (Killick, 1992a). Sometimes a country on its own anticipates those conditionalities, and undertakes policy reforms even before the formal negotiation with these funding bodies begins. In some cases, such policy changes are imposed as preconditions by the IMF or World Bank for entering into negotiations. This fulfilment of anticipated (or front-loaded) conditionalities helps the country concerned to claim that its policy changes have not been dictated by the lending bodies and have preceded loan negotiations (Webb and Karim, 1992; Mosley et al., 1991). In the case of Thailand, half the conditionalities were implemented prior to signing the agreement, as a kind of down payment. Generally speaking, the IMF conditionalities prescribe the following: (a) devaluation to bridge the gap between the official and market exchange rates of the currency of the country concerned, (b) demand management, mainly by way of reducing government expenditure, to reduce domestic effective demand and consequent inflationary pressure, and (c) reduction of fiscal deficit, as a proportion of the GDP, below 4 per cent, in phases. Here (b) and (c) are complimentary, as both require the curtailment of public expenditure, and both also help to reduce domestic demand for imports. The objective behind these measures is to bring imports in line with export earnings and to take the steam out of the inflationary pressure. Devaluation has become virtually a compulsory requirement for getting IMF assistance since 1983 (Bird, 1993).

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GATT as a Stopgap before WTO It is not widely known that Keynes proposed a third, trading organisation in 1944, in Bretton Woods itself, with the following features. First, it was to be an International Clearing Union, a central bank of all central banks, with its own currency (to be named ‘bancor’) to help ease the balance of payments difficulties of the member countries. This bank, contrary to the current practice, was to penalise countries holding a trade surplus, with a global tax of 1 per cent per month, on the ground that they were keeping the world effective demand low by their under-purchase of goods produced by other countries. The proceeds obtained from such global taxation were to be utilised for international buffer stock operations in primary goods. Second, a fund was to be created for the economic reconstruction of war-devastated Europe, on the basis of the Plan for Relief and Reconstruction. This proved to be unnecessary at the end, since the Marshall Plan sponsored by the US took care of Europe’s needs. Third, a Commodity Buffer Stock was to be operated by an International Trade Organisation (ITO), which was to maintain and operate this buffer stock of primary goods, in order to stabilise their prices. The buffer stock operation was supposed to be anti-cyclical with the ITO making purchases when the world prices were low and selling when the prices became high. Although the buffer stock operations were helpful to the poor countries, Keynes was primarily interested in stabilising the input prices of the rich countries. The fund that was established had no separate currency. In contrast with the Keynesian view, the deficit countries were now penalised as if they alone were responsible for their trade deficits. ITO was never born because of US opposition though its charter was drawn up and other formalities were completed. For about five decades, the General Agreement on Trade and Tariffs (GATT) was the single most important institution regulating world trade and determining the quantum and direction of trade flows, until its activities were taken over by the WTO. In its original concept, GATT was no more than what its title suggested: a forum for bringing the countries together to reach an agreement on trade and tariff issues, pending the constitution of the ITO. The first

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agreement, launched in Geneva in April 1947, came into force on 1 January 1948, with only 23 signatory countries (Low, 1994). No one could visualise in those early days that GATT would complete eight rounds and carry on for nearly five decades. The Uruguay Round (1986–93), the eighth round of GATT, was the last one held before WTO was launched. Each round of negotiations was followed by an agreement that lasted for a given number of years, and before it came to an end another round of negotiations was completed until the Marrakesh agreement. In this way, GATT moved from round to round, with each round further reducing tariffs and further easing the international flow of goods. The Dunkel draft, on which the Marrakesh agreement of April 1994 was based, was a document with a text of 450-odd pages and contained 28 accords. In other words, from the days of Torquay, the multilateral trade expanded considerably as we approached Uruguay. The GATT negotiations were, generally speaking, more effective in reducing tariffs than in controlling the proliferation of non-tariff barriers (NTBs). In the 1980s, the non-tariff barriers mushroomed in the rich countries which more than outweighed their tariff concessions. We have discussed those NTBs elsewhere, and do not propose to discuss them here (Dasgupta, 1998). An objective of GATT was non-discrimination and universalisation of trade relations by way of the most favoured nation (MFN) concept. Simply defined, under this concept, the trade concessions agreed upon between any two countries would be automatically extended to other member countries of GATT. The superlative made it clear that there could not be any country more favoured than the GATT members, who were the most favoured. If any member chose to make an agreement with another state that provided more concessions than were hitherto available to the members, the former became immediately applicable to all other members. In other words, a member could not discriminate against another member when entering into trade negotiations with a third country. However, this principle was subject to some important exceptions. The biggest was the regional customs unions, like the European Union (EU). They were permitted to extend additional concessions to intra-region members of those bodies that were denied to other GATT members. It was never made clear how such

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concessions given to regional trade bodies were compatible with the most favoured nation concept (Low, 1994). It has been asked whether these regional groupings are ‘building blocks’ or ‘stumbling blocks’. The argument in favour of the former view is that, by making the economies more competitive and stronger, while working within a region, it makes it easier for them to accept global integration outside the region. The other view is that it stands opposed to MFN and non-discrimination principles (Dasgupta, 2000a; Ray, 2002; UNCTAD, 1994b). Some concessions—Generalised System of Preferences (GSPs)— were also given to the poor countries from 1955 onwards. But how effective this was is difficult to tell. A condition for getting GSP was that at least 35 per cent of the value-added in manufacturing should originate in the exporting country, which most LDC (less developed country) manufacturers found difficult to fulfil. Further, trade in steel, machine tools, etc. was hedged with import quotas, in the rich countries (Watkins, 1992). In many instances, GSPs were offered or withdrawn without consistency, largely on political grounds. The GSP for Nicaragua under a Left-wing regime was withdrawn on ‘human rights’ grounds, but not for Zaire, Guatemala and Haiti, countries ruled for very long periods by brutal, autocratic regimes. In any case, GSP paled into insignificance when compared with preferences given within regional economic blocks such as European Community (EC), European Free Trade Association (EFTA), and the North American Free Trade Association (NAFTA) (Watkins, 1992). By the time of the Uruguay Round, the opposition to concessions to less developed countries, particularly with regard to import restrictions on the ground of adverse balance of payments had reached its peak (Watkins, 1992). The backward countries were expected to ‘graduate out’ of the infant industry and balance of payment protection arguments. The principle of nondiscrimination implicit in the most favoured nation clause was eventually overshadowed by the principle of reciprocity. Reciprocity was demanded on each and every issue. Any access given to tropical products in rich country markets was to be matched by further access of rich country economic operators in the less developed country markets. GATT was increasingly seen as a forum for bargaining wherein a country or a group of countries had to give something to get something. If the United States was to agree

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on the dismantling of the Multi-Fibre Agreement (MFA) or a reduction in agricultural subsidy, the less developed countries were expected to open up their markets to services, or safeguards could be dispensed with by the rich countries if the poor ones were willing to do without article XVIII (Low, 1995). Similarly, the principle of free trade, that more trade was better for everyone concerned, was increasingly replaced by the principle of fair trade, a subjective concept which can be applied for discriminatory action against a trading partner (Low, 1995). The theory of comparative advantage was also implicit in the GATT economic philosophy. A country was supposed to be guided by this principle, while identifying possible export areas. Its natural endowments indicated its relative advantages in producing and exporting certain items. A country was expected to specialise on those, while importing others at a cheaper price from the rest of the world. According to this principle, a less developed country was, generally speaking, expected to specialise in producing and exporting in agricultural goods, while importing industrial goods from its richer counterparts. However, such a theory binds export possibilities to the existing static, historically given, resource base, and, thus, also to a low level of development. Further, it limits diversification of trade and makes a country vulnerable to fluctuations in global terms of trade. Taking a dynamic view of comparative advantage, it is possible for a country, by way of investment in capital and knowledge intensive infrastructure, to create its own comparative advantage. However, as the East Asian experience shows, a dynamic view of comparative advantage presupposes some import substitution and protection from foreign predators in the early stage of development, and an active interventionist state capable of executing such policies. This was a major argument of the Singer-Prebisch thesis, popular in the 1960s in Latin America and Asia. But even the formal neo-classical trade theory allows for ‘infant industry’ argument, wherein protection is seen as a temporary, time-bound measure, with the long-term objective of strengthening domestic production (and also of export) capabilities. High subsidisation of technologically advanced domestic industries can be justified on the ground that such capital costs cannot be fully recouped by firms that incur them and, in this case, the absence of government support would lead to sub-optimal solutions (Low, 1995). In the

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GATT circle, however, the tendency was not to take the ‘infant industry’ argument seriously. As we have already noted, the two years of discussion on the Dunkel draft (1991–93) constituted an exclusively rich country matter. The dispute was mainly between Western Europe and the United States on the question of agricultural subsidy. Both the United States and the Cairns group demanded the elimination of subsidies, while the European countries, particularly France, stuck to the Common Agricultural Programme (CAP). Several rounds of discussion, including the Blair House accord of November 1992, G7 meetings and meetings of the Quad group (USA, EU, Japan and Canada) failed to reconcile their differences. The agreement was brought about just before midnight on 15 December 1993, the deadline declared by the United States Congress, by the fear that in case the GATT agreement collapsed, the United States would walk away and align itself more closely with the Asia Pacific Economic Co-operation (APEC), which accounted for half the world’s GDP and 40 per cent of the world exports (Schott, 1990). By then, the United States had also launched NAFTA (12 August 1992) as an insurance against the failure of the GATT negotiations.

WTO The WTO has turned GATT from a trade accord into a membership organisation. It establishes a legal framework that ties together various trade pacts that have been negotiated under the auspices of GATT. It signifies little extra for countries like the United States, but forces the less developed countries to comply with GATT obligations that they were able to avoid under various concessions. WTO incorporates TRIMs, TRIPs, GATT, dispute settlement mechanism, and trade policy review mechanism (TPRM). In addition, it contains four plurilateral agreements—the civil aircraft agreement, the government procurement agreement, and the meat and dairy arrangements—that bind only their signatories. Headed by a ministerial conference which meets once in two years (there have been several ministerial meetings at Geneva, Singapore, Seattle, Doha and CanCun, since the establishment of WTO) and appoints

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a Director General and a Secretariat, this organisation is a novelty in many senses. WTO does not permit ‘grandfather rights’ relating to laws passed before 1947 that were exempted from the GATT discipline. Only waivers that are permitted by the WTO agreement (Annexure 1A), such as the US-Canada Auto Pact, the Caribbean Basin Economic Recovery Act and the Andean Trade Preference Act, need to be terminated within two years after WTO comes into force unless extended. Members must deposit their schedules of commitment within two years of joining WTO, commitments to be counted from the date of beginning of the WTO. Members may withdraw by giving six months’ notice. Members may invoke ‘non-application’ as a one-time measure at the time a new member is taken; the US may apply it against China. We have already noted that in terms of voting rights WTO follows more or less the United Nations pattern of one country one vote, unlike the World Bank and the IMF, but to minimise what is known in WTO parlance as the ‘tyranny of the majority’, it provides the minority with sufficient power to block rules on most issues, e.g. for the waiver of an obligation three-fourth majority is needed. Amendments generally require two-third majority, which are considered as important safeguards by the minority. However, if amendments alter the rights and obligations of the members, these would apply only to countries that accept it. The management of an organisation with 120 members is difficult. In fact, the tendency is for the Quad group (USA, Canada, Japan and the EC) to decide issues first and then to bring those before WTO (Schott, 1990). The GATT agreement, based on the draft prepared by Dunkel, has a number of important features, apart from its volume and the range of issues discussed (National Working Group on Patent Laws, 1992a). For instance, signing on the dotted line makes a country liable for the entire agreement, with there being no escape clause, as in the Treaty of Rome. A member cannot say that while it broadly agrees with the text, it is opting out of such and such clauses. Another is the detailed and time-bound manner in which most of the provisions have been drafted. The maximum time span for the implementation is 10 years, which is split into periods of

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three, three and four years. The agreement specifies what a country is expected to achieve at the end of each of these subperiods. The agreement also specifies a machinery for dispute settlement as also for multilateral action against countries violating the agreement. The important legislations and ideas which originated in Marrakesh are discussed below. The concept of intellectual property as given in the TRIPs agreement is one of the contentious issues. Some have raised the question as to whether intellectual property rights is a ‘trade’ issue to be covered by GATT negotiations. Until recently, the World Intellectual Property Rights Organisation (WIPRO), established in 1974 following a World Intellectual Property Convention in 1967, was the agency to look after such issues (Lesser, 1991). The main argument for including it in the GATT agenda was that the protection of intellectual property rights would enhance trade. By granting and enforcing patent rights internationally, it was argued, the owners of patents would no longer be forced to keep details of their inventions secret, since such details would form a part of their patent application, and thus, the knowledge itself would be disseminated more freely (Deardorff, 1993b). The other side of the argument is that patents create a monopoly and a massive economic rent, and erect barriers against the dissemination of knowledge. The idea of ‘standards’ to be applied to all the countries on a variety of things such as environment, labour, government purchase, investment and so on is another issue. In other words, through these and patent laws, the WTO is seeking to create an international order, leaving no scope for diversity so strongly argued for by some other agencies. The patent laws have been globalised. It is no longer necessary to apply them separately to each and every country. Applying them to one member country would be considered enough. Another controversial issue has been the decision to terminate the distinction between the product and the process. Article 28 extends to the product protection enjoyed by the process if that product has been obtained directly by that process. Thus, the poor countries are denied the option to acquire a ‘process’ by paying royalty and then to produce the ‘product’ at a cheap cost by using local materials and manpower. The industry which would be hurt most by

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this condition is the pharmaceutical industry which, in India, supplies life-saving drugs at a fraction of the cost in the rich countries, by using processes with low cost inputs. The new patent regime contains several highly restrictive conditions. One of these extends patent rights to 20 years (7–14 years in case of the Indian patent law), though, given the very high rate of obsolescence of the modern technologies in today’s world, a downward revision to 5–7 years would, probably, have been more in order (Lesser, 1991). This longer period would allow the rich countries to enjoy the high economic rent of their patented technologies for a very long time. Further, it will virtually rule out the indigenous development of technologies in the backward countries and will keep the latter perpetually dependent on the rich countries for technologies. The idea of dispute settlement also figures in the list of important issues. The panel established by the Dispute Settlement Board (DSB) is required to give its report within 90 days. On receipt of the report, the DSB gets another 30 days to take a decision, unless an appeal has been referred to the Appellate Body. For the actionable subsidies, the time limits are 60 days, 120 days and 60, respectively. Countervailing measures can be sought when imports cause material injury to domestic industries. But in such cases, if the overall level of subsidies on that product does not exceed 2 per cent of its value, or the volume of the subsidised import represents less than 4 per cent of the total imports of the like product in the importing country, the investigation for imposing countervailing measures will be terminated. But even where the share of import is less than 4 per cent for a single country, if the total imports from all developing countries collectively account for more than 9 per cent of the total import of the like members in the importing country, then the countervailing action is permitted. A body called CERD (Charter of Economic Rights and Duties of States) came into being in 1974. It recognised the right of a state to nationalise foreign property provided compensation was paid. Earlier, in 1962, the UN General Assembly had passed a resolution recognising the sovereign right of a state over the natural resources within its borders. As regards the preference shown to local content requirements that ask the foreign companies to use a certain number or percentage of local manpower or material, to transfer technology, to

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seek trade-balancing (linking exports to import of inputs) or foreign exchange balancing requirements, or involve measures against monopoly pricing or monopsonist hiring practices, the agreement on TRIMs allows exemptions on a number of grounds, such as balance of payments safeguards, promoting development objectives, and preserving national security and health. Export performance requirements remain permissible (UNCTAD, 1994a).

Implications of WTO for India Regardless of one’s views regarding its method of functioning, the WTO has come to stay in the international arena. With India being a founding member, it is not at all easy for it to leave the organisation, unless there is a mass exodus. India cannot court isolation, as long as most countries in the world continue with its membership, no matter how unpalatable the standards imposed by WTO are. However, India can take advantage of the provisions of WTO to remedy the adverse consequences of the WTO decisions. As has been shown repeatedly, the developed countries prepare various drafts long before the two-yearly ministerial level meetings, and they are supported generously with skilled manpower by the assortment of multinational companies. In the 1990 Brussels meeting during the Uruguay round negotiations, Carla Hills, the US Trade Representative, brought 400 advisers, a number that exceeded the combined strength of all the sub-Saharan African and Latin American trade missions put together. Alongside those 400, a powerful group of 200 corporate giants, including American Express, Citibank and IBM lent their own staff to the US delegation. On intellectual property rights, a coalition of agro-chemical conglomerates, led by Pfizer, Monsanto and Du Pont, were active, while the support of Cargill Corporation was very much in evidence on grain negotiations. There was no way the less developed countries could match this formidable rich country combination of governments and corporate giants (Watkins, 1992). It is sad that the Indian delegation at Seattle had no lawyer to help with the draft, though whatever WTO produces is a legal

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document. As a consequence, many of the terms to which the delegation agreed could not be supported if various meanings of the terms were known through a lawyer. India can no longer shy away from the task of preparing well for a two-yearly ministerial level meeting. Second, India also needs to form lobbies with the support of other countries. It is a matter of concern that India does not belong to any customs union or economic block, while all the economically mighty nations of Europe and North America are members of economic blocks. The South Asian Association of Regional Co-operation (SAARC) is still very much a cultural and sports organisation, and seldom discusses economic issues. The South Asian Free Trade Agreement (SAFTA) proposed to be commissioned in 2000 A.D., is still buried under the deep water of diplomacy. In contrast, the ten nations of neighbouring South-East Asia have joined hands to form the mighty ASEAN, India is happy with a sop called ‘dialogue partner’ of the organisation which means very little. China, a giant in her own right, is flooding the Indian market, while no action has been taken to bind China with a contract. Many countries are not needed, when a Brazil from Latin America or a South Africa from that continent and China or ASEAN from Asia will suffice. In other words, India will have to learn the language of lobbying. Beside adding to her lobbying strength, the membership of a regional association can confer other benefits too. While non-discrimination among members is a motto of WTO-GATT, discrimination in favour of members of regional organisations is permitted. (Dasgupta, 1998; Dasgupta, 2000a). Third, India will have to prepare itself for lengthy and expensive court cases, and will have to make full use of the dispute settlement mechanism of WTO. Already the government has won a number of cases of biopiracy. But, given their costs, only a few cases can be won in courts. India has to decide which cases have bigger implications and what procedure the courts follow to prove a case. More important than proving that a word in local usage is a corrupt form of a Sanskrit word of a plant found in a scripture or a classic, is to submit a doctoral thesis on the same subject, if it carries more credibility with the courts. The WTO is taking initiatives in many fields, which, properly speaking, do not belong to its jurisdiction. Apart from trade, the WTO is involved in industry, agriculture, environment, patents, and

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what not. For each of these, there exist separate UN agencies, whose job it is to execute these programmes. The WTO is deliberately sidelining the UN and its agencies. The WTO is thus encroaching on activities which are, strictly speaking, beyond its domain. This encroachment is being justified on the ground that the WTO is dealing with only ‘trade-related issues’. This does not make sense, since the UN agencies can also similarly legislate on issues beyond their domain. For instance, the ILO can legislate on everything on the ground that it is ‘labour-related’. Similarly, the FAO can argue that everything ‘food-related’ comes under its jurisdiction. The fact is that WTO is prescribing ‘standards’ for activities in which it has no special knowledge (Dasgupta, 2002b). There is also the question about the sovereignty of the country concerned, and whether it is desirable for everything to come from an international source. Why should not the government concerned decide whether patent or child labour is desirable or not? Different countries in the world are at different stages in their development, and have passed through many and varied experiences—some big and some small, some capable of self-reliance and some, because of the smallness of their economy and a consequent narrow resource base, being dependent on exports, with some having been colonies and some having been able to maintain their independence. It is thus debatable whether one set of rules should apply to everyone. The respective governments are there to decide what is good for their citizens, and there is no reason to think that they will come up with uniform replies on various questions. Before the Doha Ministerial meeting, there were three different approaches on the issues to be raised. The first was the unfinished agenda of the rich countries to introduce worldwide standards on labour, environment, e-commerce, government procurement, income policy and so on. They also advocated a new round of trade negotiations. The second was the agenda propagated widely by India’s Prime Minister himself to fully implement the Marrakesh agreement first, before taking on any new issues. This option ruled out any further trade negotiation on these issues. The third, advocated by those holding left and liberal views, was to revise the Marrakesh agreement itself in line with the interests of the Third World countries. Unfortunately, despite making tall claims that it would stick to its position until the end of the conference, the government of India agreed to the first option, and could not stand

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up to the pressure from the rich countries. It is significant that the government failed to form trade coalitions demanding a revision of the Marrakesh agreement. At Singapore, the Indian delegation agreed to discuss ‘standards’ on government procurement, competition policy, investment policy, and so on. This proposal for trade negotiations was agreed upon in India by Mrs Sonia Gandhi and important media figures (CUTS Centre for International Trade, Economics and Environment, 2002b). However, at Seattle, this proposal was not discussed. At Doha, it was decided to begin a round of trade negotiations. But this was not followed up. The next meeting at CanCun, Mexico, like the Seattle meet, ended without any conclusion.

3 Multinational Companies The General Approach: The Main Features Multinational companies (MNCs) were not an important feature of Indian economic life until recently. From the time of Independence, the Indian economy was dominated by public enterprises, and there were many restrictions on export, import, and trade that stifled the functioning of these multinational companies in India. In addition, there were restrictions on private ownership such as the Monopolies and Restrictive Trade Practices (MRTP) Act, which did not allow private companies to grow beyond a point. All these dampened the enthusiasm of these companies for operating in the Indian market. While these multinational companies were active in the South-east Asian countries, they were virtually absent in India. The economic reforms unleashed in 1991, however, created opportunities for these companies to enter the Indian market. By definition, these companies are large and multinational. Both these terms have large implications for these companies. Being large means that these companies are not easy to compete against. Competing companies have to be almost equally large. In the case of the oil industry, for instance, the competitor would have to extend its activities in many fields such as exploration, transportation, refining, trading, etc. which is virtually impossible for a new company (Dasgupta, 1975; Penrose, 1967). Being large also means that these companies are able to spend a large amount on research and development (R&D) and keep their distance from their competitors, in terms of the development of

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products. If the competitors are close to them, they are capable of producing new products with high demand and maintain their distance from the competitors. Many of the new academic subjects like linear programming, particularly its transportation problem, arise from the commercial needs of many of these companies. The vast wealth of these companies enables them to invest in remote and inaccessible areas like deserts, forests, snow-capped mountains, and in new and expensive technologies such as those used for deepsea drilling (Dasgupta, 1974; 1977a; Penrose, 1967; Tanzer, 1969). Since people in India generally have no clear idea about the MNCs, about how large they are or what role they play in international trade, it is enough to say that the annual global turnover of some of them exceeds the GDP of some of the most populous countries of the world, such as Pakistan (140 million) or Bangladesh (120 million). Compare the annual turnover of General Motors in 1997, of $164 billion with the GDP of Pakistan ($61.7), Bangladesh ($41.4 billion), Sri Lanka ($15.1 billion), Thailand ($153.9 billion) and India, a country of 966 million in that year ($381.6 billion). The comparable figures for the annual turnover of some of the other MNCs in the same year are as follows (in billions): Ford ($147), Mitsui ($145), Mitsubishi ($140), Itochu ($136), Royal Dutch and Shell ($128), Marubeni ($124), Sumitomo ($119), Exxon ($117) and Toyota ($109) (UNDP, Human Development Report, 1999). It is, however, alleged that the multinationals are more interested in maintaining their control over the markets and less in production. The product differentiations they effect are calculated only to show how different their products are from those produced by the rivals. In many cases, the only difference between the two products lies in superior packaging, while both contain the same or similar products. The money spent by multinationals on product differentiation and advertising does not contribute to the welfare of the consumers. In other words, the vast investment they make is for proving that their products are different from those of the rivals and not for the improvement of the product in question. The history of the multinational companies is replete with cases wherein investment has been made not to produce but to keep the competitors out of the way. More land has been taken for mining explorations, while those concerned know fully well that so much of land is not needed for exploration. Still, the right of concession is taken over the land, solely to deny the competitors such land.

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As a reaction to this policy, the host countries have now provided in their contracts that if the land is not used for exploration within a certain time period, then the land will return to the government of the country. The word ‘multinational’ implies that shareholders of more than one country own these companies. In the history of the multinational companies, there are indeed cases wherein the control of a multinational company has been transferred from one country to another. In the case of the Royal Dutch and Shell company, for instance, which originally began as a Dutch company, the majority of its equity-holders now are citizens of the USA. However, despite their multinational character, these companies derive diplomatic and military support from a single country to which the majority of the shareholders belong. In the case of the Iraq Petroleum Company, the English, French, Dutch and American diplomats helped to give shape to its ownership pattern. The same happened with the Kuwait Oil Company and the post-Mosaddeq Iran Oil Company, which is why we notice a particular pattern of ownership that could not come about through ordinary buying and selling of shares. However, this dual dependence on a single country for military and diplomatic support and the tendency towards the diffusion of equity ownership among several countries, also raises the hotly debated issue as to whether national sovereignty is compromised in today’s world, and whether the controlling presence of the multinational companies and the free buying and selling of shares of those, all over the world, invalidates the concept of the sovereign rights of a country (Frank, 1966; Lenzowski, 1960; Mikdashi, 1972). Each of these companies is also vertically integrated. This implies that the company concerned is involved in many phases of the industries. In the case of the oil industry, this implies, as we have seen, involvement from exploring for oil to transporting, refining and trading in oil. Vertical integration also implies that the multinational companies can show their profit at any phase of their choice, subject to the tax constraint. If the taxes are low for products, the company is in a position to show more of its profits at the product level. Similarly, if the taxes are low in exploration or development, more of the profit can be shown at that level to minimise taxes. In other words, by manipulating prices and profits, the

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company is in a position to show its profit at any level of its choice, given its tax consideration (Penrose, 1965, 1967). History shows that vertical integration comes about via both forward and backward linkages. A refining company can buy up companies that produce crude to ensure its supply, or marketing and transport companies to ensure a good final price from the customers (McLean and Haigh, 1954). Given this, the prices of various activities at various levels are ‘book-keeping prices’ or ‘transfer prices,’ devoid of the usual economic content of ‘prices,’ and are subject to manipulations by the company concerned. At the equilibrium, demand is not equated with supply, as the textbooks suggest (Penrose, 1967). The Damle Committee in India, in the early 1960s, was baffled by the marketing companies of India that were buying crude oil from their parent companies by paying them high prices, on the basis of long-term contracts, when crude oil could be purchased at cheaper prices from alternative sources. The growing role of the multinational companies also implies that the host economy should be aware of their inter-company practices. When the parent company of the Shell marketing company in India, located in Washington, asks its Indian subsidiary to purchase crude oil from its oil subsidiary in the Persian Gulf, regardless of the price of the crude, it has no option but to purchase from its co-subsidiary of the same parent company in the Persian Gulf. In other words, the Indian subsidiary is expected to conform to the planning of the headquarters located in faraway Washington, and not to be propelled by the cost of crude oil and other considerations elsewhere. This practice confirms that, in the world of the multinationals, the headquarters take most of the decisions and the local subsidiary cannot but follow what the former instructs it to do. However, while it is possible for the company to locate its profit wherever it wants, such actions have grave implications for the countries hosting the subsidiaries, because such an outflow or inflow involves foreign exchange. The policy of a multinational company can thus make a country’s economy surplus or deficit in terms of foreign exchange. When the Indian subsidiary of a foreign company buys crude oil from the co-subsidiary of the same parent company located, say, in the Persian Gulf, at the instruction of the headquarters

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of the parent company, this involves only transfer or book-keeping prices for the company concerned, but for the exchequer of the countries concerned, this involves an outflow or inflow of foreign currency with its resultant implications. The multinational companies add to the flexibility of their hosts, because they draw resources from many countries (Petroleum Press Service, October 1973). For instance, crude oils of varying quality are available from various sources; a mix of these produces the desired mix for a given destination; a country dependent on a single source or a given number of limited sources, on the other hand, is not capable of producing the desired mix by the destination. In other words, a country that welcomes multinational companies also accepts a certain amount of flexibility on the part of MNCs that is not available otherwise. In the case of the oil industry, crude oil of a certain quality that is available from domestic sources, when refined, gives rise to a certain proportion of light, middle and heavy distillates, that may or may not agree with the pattern of consumption from one ton of refined oil. On the other hand, the multinational companies are capable of importing from their own sources in accordance with the exact pattern of consumption (Dasgupta, 1971). Horizontal integration also comes about to enable multinationals to operate as a cartel and to minimise the risk of price wars among the oligopolists. Before their takeover by the OPEC, the oil companies in various countries were under joint ownership; they further became a community of interest through long-term contracts. Given their size and influence, multinational companies are often accused of creating private monopolies that charge high prices, in place of public monopolies. In both cases, whether public or private, the monopolies charge excessive prices and tax the consumers. One can ask what the economy gains, when there is a switch from public to private monopolies. Most of the patents, and hence markets, are cornered by the multinational companies which are opposed to competition in most cases. Multinational companies mostly operate in oligopolistic markets, which are dominated by a small number of sellers. Typically, around 80 per cent of the market is controlled by four or five oligopolists, while the remaining 20 per cent or so of the market is catered to by a large number of smaller farms. In this situation,

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the oligopolists both fix the price and control the amount sold. Both are done according to oligopolistic practices. There are three ways of fixing a price. These are: (a) Price leadership: In a particular region, all the companies follow a price leader, raising the prices when the price leader raises the prices and lowering the prices when the price leader lowers the prices. In most cases, it is the biggest firm among the oligopolists, or the oldest, which is taken as the price leader. (b) Every firm following the same price formula, and therefore reaching the same price for a given destination and for the same quality. In such a price formula, usually there is a basing point, and the same manner of calculation of the freight from the basing point to the destination. In the case of the oil industry, for instance, the Persian Gulf was, for a long time, taken as the basing point. Earlier, the US Gulf was the basing point. In each case, it was assumed that oil had been procured from the basing point, regardless of where actually the oil came from. In the case of India, most of the oil in the 1930s came from Burma, but for the purpose of price fixation, it was assumed as if the oil came from the US Gulf. In other words, the consumers in India had to pay a ‘phantom freight’ in addition to the freight they had to pay for the transport of oil from Burma to India. This was justified by the companies on the ground that it reduced the rivalry among the oligopolists and hence produced a stable market. The fact that all suppliers were charging the same price, and following the same price formula, was often cited by the multinational oil companies as proof that they were operating in a perfectly competitive market at a time when the seven major oil companies dominated the international oil market. The price in the Gulf—whether in the Persian or the US Gulf—was determined by the prices quoted in a respectable journal. In the case of the Persian Gulf, when it acted as the basing point, the prices quoted in the Platts Oilgram Press service were taken as the base. From the Persian Gulf to the destination, freights were quoted from AFRA, an independent body which worked out the average freight. Within the country, actual transport cost

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was calculated f.o.b. (free of board) port price plus actual freight cost from the port to the destination, to derive what the consumer had to pay at the destination. In this way, every supplier of every company worked out the price formula and reached the same price, thereby avoiding price competition. (c) Straightforward agreements fixing price and quantity, for example the ‘as is’ agreement of oil companies in 1928. However, this is difficult to follow now because the governments, including the government of the United States, are opposed to such agreements (Dasgupta, 1971). Such prices imply that at a given price so much can be sold, and it is the duty of the oligopolists to apportion the amount among various suppliers. In the history of the oil industry, while the prices have been fixed through a price leader, a price formula or straightforward agreements, care has also been taken to apportion the amount among the suppliers. One formula that has been followed is to allow every supplier to sell up to a historically given amount, which is usually the percentage share of the supplier concerned. Another has been to physically limit the market in terms of latitudes and longitudes, as was the practice followed by the ‘as is’ agreement of 1928. In the case of OPEC (Organisation of Petroleum Exporting Countries), the quantity for every member country was fixed along with the prices (Frank, 1966). In this way, attempts were made to reduce price rivalry among the oligopolists, though it could not be entirely eliminated. The oligopolists, though reluctant to initiate price rivalry, nevertheless wanted to corner as much of the market as possible for themselves at the cost of other oligopolists, and to achieve this, they offered all kinds of price discounts to their agents. This is typical of all oligopolists, no less the airlines. But they usually refrain from these types of price competition, lest such discounts lead to costly price wars among the oligopolists. Hence, they give more importance to all kinds of non-price competition that do not lead to price wars. For instance, the oligopolists offer better delivery and services to attract customers. Price wars can be identified as belonging to two alternative types. First, there are price wars initiated by major companies with the objective of re-negotiating their market shares. Here the company concerned is unhappy with its market share, and the sole objective

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of the price war is to attain a larger market share. This situation arises particularly when a new source has been discovered. The second type of price war is usually waged against smaller opponents who operate in smaller markets, and here the objective is to eliminate these rivals. In this situation, price wars often involve a sudden drastic lowering of prices in some of the markets, particularly in those where the small opponents are operating. Elimination of the rivals through price wars is usually followed by fixing higher prices in order to compensate for losses incurred during the price war days (Dasgupta, 1971). Price wars against oligopolist rivals can prove costly. Such price wars, once initiated, can easily involve many markets and products, and escalate to become a costly world war, covering a large part of the globe. Besides, the outcome is often inconclusive, with both sides being large and resourceful. In such a situation, the oligopolists tend to avoid price wars and resort to non-price competition. The MNCs decide what to produce and how to produce, where to sell and at what price. In this unequal relationship, not just the tiny countries but even the large ones often find themselves without the data to counter the MNC viewpoint, and therefore, prove to be no match for these corporate giants in negotiations. The MNCs may deny the host governments vital information that might have improved the latter’s bargaining position, and may even punish a host government for adopting a hostile attitude by not producing or exporting enough from that source. An MNC may even induce its own government to impose an embargo on the trade of the country, should the host government retaliate by nationalising. Various proposals, for greater transparency in their negotiations with less developed country governments, for making them follow a code of conduct, for monitoring their activities by the UN and for facilitating the exchange of information among the less developed country governments to ensure effective bargaining, have not gone very far, largely because of the lack of enthusiasm, sometimes even direct antagonism, on the part of the rich country governments. A great deal of what passes as international trade is, from the point of view of an MNC, given its multinational character, an intracompany affair, or a transfer between two affiliates located in two different countries. Towards the end of the 1970s, such intra-firm, but international, trade accounted for about 30 per cent of the total

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world trade. As for the United States, intra-firm MNC transactions contributed to half of its manufactured goods exports, and accounted for about 45 per cent of total imports, and, in the case of the import of minerals, accounted for shares of 70–80 per cent. Further, 27 per cent of the Mexican exports and 42 per cent of the imports to and from the United States were intra-firm operations of the US companies. In the case of Brazil, 14 per cent of the exports to the US in 1990 were intra-firm (ECLAC, 1994). These companies are also involved in a great deal of trade amongst themselves—by the early 1980s, trade between 350 of the largest MNCs amounted to an estimated 40 per cent of the global trade. MNCs also dominate technology flows, most of which remains confined within the corporate framework—for the US, four-fifths of the technology receipts are intra-firm, and over 90 per cent in the case of Germany. A handful of MNCs (say six to ten), account for 60–70 per cent of the world production of leading minerals such as bauxite, copper, iron ore, nickel and zinc, as also of major agricultural exports such as tea, coffee and banana. The activities of the MNCs have serious implications in environmental terms. The operation of MNCs, guided by global considerations of profit maximisation over a limited time frame, often comes into conflict with the long-term interests of the country, particularly in terms of the rational and optimal utilisation of resources and the interests of the future generation. We have noted that their operation might give rise to the under-utilisation of local resources. An opposite example, of over-utilisation, is that of Venezuela, whose oil resources were virtually exhausted, when the world oil prices were low, to meet the insatiable US demand for oil, and now very little of its oil is left to be sold for taking advantage of the current high prices. In fact the multinational companies, particularly the seven biggest among those known as the ‘seven sisters’, operated as a cartel before 1973, while the oilproducing and exporting countries were divided among themselves, which made it possible to keep the oil prices low. Professor Adelman of MIT even went to the extent of predicting that by the 1970s, the price of crude oil would come down to one dollar per barrel (Adelman, 1972). Generally speaking, for the MNCs, the less developed countries are not preferred alternatives for industrial location. They would rather sell their goods than invest in industries in those countries.

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In 1980–81, at the time of the launching of structural adjustment, out of a total of $94.9 billion of DFI, 73 per cent was devoted to the developed countries, 14 per cent to the less developed countries of the Western hemisphere (mainly Brazil and Mexico), 2.4 per cent went to the OPEC countries and only 1.9 per cent to Africa, while, of the remaining 8.3 per cent going to Asia, half went to Singapore, Hong Kong, Malaysia and the Philippines, ignoring 0.3 per cent that was unreported. Their investment in the less developed countries is usually connected with the possibilities of capturing domestic markets, mainly in partnership with some local companies, or with the need to comply with national requirements, or to evade environment control measures in the developed countries by locating the polluting ones here. Otherwise, they prefer a few selected countries, such as those in East and Southeast Asia or in Latin America. With the tightening of environmental measures in the rich countries, there is a tendency among the MNCs to locate the polluting industries in the poor countries, where environmental legislation is non-existent or is not properly implemented, as exemplified in the Bhopal gas tragedy (OECD, 1992a). The main arguments in favour of MNC operation are as follows: they take risk, they bring capital, they promote technology, they promote exports and, in general, they help to make the local economy global, outward-oriented and modern. Let us examine each of these aspects in turn. As for the risk-bearing role of the MNCs, there is indeed a considerable amount of truth in this view. At the same time, the world is replete with cases wherein the initial risk has been taken by a smaller company, which has made a discovery or invention, but then, lacking capital and other resources, has sold the deposit, technology or whatever it is, to an MNC, which has then developed it and amassed huge profits. This is as much true of oil deposits in Iran or North Africa as of Microsoft. As for bringing capital, while this is true about the initial investment, in most cases, in latter years, there is a tendency to re-invest a part of the profit earned in the country concerned, while the larger part of the profit is remitted. The MNCs also exhibit a remarkable capacity to mobilise domestic resources, often in partnership with local firms.

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As for promoting technology, MNCs are, generally speaking, shy about technology transfer, are cautious about any dissemination that would give away their competitive advantage, and are unwilling to train local staff as they are scared of poaching. In fact, this issue of lack of technology transfer from MNC sources has been raised repeatedly in many international fora, and has given rise to concepts such as TCDC (Technical Co-operation among Developing Countries) and South-South co-operation. As for export promotion, there is no doubt that MNCs, with extensive links all over the world, can and do play an important role in this. But this role is subject to the point made earlier regarding the possible conflict between their global objectives and the national objectives of a country. When they locate their activities in a small country, their main objective is usually production for exports, besides which they are not interested in anything else. However, when locating their activities in a large country like India, Brazil or China, the principal objective of MNCs is to capture the domestic market, and even to enjoy the fruits of import substitution. In the case of Pepsi in India in the late 1960s, while they agreed to export a certain proportion as a condition for obtaining a products licence, they began dragging their feet afterwards, and eventually agreed to export things other than what they produced, such as tea. As for making the countries that have provided them unlimited access for operation modern and efficient, this has not happened in a vast majority of such countries, including Pakistan, Congo or Haiti, to name some countries that threw their doors open for multinationals. Taking everything into account, there can never be a level playing field in competition between the resource-rich MNCs, with worldwide connections, supported by BWIs and the governments of their countries of domicile, and the local companies. Besides, the MNCs, having access to low interest developed country credit markets, always enjoy an advantage of 4–17 per cent in terms of interest alone (UNDP, Human Development Report, 1992). Another major advantage lies in their immensely superior economic power, and their capability to project their goods and to capture markets by making full use of the television and other media, and even by employing a bevy of world beauties crowned with various awards. Their proficiency in packaging and product differentiation, aided

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by technology, and their R&D capability, helps them to maintain a distance from local rivals. Their entry into domestic economies is usually followed by a spate of takeovers and mergers after some token resistance. In 2001, there were 1,050 acquisitions and 294 mergers (Reserve Bank of India, 2001–02). A major consequence of structural adjustment and also of the Marrakesh agreement has been to facilitate the globalisation of patents. Once something has been patented in one country, it is taken as having been patented everywhere. Further, the Marrakesh agreement has largely freed the MNCs from the controls and regulations of the host governments and has widened their access to the markets that were hitherto closed. By eliminating ‘local content requirements’ and by insisting on ‘national treatment’, the Marrakesh agreement has helped resolve the conflict between the global objectives of the MNCs and the national objectives of the host governments in the former’s favour, while the reduction of subsidies and the establishment of a global patent regime would help them to more effectively penetrate the local economy, and to maintain their superiority over local producers for a long time to come. The agri-business companies have developed what is significantly known as the ‘terminator technology’. This technology makes the seeds sterile or incapable of being used for the second time for germination. The objective behind developing this technology is to prevent peasants from using the same seed again and again, and to force them to approach the multinational companies for new seeds every year. While agriculture is synonymous with regeneration, renewal and reproduction, this technology strikes at the base of such predominant features of agricultural life by making seeds infertile and unsuitable for multiple use. Even more dangerous is the frightful possibility that even in cases where this ‘terminator’ seed is not used, pollens from the latter would spread over a very large area and make even other seeds infertile. According to Geri Guidetti of the Ark Institute, while the ‘terminator ’ is a remarkable scientific landmark, ‘The terminator technology … has crossed the tenuous line between genius and insanity. It is a dangerous, bad idea that should be banned.’ In consideration of all these developments, there have been repeated demands in the past, from the less developed countries, for keeping

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the MNCs under leash. The demand for the New International Economic Order in 1974 as also several other resolutions of the 1970s were mainly prompted by the fear of MNC domination of the world economy. It was mainly the fear of the multinationals that often induced the governments to seek import-substituting industrialisation led by the public sector. UNCTAD (United Nations Council on Trade and Development) was formed in 1964 mainly because of the perception among the less developed countries that they had no influence over the world trade system, and the issues of trade should also be linked with their own concern for development. It was at their instance that a body, under the auspices of the United Nations, was formed to monitor the activities of the MNCs, to bring about some transparency in their mode of fixing prices and taking other decisions, and to help the host countries with information and legal interpretations, when negotiating with MNCs. However, such a body could have no role to play in a world dominated by structural adjustment, and so it was closed down in the early 1990s.

The Indian Case after Liberalisation There is a tendency in some circles in India to view the entry of multinationals as an indicator of the globalisation of the economy. Such a view can be justified on a number of grounds. First, the multinational companies have always been on the side of the market in the State vs. Market controversy. Second, with many subsidiaries spread over the whole world these do indeed operate in a large part of the globe. And look global indeed. The entry of these multinationals into the Indian market has been greeted with ambivalence by the Indian industrialists. At the beginning, in or around 1991, the support to MNCs was unalloyed and unquestionable. At that time, the entry of multinationals was juxtaposed against the predominant role of the state enterprises. When the multinationals began coming in large numbers, and initiated the processes of mergers, takeovers and acquisition, such support was turned into a fear of these very large entities. One of the ways in which the Indian regime reacted to the proliferation of MNCs was through the Companies’ Act itself. The Indian

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companies were now permitted to attract shares without voting rights, and surreptitious takeovers by buying shares without the knowledge of the sponsors was no longer allowed. All these measures were taken to protect the Indian sponsor, who usually contributed about 10 per cent of the total equity, and was, almost as a rule, a minority shareholder. His majority was given by public sector banks whose nominated Directors usually believed in noninterference and left the management of the industry to the sponsors. While foreign investment poured in, taking advantage of higher rates of interest and profit in India, the MNCs dominated the Indian stock exchanges, much to the displeasure of the Indian brokers. The Foreign Institutional Investors (FIIs) dominated the stock exchanges, even when they accounted for a small proportion of the stocks—only 6 per cent, according to one estimate—because they operated at the margin where things were happening. The fact that many multinationals preferred the money and banking markets as their chosen sectors is not accidental. Over the years, the multinationals have developed their expertise in these sectors, from which they have been extracting handsome profits. They now want to open up one financial sector after another, beginning with the insurance sector, with a controlling authority in place to regulate the entry and egress of these private companies. The entry of multinationals suffered a setback when in the first share scam in 1993, associated with Harshad Mehta, four foreign banks were implicated for the issuance of false bank receipts to the culpable stockbroker. However, the Prime Minister of the country at that time saved them, despite their violation of foreign currency and banking laws, on the ground that action against the senior officials of these foreign banks could be construed as an attack on globalisation. The first time that multinationals made headlines was when Enron, which has now shut down but was then a global power giant, asked for a price of oil, when supplying to the local state electricity board, which was higher than the price they hitherto paid, and asked for a counter-guarantee from the central government at 16 per cent, which then became the norm. It was asked whether such a counter-guarantee was compatible with the operation of a free market. Similarly, the question as to whether the

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multinationals were subject to the laws of the country as much as the others, was also raised. Then the question came about the role of the multinational companies in scams, and whether these MNCs, taking advantage of their privileged position, had not aided such scams. The next big intervention of private enterprise in the Indian market was when the insurance business was opened to multinational companies. A regulatory authority—the Insurance Regulatory and Development Authority (IRDA) in this case—was installed to enable the government to regulate the insurance business among enterprises with varying motives and sizes. It became typical for regulatory bodies to govern the functioning of private enterprises which operate in the given industry. MNC production in Indian agriculture takes the form of both plantations operating with hired labour and working through contract farmers who produce with inputs supplied by MNCs, according to their specifications and hand over their output to MNCs. Both sets of prices—the prices of inputs supplied by the MNCs and of outputs sold to the MNCs—are determined solely by the MNCs as suppliers of inputs to farmers. In most such cases, MNC production is linked with processing and marketing, such as Pepsi, while in some cases, wasteland management is being transferred into their hands. MNCs have succeeded enormously in creating markets for their products by way of media advertising, and have sidelined Indian indigenous producers who had, until now, somehow been eking out a living with support from the Khadi Village Industries Commission (KVIC), but who are no match for these corporate giants. MNCs are creating demand for foods and drinks that are not grown in the field, such as Pepsi, Coca Cola or burgers. After liberalisation, there is no need for them to produce goods in India, while the legislation on exclusive marketing rights for things patented anywhere in the world, passed in February 1998, makes indigenous production even less necessary as their goods exported to India would enjoy monopoly rights (Government of India, 2001b). The MNCs are also active as suppliers of agricultural inputs, with the seed as the core of their package that includes pesticides and weedicides that are compatible only with a particular brand of seed. As mentioned earlier, ‘terminator’ seeds would, in future, put an end to the practice of re-use and force the peasants to buy

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seeds annually. Once someone begins buy such a package from a multinational company, their dependence continues year after year with no end to such dependence in sight. One of the largest multinational agri-business firms, Monsanto’s annual sales exceed US $7.5 billion. It specialises in chemicals, particularly herbicide production. Over the past few years, it has been taking a keen interest in seed production in order to boost the sale of its herbicides. Here the seed is secondary, while the main marketing point of the company is the use of its own herbicides. The latter would not harm its own seed and the plant growing from it and, thus, would be more effective as it could be applied to standing crops (The Ecologist, 1998). Its patented genetically engineered ‘Roundup Soybeans’ can be used by farmers only under the following conditions: the farmer must: (a) pay a technology fee of $5, (b) give Monsanto the right to inspect, monitor and test his/her fields up to three years (any time without notice), (c) use Monsanto herbicide, (d) give up his/her right to re-plant the patented seed or sell it to anyone else, and (e) in case of violation of any of these conditions, pay 100 times the price of the seed as also legal and administrative expenses of the company as penalty. In other words, the contract farmers are expected to behave as slaves of the company. Bollgard Cotton, a seed that is supposed to be fully effective against insecticides, is also given to the farmer under similar terms, with the technology fee being even higher at $32. Very often, this seed has proved ineffective in India and elsewhere in killing pests. In some other cases, the heavy toxin from herbicide has led to genetic resistance by pests, later requiring an even more potent pesticide to kill them, leading to further genetic resistance and a still further increase in the potency and toxicity of the pesticides. The vicious circle goes on and on. In May 1998, Monsanto took over 26 per cent share of MAHYCO (Maharashtra Hybrid Seeds Company) with the objective of promoting ‘transgenic cotton’, herbicides and other patented products. It should be noted that in 1987, about 30 cotton farmers of the Prakasham and Guntur districts of Andhra Pradesh committed suicide after 90 per cent of their produce was destroyed by pests against which they had no protection; the latter grew because the farmers, goaded by the pesticide sellers, used more pesticide than was necessary to kill a major pest that used to keep the population

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of other subordinate pests in check. In 2002, about the same number of farmers committed suicide in Andhra Pradesh, Punjab and other states because the pesticides were adulterated and became ineffective, more or less for the same reasons. This is a new area about which little is known, but it raises questions as to whether the profit motive of the MNCs can take us along a path that is harmful for both India’s agriculture and environment. The provision for patents on plant varieties has led to a mad rush among MNCs for specialising in agri-businesses to scour the countryside of the poor countries that are rich in biological wealth, to collect plant varieties and their germplasms, to take these back to rich countries, and then, after some tinkering, to patent them as their own. The word ‘biopiracy’ has been in currency to describe this situation. Neem, basmati, kalajira, kalojam, karela, brinjal, and anar are among the plant varieties that have been patented in foreign countries (Cullet, 2001; Dhar and Rao, 1997; Shiva et al., 1999). Some of these patents have been successfully contested in the courts of foreign countries, by the government or non-official bodies. Constantine Vaitsos estimated in 1972 that, in the case of the less developed countries, 80–85 per cent of the patents are held by foreign interests, a figure confirmed by a subsequent UNCTAD study in 1975. It is more than likely that the proportion remains the same now or has actually increased. According to a more recent document of the WIPO (World Intellectual Property Organisation), the citizens of developed countries hold 95 per cent of the patents in Africa, 85 per cent in Latin America and 70 per cent in Asia. According to another source, the vast majority of biotech patents are in the name of companies originating in the West—in 1990, 36 per cent of these were in the name of US companies, 32 per cent in the name of European Community companies, and another 23 per cent in the name of their Japanese counterparts, accounting for an aggregate of 91 per cent. There was fear of the multinationals engaged in agricultural activities, like Monsanto, for yet another reason. In the colonial days, the former were unimportant, because the British authorities were concentrating on non-agricultural activities and the agricultural activities were taken to be the prerogative of the Indians. All the British-operated agricultural activities were located in the fringes, so that these did not compete with the Indian enterprises. In particular, after the indigo riots, the British authorities were

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careful to avoid friction with local land-owning Indians, and virtually left the entire agricultural sector in the hands of the Indians. This was different from what the colonial powers did in many countries, particularly in Africa. In Algeria, Libya and other parts of North Africa, French colonisers played an active role in agriculture. Similarly, in Southern Africa—South Africa, North Rhodesia, South Rhodesia and other places like Kenya—the British agriculturists played active parts in the agricultural activities of those countries. In the current situation, however, with multinationals engaged in agriculture, there has been a reversal of this attitude. A major controversy, particularly in Maharashtra, has been related to the use of genetic inputs in the production process. The company involved, Monsanto, claims that the deployment of genetic inputs increases productivity, though this contention is disputed. In England, the departmental stores keep genetic foods separate from others, so that buyers can have a choice between the two. It is argued that Indian consumers should be given similar choices.

4 Patent Policies It is not clear whether this chapter should be included with that on reforms initiated since 1991, with the idea of patents being so basic to privatisation. But the fact is that patents existed before reforms were initiated in 1991, and from the 1850s onwards patent offices existed in India with their headquarters located in Calcutta and were recognised as an intellectual property in India. The discussion on patents can be divided into the following phases: the pre-1992 position; the globalisation of patents; attempts to get the first patent law on exclusive marketing rights and a mailing system to accompany it in order to fix priorities, until its enactment by the BJP government in 1998; the work of the selection committees on three patent bills and their eventual enactment; and what remains to be done by way of enactment to remove the distinction between process and product patents before 2005, by when patent laws everywhere including in India, will be standardised (Dasgupta, 1999). We begin with a general discussion of what patent laws entail. Until recently, patents were seen as a way of establishing time-bound individual rights over an invention, which usually applied to things like machines and medicines. Most countries have patent offices in their major cities. If someone invents a new machine, say, a television or a watch or cycle or car, he goes to the patent office and claims that invention. The person claiming a patent right has to show that what he has done is: (a) unique, (b) non-obvious, and (c) useful, and not a mere theory. If that claim is accepted, the inventor is recognised as the rightful owner of that product for a certain number of years, say, seven to fourteen years. This implies that others seeking to use that patented product would have to obtain permission from the patent holder, usually against a fee or

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royalty (Irani, 1995; Iyer, 2000; Keayla, 1997, 1998, 2000; Keayla and Dhar, 2001; Ray, 2002). Here the stated objective of the patent is to encourage invention, the argument being that such a monopoly for a given time period would allow the inventor to recoup his cost of inventing and developing this product, and would compensate him for the risk he took, as also that the system of the patent, by rewarding the inventor in this way, would encourage others to try and invent new things, thus helping to extend the frontiers of scientific and technical knowledge. However, the fact is that patents, instead of extending the frontiers of knowledge, foster a culture of secrecy, create a monopoly on knowledge and in fact, deprive others of the use of such inventions. In many cases, patents are taken not so much to produce something, but to prevent others from producing it, in order to protect the market of a multinational corporation (MNC) specialising in a product with a similar use (Keayla, 1997, 1998). How can this individualisation of rights help either agriculture or the agriculturists or even mankind, in general? The main argument of those opposing patents is that life cannot be patented, or otherwise subjected to individual ownership. Those favouring patents say that it would encourage inventions and scientific development, as the inventors would be able to recoup the investment made. Without such inducement why should any individual or company be prepared to develop such new products or processes, they ask. Such an argument does not take into consideration the fact that most scientific research is undertaken with public funds, mainly by the universities and research institutions patronised by the government. What the MNCs do is to use the fruits of such research by making further investment on their commercial use. They cover only a small part of the total cost of the research and then claim patent rights over the entire product in order to exclude others from the fruits of such research. Such individualisation of rights and the absence of social control can easily give rise to a situation wherein the risks and uncertainties associated with a particular product or process are suppressed, as happened in the case of Du Pont which caused ozone depletion by CFC (chlorofluorocarbon), or can happen if experiments in genetic engineering get out of control. Such privatisation usually

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takes place at the cost of the rights of the future generations, who are not present as a party to market bargains (Dasgupta, 1998). An individual company is unlikely to take a long-term view or plan beyond 15 years, given the rate of discount of future earnings or benefits, for deriving their present values. Poaching or standardisation of crops and varieties are unlikely to significantly affect the current generation, while their long-term effect can be devastating. Further, as experience in both industry and agriculture shows, most of the important original inventions and discoveries are usually made by small guys working in their tiny workshops, which they patent, but then they sell themselves and their patented products to the MNCs as they cannot afford the further costs of development and sales promotion. It is not usually the giant conglomerates with their tentacles spread all over the world who make the earth-shaking discoveries, not even Bill Gates of Microsoft, the icon of the modern computer era. Besides, it is not clear how much importance was given by the Wright brothers to the monetary incentive for their invention as compared to the psychological satisfaction they derived from their quest of a flying machine for men, despite many failures. Or what drove our very own Jagdish Chandra Bose to one invention after another after his failure to obtain a patent for his wireless? Incidentally, the green revolution technology, which has been in operation in India since the mid-1930s, while sharing many of the ills associated with the privatisation of rights and dependence on MNCs, is free from this patent regime, and had led to a trebling of the agricultural production in the country since the mid-1970s. What made the green revolution possible was the purchase of a few kilograms of ‘foundation seeds’ of high yielding wheat, rice and maize varieties from CYMMIT (Centre for Research on Wheat and Maize) of Mexico and IRRI (International Rice Research Institute) of Manila, their cross-breeding in agricultural universities in India, particularly at Ludhiana, with local varieties to produce new varieties that combined the high-yielding properties of exotic varieties with the durability and adaptability of local varieties to local ecology, and then their release after several years of experimentation to seed farmers. The seed farmers multiplied these new varieties and sold them to actual farmers who planted them. If the

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largest growth in agriculture had become possible without patents, where is the case for patents now (Amsden, 1989)? Until April 1994, when the TRIPs (trade-related intellectual property rights) agreement of GATT was signed at Marrakesh, and the launching of the World Trade Organisation (WTO) in January 1995, countries had their own patent laws, and an inventor had to apply to get his product patented separately in different countries. A major change introduced by TRIPs is that the world market is now virtually ruled by a single system of international patents. Members of WTO have been asked to change their national laws on patents in conformity with the international norms prescribed under TRIPs. The least developed countries like India have been asked to make these changes by AD 2005. Another aspect of the WTO-led patent regime is the system of Exclusive Marketing Rights (EMR). Under EMR, it is no longer necessary for a patent holder to apply separately to each country for patent rights. Once a product is patented in any one country, it becomes universally applicable to all the member countries of WTO. Every country is bound to give exclusive marketing rights to that patent holder, who can hold a patent anywhere in the world, as long as that country is a member of the WTO. Two other significant changes have been made by the TRIPs agreement and WTO. First, earlier a distinction was made between a ‘product’ patent and a ‘process’ patent. The Indian Patent Law of 1971 allowed a process patent but not a product patent. It was possible for an Indian pharmaceutical company to buy a ‘process’ of making a particular medicine, in exchange for royalty paid to the patent holder in a foreign country, and then to produce the medicine by using cheap, local material. This is why life-saving drugs are often sold in India at one-twentieth of their prices in the developed countries. But now, under TRIPs, the distinction between ‘process’ and ‘product’ patents is going to be abolished, and, therefore, after AD 2005, when the TRIPs deadline expires and the Indian law is amended accordingly, the ‘product’ cannot be made locally with cheap materials, and Indian manufacturers will have to purchase the product from foreign companies at exorbitant prices. The second change has been made to the period of the patent. Under the Indian patent law, the maximum period for which a patent right can be exercised is 14 years. Now TRIPs has made

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this period uniform and universal at 20 years (National Working Group on Patent Laws and Public Interest Legal Support and Research Centre, 2003). This change has come at a time when there are weighty arguments in favour of doing just the opposite— of revising the period of patent rights downwards. These days, technologies change much faster, in a matter of three or four years. While the radio and gramophone lasted for decades, the black and white TV, colour TV, cable TV, VCR, multimedia, have come in quick succession, after every four or five years. In this situation, by the time the patent period of 20 years would be over, there would be no takers for the obsolete technologies. Even computers do not last beyond four to five years, while software packages are revised every two years or so. To revise patent period upwards to 20 years now implies that the MNCs would continue to control these technologies virtually for ever. These MNCs have sufficient money power and brain power to invest in research and development, and to perpetually maintain their lead over the Third World countries, so that long before one period of patent would be over, another better and more attractively packaged product would be launched catering to the similar needs of consumers. Article 27(3)b of the TRIPs agreement makes it necessary for every seed and plant to be ‘protected’ by a patent or a sui generis. The latter implies a system that is different from patents, and is something unique or distinct, but still serves the same purpose, which is of providing some rights to individuals inventing something new. Taking advantage of this article, many MNCs specialising in agriculture, are scouring the countryside in search of seed and plants without such patents. Their activities have brought the word ‘biopiracy’ into currency. Biopiracy involves stealing and plundering of India’s vast biological resources—mainly its plant varieties—and then claiming those as their own, patenting those, and then, by making use of the patent rights, excluding India’s own agricultural products from the world market. If the government has its way, and if the Indian peasantry does not rise up in strong protest, they would even succeed in keeping away Indian plant varieties from the Indian market itself. The phenomenon of biopiracy became a matter of public debate when Ricetec, a Texan seed breeding company, collected some specimens of basmati rice plants from India, then cross-bred those with some high yielding varieties, and claimed that it had

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produced a new rice variety. Earlier they were selling their products as ‘texmati’ (that is basmati of Texas) or ‘kasmati’ (basmati of Kashmir), playing on the word ‘mati’ to attract consumers. Then they dropped those pretensions and began selling their rice as ‘basmati’ and patented their product in the United States. Similarly, patent rights were claimed on neem and haldi among others. Things like basmati, neem and haldi are an integral part of Indian and Pakistani life and cultural heritage. Further, these are no longer found in a raw state in nature. These have been purposively selected, adapted and developed by Indians (and Pakistanis) over thousands of years. Therefore, unless one takes the view that a thing does not exist unless it is ‘discovered’ or ‘invented’ in the West, from the discovery of America by Columbus to the patenting of neem by a company, the fact is that companies like Ricetec are not ‘inventing’ anything, but are merely ‘discovering’ what has been known to exist in India or Pakistan since times immemorial. These are not like machines that have to be invented, but life forms, which cannot be created. These were successfully contested in the US courts by the government or private NGOs, but the danger of biopiracy remains (Shiva and Bhutani, 2001).

Why Are Patents on Life Forms Unacceptable? Until the advent of TRIPs, patent rights were confined to things like machines and medicines, and did not extend to life forms such as animal or plant varieties, cells, DNAs, embryos and the human body or its parts. One major issue is: who owns biological resources? Apart from the fact that owning a patent over a life form is wrong, and the market has never reflected the scarcity value of any product, whether it be oil or food—the price of oil was a fraction of the price in 1973 and in recent years, the world food prices have been distorted by large subsidies offered by Japan, the USA and the European Union and others to their producers—the fact remains that more than two-thirds of the biological wealth of the world is located in the poor countries. Further, in the case of agriculture, the development of plants and plant varieties has taken place over a very long period of time, through continuous exchange

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and dissemination of information about new breeds among people. Every society has made some changes to the seeds and to their production methods. A prominent environmentalist, Vandana Shiva, has described this reservoir of knowledge as the ‘intellectual common’, from which the entire community, country or mankind has benefited. The ownership of biological wealth, if one is constrained to find a owner for it, belongs to the communities which, for generations, have selectively adapted and developed plant varieties, but without erecting any barrier to the flow of information within or between these communities. After TRIPs, nearly all the rich countries, including the USA and Japan, opted for a patent system in the case of plant and animal varieties. However, for a long time, the European Parliament was opposed to patents on life forms. During the period when they were opposed to patent on life forms, it was necessary on the part of the Indian government to ensure that the European countries continued to follow such a policy and went by their own patent legislation that opposed such patents on life. The government of a country holds sovereignty as the custodian of the interests of communities and individuals living in that particular country. Several UN resolutions, such as the 1975 UN resolution titled Towards a New International Economic Order, and the 1993 Convention on Biodiversity had recognised those rights of the governments over natural—mineral and biological— resources. The concept of patents, an individual right over a limited period, can be viewed as a significant and distinct move away from this traditional concept of community/state ownership of resources and the consequent sharing of the benefits of knowledge. It was possible for India to view the European Parliament as an ally in the battle on patenting life forms. However, the climate of opinion changed in Europe in 1997, mainly because its own pharmaceutical and biotechnology industries insisted that without such patents, Europe was falling behind the United States and Japan in these important areas at the frontier of technology. In August 1997, for the first time, a Directive (which is what a European legislation is called) was drafted by the European Commission, accepted by its Council of Ministers, and then forwarded to the European Parliament. As is the practice in the European Parliament, this Directive was subjected to two readings. During the first reading, those Members of the European Parliament (MEPs), who were, in

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principle, opposed to the patent on life forms found many allies and together moved many amendments. Of these 66 were accepted by the European Parliament, including one (known as Amendment 76) against biopiracy. Although this amendment was far from perfect, it was the best that could be achieved under the circumstances, according to those opposing biopiracy. This amendment required the applicants to reveal the country of origin of the genetic material, and then to comply with the laws on legal access and exports in that country of origin. If the amendment was passed, it remained within the rights of the Indian government to legislate on the export of genetic material that could stop biopiracy as far as Europe was concerned. This amended Directive was then sent back to the European Commission and to the Council of Ministers. The latter accepted 65 of those 66 amendments, but changed them beyond recognition while revising them. The one amendment that they did not accept, the one banning biopiracy, was the most crucial one from the point of view of the Third World countries. Among the European countries, Italy voted against this attempt to legalise biopiracy, the Dutch and Belgian governments abstained, and while the Danish government did not oppose it in the Council of Ministers, its MEPs were opposed to biopiracy. Among the political formations, the Leftwing and Green parties opposed biopiracy, while the Socialists were divided, almost right down the middle. To get the amendment through during the second reading, 315 votes were needed, while those opposing patents on life forms or those who at least wanted biopiracy to be stopped, had about 286 votes. It was a matter of influencing 30-odd votes. In the last week of April 1998, an informal Indian delegation consisting of the present author and Ms Indira Jaisingh, a prominent lawyer of the Supreme Court, went to Brussels at the invitation of the Dutch Coalition against Patents on Life and the Gaia Foundation of London, and met a large number of MEPs. While the delegation could identify a core of committed MEPs who were strongly opposed to biopiracy, some others also expressed their reservations. Some of them said that Europe had to survive in a competitive world with the USA and Japan, and had to have something in place to counter the USA and Japan. Some were sick and tired of discussing this issue again and again, did not care about the final outcome and were keen to get this Directive out of the way.

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Some said that they had not studied the issue in detail and would be guided in their voting by their leaders or friends who knew more about it. Some even asked why the Indians should be so interested in European legislation, when their first priority should have been a good legislation of their own. The delegation pointed out that even with the best legislation in the world, Indian legislation would only protect Indian interests within the country, while what was happening in Europe and the USA would influence Indian exports. Before going to the European Parliament, the amended Directive had to go through the Committee stage. Surprisingly, this subject was being discussed at the Committee on Legal Affairs, and not by the Committees on Development (whose Chairman, Rocard, a former Prime Minister of France, assured the Indian delegation that in his committee, the deliberations would have been more substantive) or Agriculture. Both members of the Indian delegation were allowed in during the discussion held in that Committee, and the Chairman formally noted their presence as also did quite a few participants in the meeting, and the note they circulated was also seen. But the discussion was purely technical and legal in nature, and did not touch upon the substantive issues, and at the end, all the new amendments suggested by those wanting to stop biopiracy were defeated. Mr Rotley, the European Commissioner who piloted this Directive through the Committee, said that what Ricetec had produced was something distinct from basmati and therefore they were entitled to patent it; what was debatable was whether the name basmati should have been given. But then, he added, it was a matter of bad luck that India did not protect its name and so allowed that name to be patented. It was clear from the responses that most of the MEPs had been subjected to intense lobbying from the MNCs in the field of agribusiness and pharmaceuticals, far exceeding the lobbying that could be done by the Left and Green forces, or by NGOs concerned with environment and the role of MNCs. They even organised front groups such as patients suffering from serious diseases, sitting in their wheelchairs and chanting, ‘no patent, no cure’, conveniently ignoring the fact that for the vast majority of people in the poor countries like India, patents would imply a 20-fold or 30-fold increase in the prices of life-saving drugs.

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Indian Inaction during the European Debate A strong intervention from the poor countries led by India could have managed to tilt the balance in favour of this amendment on biopiracy. So far they had been listening to only one side. However, the local Indian Embassy did not seem to have the faintest clue about what was going on. The specialist in the Embassy on trade affairs confused this with the discussion on biotechnology in the European Parliament and with the TRIPs discussion in Geneva and the UPOV regime, which were different issues. However, the Indian Ambassador agreed to send faxes of the delegation to the Prime Minister and the Ministers in charge of Agriculture, Industry, Commerce and External Affairs, expressing concern and urging immediate and strong intervention, as time was running out, in order to influence the outcome of the debate on biopiracy in the European Parliament. When the delegation returned to India on 9 May 1998, the Minister of Agriculture, Sri Sompal, informed them that the fax had indeed reached the government on 29 April, but during the intervening 10 precious days, he had done nothing except circulating the fax to all the Ministers seeking their opinion. Mr Sikandar Bakht, then Minister of Industries, wrote saying that the government fully supported the position of the Indian delegation and the Embassy in Brussels had been asked to pursue the matter. However, still nothing happened. Obviously the government was busier in other things, such as detonating a nuclear bomb at Pokhran, without having the economic might, in this case the nuclear independence, to justify such a status; but that is a different issue.

Patent Amendment Following the Marrakesh Agreement While the immediate impact of TRIPs and the WTO was to take away the export markets for agricultural products, in the not too long run, as India would conform to the international patent regime by 2005, this would also seriously jeopardise the domestic

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production. An ordinance was then promulgated incorporating EMR and mailbox, in order to justify India’s membership of the WTO (Keayla and Dhar, 2001; Narayanan, 1999). However, any ordinance is required to be approved by the Parliament within six weeks of the next parliamentary session. When the Narasimha Rao government attempted this, it faced a serious difficulty. While the government had a small but working majority in the Lok Sabha, and got the bill validating the ordinance passed, in the Rajya Sabha, it had no majority. With the BJP joining the Left parties and Janata Dal on this issue then, there was no way that such a bill could have been passed. Given this situation, the government engaged itself in a series of discussions with the opposition in the Rajya Sabha in 1995. The proposed bill on patents, though on the list of business of the House, was not brought before the House for some days, because the government did not enjoy a majority in the House. Then on 22 March 1995, the government deployed an ingenious tactic to get the bill passed, to be followed by even more ingenious devices in the days to come. The bill was taken off the order of business, and, after many in the opposition had left, the bill was re-introduced at tea. The attendance of the members of the ruling Congress party was ensured by way of a dinner meeting that evening, called by the Prime Minister himself. When the opposition unitedly blocked that effort, the Deputy Chairman of the Rajya Sabha was induced to hold an all-party meeting at her place on 23 March 1995, and during the night pressure was put on the smaller parties to conform. Next morning, when it was argued from the government side that this was an international obligation and, therefore, could not be reneged upon, the opposition argued that it was never a party to that agreement, as it was not consulted and the matter was never discussed in the Parliament. Afterwards, in the Parliament, the Prime Minister, Narasimha Rao, admitted to a meeting of party leaders that the bill, if presented to the House, would be defeated and there was no way that the ordinance could be validated within six weeks. He sought the cooperation of the opposition in ensuring that the government did not lose its face in the eyes of the world. The formula he proposed was for a leader of the opposition to state in the House that they needed time for considering the bill. Some of the opposition leaders did oblige him by saying so in the House, but some others refused.

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If anyone thought that the issue was over, he was proved wrong when in the late afternoon, the Minister of Parliamentary Affairs, Vidyacharan Shukla, who was in charge of the bill from the government side, suggested that a special session be held on Saturday to get the bill passed. Obviously, the government was hoping that during one of these days, they would succeed in catching the opposition with low attendance. It was not until a day earlier that a special session on Saturday was called off. Again on 11 and 19 April 1995, meetings were held between the government and the opposition without success. Various manoeuvres were deployed by the government without success to get the ordinance passed or to obtain a majority of seats in the select committee. Since this has been discussed elsewhere in detail, we are refraining from discussing it here (Dasgupta, 1999). When the Congress party tasted defeat in the election and was replaced by the United Front, then for two years during l996–98, the matter was not raised.

Scenario after the Accession to Power of the BJP For two years nothing much happened. In 1996 and 1997, the United Front governments led by Mr Deve Gowda and Mr I.K. Gujral, did practically nothing with respect to the patents issue and the matter was left where it had been during the Congress government. In 1998, the BJP came to power with the support of a large number of regional parties. The scenario changed with the BJP in the government in 1998. The composition of the Rajya Sabha was such that a combination of any two of the three groups—the Congress, the BJP and its allies, and the Left and democratic parties—could defeat the third group. With its strength being much less than that of the Congress, the BJP was, on its own, incapable of getting anything passed in the Rajya Sabha. But the BJP’s support was crucial on the patents issue. The Left forces had succeeded in 1995 because the BJP had supported them then. This was rare and unusual because, generally, on economic issues, the BJP sided with the Congress. But from 1998 onwards, the BJP, being in the government, was keen to have close relations with the Western countries and ditched the slogan of swadeshi, in favour of globalisation. Its Finance Minister

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had stated time and again that its preaching of swadeshi had no bearing on the Indian government’s commitment to globalisation. In this situation, the BJP joined hands with the Congress and together got the patent bill passed by the Rajya Sabha with a sizeable majority (Ganesan, 1999). The bill was passed with a single BJP amendment which made it inoperative in the case of Ayurveda. One wonders, what was the point of moving this amendment if patent laws were good for all including Ayurveda.

Selection Committees Considered Three Patent Bills The Selection Committees were formed after the WTO ministerial conference at Seattle. At the beginning of 1999, two selection committees of the Parliament were functioning on two bills. But each of these bills was processed by a separate ministry in response to a declaration made by the government, and there was virtually no communication between them. The bill on biodiversity, considered by a Standing Committee, was a response to the convention on biodiversities in 1993, following the Earth Summit in 1992. The bill on the rights of the farmers was in response to the TRIPs provisions in Article 27 (3)b and its major import was to find an alternative to that article. The bill on patents, in general, was a substitute of EMR (Exclusive Marketing Right) and raised the time period of patents to 20 years. Each of the bills was moved by a separate ministry like the Ministries of Environment, Agriculture and Industry. Each of the three bills contained a provision for the authorities to implement them and each provided for compensation to communities for work done by these communities in the past and for sharing the benefits. In other words, these three bills contained many common features and there could be conflicts between them on any of these. Strictly speaking, the last bill to be passed—the bill on biodiversity—superseded the other two, as it came last, in the event of any conflict between them. The government never summoned the three ministries concerned to iron out the conflicts. In fact, the different ministries signed the relevant treaties on behalf of the government, oblivious of the fact that signing one

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disqualified them from signing another. The government is either for uniformity or for diversity, it cannot be for both. It cannot sign both the international documents on biodiversity and TRIPs. The first bill to be passed pertained to the farmer’s rights. Although the bill contained a chapter on Farmer’s Rights and one of the major objectives of the government was to transform the peasants into entrepreneurs, the farmers found it almost impossible to transform themselves into seed producers and competitors of the multinational companies. The bill provided for standardised and uniform seeds for the purpose of patenting, a condition that could not be fulfilled by ordinary farmers. One alternative usually suggested in India, as a kind of sui generis, is to adopt UPOV (International Plant Breeders’ Rights Convention), a soft patent regime that arose from an international convention in 1961, supported by 38 countries by January 1999. UPOV was twice amended, in 1978 and again in 1991, and the option to join the convention on the 1978 terms closed in April 1999. Now, most probably, the only available UPOV option is the 1991 one that, unlike the 1978 one, does not permit the farmers the right to re-use the seed, or the ‘traditional rights to save, exchange, share and sell his farm produce, including for reproductive purposes, of the proposed variety’, and gives the plant breeder the claim on the farmers’ harvest should the former’s right be violated by the farmer. A major criticism of the UPOV is that it protects the interests of the plant breeders, mostly rich country-based MNCs, by giving them monopoly rights that are analogous to patents, while ignoring those of the farmers and making those secondary to the former. A major reason for this concern is that already 40 per cent of the seed market is in the hands of ten companies, and UPOV might reinforce this tendency towards concentration. This would give MNCs legal ownership of plant varieties that contain genetic information obtained from farmers’ own fields, and obtained, in many cases, without paying any fee. It is not easy for the farmers to register varieties developed by them; to qualify for this registration, the seeds produced from those varieties would need to be stable and standardised. Since 1988, when the new seed policy was introduced, prompted by a study by US Aid, those seeking such legislation had only the interest of the breeder and of the seed industry in mind, and the interest of the farmer was overlooked.

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Although it ensured India’s membership in various conventions, the Parliament was not told of various UPOV conventions or of the benefits to be derived from membership of one or the other. It seems that India is trying to obtain membership of the 1979 UPOV convention. But this issue was not discussed. Further, this international agreement has allowed plant breeders to claim exclusive marketing rights in varieties developed by them by crossing the previously existing ones. This has revealed a serious dichotomy— while access to raw germsplasm, gathered from the poor countries and stored in gene banks is virtually free, the improved germplasms patented in the rich countries by rich country companies are being sold to the less developed countries at high prices. In its obsession with UPOV as a sui generis, the Indian government is not examining other possible alternatives. One such alternative is the proposal of The International Undertaking on Plant Genetic Resources, an initiative of the Food and Agriculture Organisation (FAO), that all germplasm be recognised as a public resource and a part of the heritage of mankind. This way, at the least, the poor countries would be able to retain some control over their own plants and other forms of life. Unfortunately, to quote two scholars of RIS, Biswajit Dhar and Sachin Chaturvedi, ‘the singular weakness of the FAO undertaking is that, its ratification by the global community notwithstanding, there is no internationally accepted instrument through which farmers can be provided economic reward for their contribution to agriculture’. These three bills were passed as laws of the country in due course. However, the basic problem remained unsolved. Another bill will be passed before 2005 to give full effect to the Marrakesh Agreement, in particular, the age of a patent at 20 years. That the patent issue was so prominent among the pharmaceutical companies of India was not surprising. Before the Marrakesh Agreement, the common practice among the Indian pharmaceutical companies was to buy a formula for medicine and then to produce that medicine with local material at a low price, which is the reason why Indian life-saving drugs are so cheap in India. The Marrakesh Agreement hit all these companies very hard and the distinction between the produce and the process was eliminated.

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Stiglitz’s View In 2001, Joseph Stiglitz won the Nobel Prize. That year his book on globalisation received acclaim all over the world. In this, he sharply criticised the Bretton Woods institutions, that is the World Bank and the IMF for neglecting the needs of the poor countries. He contended that there was nothing wrong in the concept of globalisation, but that its implementation left much to be desired. He did not say anything new, but Stiglitz being Stiglitz, his criticism found an audience everywhere in the world. Here was someone, who was Vice President of the World Bank, and President of the Advisory Committee of the President of the United States, with a great deal of experience.

5 Environment Policies During the WTO Ministerial conferences at Cancun and Seattle, a substantial number of protesters were environmentalists of all shades, coming from all over the world. While most were genuinely concerned about the future of life on this planet, and believed that industrialisation and further trade expansion were environment degrading, a section among them was sponsored by industrial interests in rich countries to use ‘environment’ as an argument to keep Third World exports away. Only three decades ago it was unthinkable that concern for the environment could ever be used in this way. In the early 1970s, there was a universal expectation among the poor countries that the rising concern worldwide about environment would benefit their exports (Dasgupta, 1998). This expectation was largely based on the bias in favour of biological and natural products, and against things chemical and artificial, implicit in this concern for environment. The primary producing poor countries hoped that their own products—a large part of which were natural—would now be in heavy demand in the world market, as consumers everywhere would move away from synthetics and things produced in laboratories, e.g. jute bags in place of plastics. Nearly three decades have passed since those early years of environmental concern. During this period, the poor countries have witnessed, with horror, how the tables have been successfully turned against them, and how rich country interests have successfully deployed the ‘environment’ argument against poor country exports. While the terms of trade are continuing to operate against the primary producing countries, and will continue to do so until the end of the first decade of the new millennium according to estimates made by the World Bank and the IMF (Development

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Committee, 1994), environment has been skilfully used as a protectionist argument against Third World exports. At the Seattle inter-ministerial conference of the WTO, the rich countries themselves proposed an ‘environment standard’—a set of rules universally applicable to all the countries of the world, ostensibly to protect the environment. How did this happen? As in the case of the ‘labour standard’, the rich countries are claiming that while the environment-friendly rich countries are paying a high cost for environmental protection in various ways, the poor countries are making their products cheap at the cost of the environment. Thus, according to them, the poor countries are gaining, by continuing to degrade the environment, thereby enjoying an unfair trade advantage over the rich countries. This amounts to dumping, since the prices at which the poor countries are offering their products in the global market are less than the cost of their production once the environmental cost of declining natural wealth is taken into account. Eco-dumping, they argue, amounts to a subsidy given by way of the erosion of natural wealth and, therefore, should be regulated by GATT/WTO like other kinds of subsidies. That advantage, so unfairly gained by the poor countries, can be wiped out only if the same ‘environment standard’ is applied for the production and export of commodities all over the world. If this argument is accepted, and a universal set of environmental rules is framed accordingly, the poor countries would be forced to pay for the difference between the two standards—their own and the global environmental standard—by way of tariff and other measures. Already, without waiting for the framing of such global rules, the rich country purchasers are prescribing, as a condition for their purchase, strict environmental specifications, and are monitoring production processes in the exporting poor countries through their own inspectors. In cases where they feel that environmental or hygienic standards are not being adhered to, they are wasting no time in imposing a ban on such exports, e.g. the ban imposed by Europe on Indian shrimp exports in the mid-1990s, or that on the export of Indonesian timber from natural forests. Such a ban is lifted only after the exporting poor country agrees to meet the specifications laid down by the rich countries. In these cases acceptable ‘environmental standards’ are being defined, unilaterally, by the rich country interests, as also the

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appropriate processes for achieving those standards, nearly in all cases, without any consultation with the poor exporting country producers or governments. In many cases, it has been found that such restrictions have nothing to do with the standards set for the competing domestic producers in the importing country (Low, 1995). The important point to note here is that in all these cases, the cost of environmental protection is being passed on to the rickety shoulders of the poor countries, thus making their products costlier and un-competitive. In the jargon of economics, the poor country producers are being forced to ‘internalise’ the environmental cost (UNCTAD, 1994). Further, such policy is far from environment-friendly. By denying the poor countries a fair share of the global market and by forcing them to sell most of their products within the country, they are encouraging excessive local consumption of natural wealth, e.g., timber obtained from natural forests, as in the Indonesian case. Eco-labelling is another form by which the environment is being used as a protectionist tool (Sorsa, 1992). Taking advantage of the high and rising environmental awareness of rich country consumers, the system of eco-labelling is a way of telling the consumer that what he is buying (with the eco-label prominently displayed on it) is environment-friendly, and has been produced by a process that has not degraded the natural environment, e.g., products of plantations made by MNCs rather than those delivered from natural forests by indigenous producers. The specifications for obtaining an eco-label are usually worked out in consultation with rich country industrial interests that are competitors of poor country exports; and, in many cases, these have no bearing on the environment but are designed to keep Third World exports away (UNCTAD, 1994). The Third World exporters find it difficult and costly to meet these standards, apart from the fact that these are also not widely known (Jha et al., 1993). For instance, one can understand the justification for the attachment of costly turtle-saving appliances to the fishing boats in coastal Orissa, but not why these should be necessary in other parts of the Bay of Bengal where turtles are non-existent (ibid.), nor why the UNCTAD recommendation for consulting poor country exporters when determining technical criteria and threshold

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levels for eco-labelling, should be ignored (UNCTAD, 1994). The way such eco-labelling is done and implemented is, by all accounts, discriminatory and protectionist, and in gross violation of the call for the ‘national treatment’ of foreign producers under TRIMs (Trade Related Aspects of Investment Measures) of the Marrakesh Agreement of 1994 (Sorsa, 1992). In the United States, the management and labour have joined together to use this argument against cheaper Mexican products, after the formation of NAFTA, the regional economic grouping that includes Canada and Mexico, to justify their demand for protection (Low, 1995). One study by UNCTAD has, in fact, found this fear of eco-dumping by poor countries is not grounded in reality, as their cost effects are negligible (UNCTAD, 1994). As one perceptive observer commented, ‘If implicit subsidies were to become a source of unfair trade, the practice could open a door for abuse for all kinds of purposes; differences in social benefits, wages, etc’ (Sorsa, 1992). Such trade restrictions in the name of environment benefit the rich countries in another way. The growing global environmental awareness has brought into being a massive ‘environment industry’, which is expected to have a global market worth $300 billion by the turn of the century. This new industry deals with water and effluent treatment, waste management, air quality control and noise pollution among others, and spends about $10 billion a year in research (OECD, 1992). In other words, more such environmental consciousness and more such regulations to protect the environment add more billions to the coffers of the MNCs engaged in the environment industry. On the other hand, it can be argued that the so-called export orientation, so strongly advocated by the global trinity of the World Bank, the IMF and the WTO, does enormous and irreversible harm to the global environment. The forests of Thailand have been reduced by half in two decades, and its drive towards industrialisation has taken a heavy toll in terms of pollution: the level of hazardous waste reaching a level of 1.9 million tons a year. Thus, while the environment industry is making money by producing gadgets and developing processes that save the environment from degradation, the theology of the global trinity—structural

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adjustment, stabilisation and globalisation—is busy creating a situation wherein this industry would never be short of clients. The Marrakesh Agreement permits the governments to impose trade restrictions to protect the environment and ‘human, animal or plant life or health’, under the Agreement on the Technical Barriers to Trade. Another agreement, on the Application of Sanitary and Phytosanitary Measures, allows the importing country to take action in order to protect human or animal life within the territory of the importing country. As we have noted earlier, these provisions could have been used by poor countries like India to protect their own plant and animal varieties, but have not been so deployed. On the other hand, by now, the rich countries have made ample use of these measures to keep poor country exports out of their markets. One argument that is being used to justify global environment standards is that it would obviate the need for a country like the United States to impose its own environment standards on foreign products that are seeking entry to their markets, as the standards would be determined, monitored and implemented universally and multilaterally. Judging by the unwillingness of the United States to withdraw unilateral ‘Super 301’ of the US trade legislation despite the introduction of a dispute settlement machinery under the WTO since 1995, such assurances cannot be taken at their face value. All this is not to say that environment standards are not important. The great Bhopal tragedy would not have taken place had there been an appropriate environmental legislation and had its implementation procedure been in place. The tendency among the multinationals to transfer the polluting industries to those territories where environmental legislation is non-existent or not properly implemented cannot be effectively countered without those measures and their strict monitoring. Poaching of plants and animals on the verge of extinction, or of activities that prejudice their sustenance, are quite widespread and necessitate speedy action. There can also be no justification for the unhygienic conditions in which a great deal of our economic activities are conducted, in slums or cottages or factories. For all these reasons, a legitimate opposition to the use of the environment as a trade barrier by the rich countries, at the international level, should not be construed as an argument for inaction at the national level.

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Government Fiat vs Privatisation for the Cure of Environmental Abuses The structural adjustment programmes for the countries, prepared by the World Bank and the IMF, since 1980 until the end of the decade, did not contain anything on the environment. However, the Bank, while admitting that it was wrong on its part to ignore the environment, took the view that no harm was done as the former always advocated good economics, which was tantamount to good environmental economics. As a consequence, two types of views emerged, regarding the respective roles of the state and the market. The first view, which was dominant until the advent of the structural adjustment programmes, ascribed an important role to the state for solving environmental problems. It was pointed out that the changes brought about by environmental degradation were not marginal, particularly the ‘outer limit’ cases such as nuclear war, weather modification, genetic engineering and the depletion of the ozone layer in the atmosphere. Hence, any marginal solution is not going to work in most environmental cases. This is especially true when the causes and their effects are separated by physical distance or time, as in cases where the pollutant, maybe an insecticide, is driven a long distance from where it was carried first, or where, as in the case of Sahara, the changes were small and marginal at any point of time, but cumulated over a long period of time, became massive (Dasgupta, 1978). However, the World Bank and its followers took the view that if the prices were right and private property rights were welldefined, most of the environmental problems would disappear, through discussion and the exchange of the bundle of legal rights that each possessed. Following Coase, some economists argued that it was possible to buy or sell a bundle of private rights to effect necessary environmental changes and this applied to all the things like airports, highways and reserve forests. They said that if the farmer wasted water, the remedy was to raise the price of water. They also took the view, that, in the field of environment, there was no sinner and no one sinned against, and everything was possible by changing the bundle of private rights of the parties concerned through the market. They reckoned that it was possible

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for those who are disadvantaged by a gas chimney emitting smoke to buy the chimney from the current owner and to prevent it from emitting smoke. For a farmer to prevent the cows from eating the grain from his field, the remedy lies in suitably rewarding the cowherd to dissuade him from allowing his cows to stray into the farmer’s fields and to the grains produced by the farmer. The followers of Coase even considered the possibility of buying and selling polluting gases to discourage the emission of those in the atmosphere beyond a certain level (Coase, 1960; Dasgupta, 1998). Nothing is not saleable to the private sector, including highways, game parks and national parks including a chunk of forests and power stations. Coase did not believe in the dichotomy between public goods like power stations with decreasing cost, which according to theory, should be under public ownership, and industries with increasing cost that qualify to be in the private sector. He also did not believe that the difference between the private and social costs of offending smoke chimneys immortalised by Pigou could be eliminated by ways of suitable subsidies and deficits (Coase, 1960; Pigou, 1920).

Implications of the Debate on the Environment for India India, though holding a low position in terms of per capita income, holds quite a high position when the physical environment is taken into account. Environmentally, India is quite rich, while the rich countries, by removing their green cover, uprooting their trees and polluting their environment, have reduced themselves to countries with low standing in environmental terms. Of the first eight countries in terms of biological wealth, not a single one is developed. Having destroyed their own environment in the course of their development, the rich countries are suddenly now becoming greatly concerned with the international aspects of the environment, without paying for it. They have asked countries like Brazil or Indonesia not to sell their forest products for the sake of the equilibrium of the world, and have asked their consumers not to buy forest products and only to buy plantation products from these countries. However, at the same time, they

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have refused to change their energy-intensive lifestyle for the sake of the world environment or to pay their share of the international income taxes, based on GDP or their share of world export earnings to compensate Brazil or Indonesia for the loss of export earnings, should they decide to ban forest product exports to maintain their forests. The debate on the environment has serious implications for India. Since the early days, India could boast of two major organisations for sorting and shifting the environmental objects: the Zoological Survey and the Botanical Survey. One of the major objectives of the two organisations was to collect specimens of flora and fauna spread over the length and breadth of the country. Had this been done in the past, there would have been no problem of patenting Indian products, such as basmati, by a US-based multinational company. Even now, the priority of the Indian authorities should be to list all the Indian products so that these cannot be subjected to biopiracy, and if Indian plants and seeds are patented by any other country, these can be immediately objected to. Apart from the plants and seeds, many of which can be used for medicinal purposes, there are many other things which require environmental husbanding. In particular, the top soil, forests and the water resources are vulnerable. These components are discussed in detail below.

Water There is no shortage of water in India, on an overall basis. However, there are periodic and area-based shortages that cannot be overlooked. For instance, every year there are floods in some parts of the country, while there are droughts in others. Relief activities are required every year, from flood or drought in some part of the country or another. Besides, there are drought-prone areas in every state. In West Bengal, three districts are known to be droughtprone, while the Telengana area of Andhra Pradesh and many districts of Karnataka and Maharashtra suffer from lack of water in most years, though the states mentioned here are known to be generally free from drought. Further, hardly a year passes by when the river Brahmaputra is not in spate. There are water disputes

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concerning many rivers, in particular, the rivers that divide Tamil Nadu from Karnataka and Andhra Pradesh, the neighbouring states with which it shares common rivers. As a solution, sometimes it is suggested that the rivers should be linked. In the past also, there was talk of linking the Ganga in the north with the Cauvery in the south. The link was to be initiated near Patna, running through the basins of the Sone, Narmada, Tapti, Godavari, Krishna and Pennar rivers, and joining the Cauvery somewhere upstream, as part of the same solution (Iyer, 2003). Another idea was to link the Ganga with the Yamuna, a tributary of the water-surplus Brahmaputra across Bangladesh (Shiva and Jalees, 2003). For a long time, there was talk about using the surplus water of the Brahmaputra, but Bangladesh rejected it as it was fearful of the consequences of making canals in the congested areas (Iyer, 2003). In 1982, a National Water Development Agency (NWDA) was set up. Table 5.1 shows these links (ibid.). From the beginning of the twenty-first century, particularly since the case came up before the Supreme Court in October 2002, the government has taken up the task with all seriousness, and a task force was formed with Mr Suresh Prabhu, a former Central Minister, as its Chairman. However, after the defeat of the BJP in the 2004 election, this body with Prabhu as its Chairman has been dismantled. There are twelve major river basins in the whole country, which are listed in Table 5.2. The biggest of these basins is the Ganga basin, which accounts for about 37 per cent of the population and the cultivated land accounts for 509,994 sq.km., constituting almost 62.5 per cent of the total area of the basin (Shiva and Jalees, 2003). The main problem with these river links is that we simply do not know the environmental outcomes of such river links. Would they help form a national grid of water and resolve the problem of floods and droughts in a given year in different parts of the country, or would this unleash the mighty natural forces that our present state of knowledge and technology are not able to control? The National Water Policy, approved on 1 April 2002, suggested that about 690 billion cubic metres are available from surface water sources and 432 billion cubic metres from ground water sources. In the early post-Independence period, influenced by the success of the Tennessee Valley Authority (TVA) in the United States, the government laid emphasis on large-scale river valley projects, like

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Table 5.1 Nine Major River Links Name of Link

From River

To River

Manibhadra to Dowleswaram

Mahanadi

Godavari

Inchampalli to Nagarjunasagar

Godavari

Krishna

Inchampalli to Pulichintala

Godavari

Krishna

Polavaram to Vijayawada

Godavari

Krishna

Almatti to Pennar

Krishna

Pennar

Srisailam to Pennar

Krishna

Pennar

Nagarjunasagar to Somasila

Krishna

Pennar

Somasila to Grand Anicut

Pennar

Cauvery

Kattalai Regulator to Vaigai to Gundar

Cauvery

Vaigai

Annual Volume of Transfer (mm3) 11,176 (6,500) 16,426 (14,200) 4,371 4,903 (3,305) 1,980 2,310 (2,095) 12,146 (8,648) 8,565 (3,855) 2,252

Source: Iyer, 2003, p. 4.

the Damodar Valley Corporation, Bhakra-Nangal Project or Hirakud Dam Project, but the consequences of linking the rivers are unknown as we still know little about the consequences of tinkering with nature. During the 1960s, at the time of the Green Revolution, the ground water resources were found to be easier to handle, less expensive and more compatible with the technology associated with the new and high-yielding seed varieties. Eventually, the idea of the conjunctive use of the two sources—surface and ground— was born, when it was found that a good surface water system helps to maintain the ground water, while a good ground water system helps to reduce the salinity of the surface system. It was also found that the better-off farmers tend to over-exploit the ground water sources, which is why it is necessary to obtain the permission of the authorities for new tubewells (Dasgupta, 1977b). In India, water-carrying zones were classified as red, grey and blue zones. While it was quite easy to get permission to install tubewells in blue zones, it was difficult in the grey areas and virtually impossible in the red zones.

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River Basin Indus

Important Rivers of the Basin

Catchment Area (Million Hect.)

Sutlej, Beas, Ravi, Chenab and Jhelum Ganga Yamuna, Chamba, Sindh Betwa, Ken, Sone, Ram-ganga, Ghagra, Gandak and Kosi Brahmaputra Subansiri, Bhorelli, and Barak Manas, Buri Dehang, Dhansiri, Kopili, Teesta Jaldhaka, Torsa, Barak, Gumti, Muhari, Fenny, Karnaphulli, Kaladan, Imphal, Tuxu and Nantaleik Brahmani Karo, Sankh, Tikra, Baitarni Salandi and Matai Mahanadi Seonath, Jonk, Hasdeo, Mand Ib, Ong and Tel Godavari Pravara, Purna, Manjra, Pranhita, Indravati and Sabri Krishna Ghataprabha, Malaprabha, Bhima, Tungabhadra and Musi Pennar Jayamangli, Kunderu, Shagileru, Chitravati, Papagni and Cheyyeru Cauvery Harangi, Hemavathi, Simsha, Arkavati, Lakshmanathirtha, Kabbani, Suvarnavati, Bhavani, Noyil and Amravathi

Average Annual Surface Water Availability (BCM)

Live Storage Capacity of Dams Completed (1995) (BCM)

32.13

73.31

13.83

86.15

525.02

36.84

23.61

585.6

1.10

5.18

28.48

4.76

14.16

66.88

8.49

31.28

110.54

19.51

25.89

78.12

34.48

5.52

6.32

0.38

8.12

21.36

7.43

Table 5.2 contd.

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Table 5.2 contd.

River Basin Tapti

Narmada

Mahi Sabarmati

Important Rivers of the Basin

Catchment Area (Million Hect.)

Bhokar, Suki, Mor, Harki, Manki, Guli, Aneri, Arunavati, Gomai, Gomati, Valer, Purna, Bhogvati, Vaghur, Girna, Bori, Panjhra, Buray, Amravati, Shiva, Rangavati and Nesu Burhner, Banjar, Sher, Shakkar Dudhi, Tawa, Ganjal, Chotta Tawa, Kundi, Goi, Karjan, Hiran, Tendoni, Kolar, Man, Uri, Hatni and Orsang Som, Anas, Panam Sei, Wakal, Harnav, Hathmati, Watrak

Average Annual Surface Water Availability (BCM)

Live Storage Capacity of Dams Completed (1995) (BCM)

6.51

14.88

8.53

9.88

45.65

6.60

3.48 2.17

11.02 3.81

4.76 1.35

Source: Shiva and Jalees, 2003, p. 12.

The critics of river-linking measures pointed out that the impact of it is unknown and that river-linking might be risky. In some areas, particularly in some of the districts of West Bengal, it was found that water was contaminated with arsenic and created all kinds of deformities in the people who used such water. So, the government made treatment of arsenic-contained water a high priority.

Top Soil and Degraded Land The top soil of India, which facilitates agricultural production, is one of the largest in the world. Among other countries, only the top soils of Bangladesh and Ukraine are comparable with that of India. But, every year a large amount of top soil moves to the sea,

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driven by rain and other agents of nature. Once an inch of top soil is lost, it takes a few hundred years to make that much of top soil again. One of the issues highlighted by former Prime Minister Rajiv Gandhi is that a large amount of soil remains degraded. According to the estimates of degraded soil, about 130 million hectares of soil remains degraded, and various measures have been proposed to improve the quality of such degraded top soil (Dev, 1997). Since most of such degraded top soil is located near or inside forests, and according to one estimate about 28 per cent of such degraded land is in the forests (ibid.), it is suggested that a high quality of forest land would help to improve such land. It is, however, wrong to assume that degraded lands are not in use. Most such lands are used in one way or another. So, before changing the use of the land, it is necessary to find out the purpose for which it is currently in use. For instance, if the land is under use for grazing, in this case a switch in land use from degraded land to land under productive use should also take into account the cost of resettling the displaced cowherds.

Forests Several legislations on Indian forests have been framed to improve the quality of forest land. It is suggested that forests should cover at least 40 per cent of the total geographical area. Satellite and other long distance measures show that forest cover is much less than what is expected (Dev, 1997; Shiva and Jalees, 2003). Social forestry is important for various reasons. People in different establishments are encouraged to set up their own social forestry. They are also encouraged to line the local streets and other utilities with trees. In social forestry, India’s record is creditable—it holds the top position among all the countries of the world.

Energy We should also consider the lowest cost of producing energy. Here the amount of energy intake and the amount of energy produced would determine the technology used and the product produced.

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It is found that some sources produce more energy than they consume, while there are others which consume more than they produce. Pigs are good energy savers, they require less energy than other sources for what they produce and should be preferred. Nonconventional energy sources such as windmills and sea waves are also under consideration to tap diverse energy sources.

Oil At one time, it was thought that India does not possess oil resources. It goes to the credit of the USSR, and several other countries of East Europe which posited a ‘log normal’ distribution of oil deposits, and given the large prospective oil-bearing area of the country, hoped for many discoveries of oil deposits in the years to come. It was at their initiative that oil deposits were discovered in Nahorkatiya (Assam), Ankleshwar (Gujarat) and other places in India. There were some controversies regarding the oil pool fund. The opposition has alleged that the money collected in this fund goes up when the world oil prices are high, but it does not go down when the world oil prices are low. Moreover, the government uses the money from the fund for non-oil purposes, and, as a consequence, the government is always in the deficit as far as this fund is concerned.

Coal Coal is a major source of energy in India. It has led to urbanisation in many areas as ‘coal towns’ came into being and migration over long distances in search of jobs became typical with the advent of the railways in the early 1850s. In 1992, a summit was convened at Rio de Janeiro, 20 years after the world conference at Stockholm, where many heads of state took part. This summit, which followed a report on the environment by the former Prime Minister of Sweden, raised the question of the importance of diversity. The report contended that diversity

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was the essence of life, and that it should be increased to make life habitable on this planet. On the other hand, too little of diversity could destroy life on earth as we know it. This was the main message of the report, which was opposed to taking development beyond the point where the latter would reduce diversity. Unfortunately, in 1995, at the Marrakesh conference of GATT, and later at the Singapore ministerial conference, this urge for diversity was ignored in favour of uniformity, and expressions like eco-dumping came to use.

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6 Agricultural Reform From the beginning there have been two views on Indian agriculture. There were those who thought that the production in Indian agriculture could be increased only by way of institutional changes such as land reform, and the establishment of co-operatives and panchayats. The second view was that ‘technological’ measures such as higher-yielding seed varieties, irrigation, fertilisers and iron ploughs used as inputs would provide the right solutions. While the ‘grow more food’ campaign, district integrated plans, and several other schemes spoke of technological solutions, in his numerous writings, Wolfe Ladejinsky, the architect of land reform in post-War Japan, South Korea and several countries of east and southern Asia, preached institutional changes. The controversy took a new turn when, based on farm management studies for various districts, Amartya Sen showed that smaller farms were more productive than larger ones. The explanation for this was that the management of smaller farms was in the hands of those who were principally dealing with family labour, while the larger farms depended more on non-family labour who worked against wages. It was found to be easier to handle family labourers, many of whom were sons and other relatives of the head of the farms. Their contribution on the field was uncorrelated with the wages they got from the head. In fact, there was a tendency to go beyond the point at which the wage of the family labour equated the marginal product, while the farm employing wage labour and not family labour is likely to stop at the point at which the wage equates the marginal product. In other words, more labour (family labour) is likely to be employed in a smaller farm per unit of land, which would raise productivity. So, the higher productivity of a small farm has to be found in its greater labour intensity per unit

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of land. In fact, a small farm is likely to use more labour, fertilisers and other inputs per unit of land than a larger farm (Sen, 1962). Moreover, the more productive and fertile land is likely to be more intensely fragmented and partitioned, while the less fertile land, as in the arid and semi-arid conditions of Rajasthan, are less likely to be divided. This also would explain why the larger land holdings are less productive than the smaller ones. The debate took a new turn after the mid-1960s, when, under the Green Revolution, the high-yielding seed varieties and associated inputs were introduced. In the new situation, the negative relationship between farm size and productivity was no longer valid. In fact, there was no relationship between farm size and productivity. It could not be said any more that the smaller farms were more productive or that the small farms only worked with family labourers, as they had to employ wage labourers at various times, such as at the time of harvesting. The larger farms took advantage of the technology associated with the new varieties while even smaller farms had to hire wage labourers to carry out various tasks during harvesting.

Agriculture under NEP The New Economic Policy (which is more or less the same as the New Political Economy) envisages a special role for agriculture in the economy (National Working Group on Patent Laws and Public Interest Legal Support and Research Centre, 1992a). First, it argues for an economic order that is in line with the comparative advantage of the country in question. In the case of the poor countries, it argues for activities that use more of labour and less of capital. Agriculture is favoured because of its low capital intensity. NPE argues that the poor countries should export agricultural goods and import what is required from the export earnings based on agriculture. Second, NPE takes the view that agriculture in the poor countries is subject to various constraints. For instance, the output price for agricultural goods is kept artificially low, in the interests of the

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urban-industrial lobby, at the cost of low traded prices which discourage trade. The NPE frees agriculture from these low prices, which are expected to find their own levels, in conformity with market conditions, and which expect agricultural production and exports to increase. Third, agriculturists in the poor countries, given the policy of import substitution, are forced to buy the high-price products of indigenous industries in place of cheaper imports that are free of import control. Under the New Political Economy, all kinds of control are dispensed with including price control. The area under agriculture is, therefore, expected to increase at a high rate, to meet both the domestic subsistence needs, and the export needs. In other words, a steep increase in agricultural production was expected after the introduction of globalisation. It is hoped that this increased agricultural production would take care of the increased export needs for agriculture and enough would be earned by way of exports to realise the demand for imports for the economy. However, as our book on agriculture shows, such an increase in agricultural production did not take place (it was 211.3 million tons in 2001 according to the RBI, following figures of 195.9 and 209.8 million tons, respectively, in the previous two years). There were not enough agricultural goods for exports under the new political economy, as envisaged by the proponents of comparative advantage, who wanted India, a poor country with surplus labour, to specialise in agricultural production (Dasgupta and Ghosh, 2001). Our publication explains, in terms of a wide range of inputs, how the Indian economy fared during the two periods before and after 1991. We do not propose to repeat those here, but it shows that the performance was better prior to 1991, even in terms of commercialisation. (The share of rice acreage, 36.69 per cent in 1999–2000, was followed by 37.03 per cent and 35.84 per cent, respectively, during the following two years). It shows that despite many favourable conditions such as high support prices prompted by the NPE, unusually good rainfall for 15 successive years and the support of the government, the agricultural production during the 10 years under structural adjustment was less than the figures for the preceding 10 years.

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The WTO and the Subsidies It was stipulated that there would be no subsidy for production (Ray, 2002). The WTO was based on a no-subsidy solution. The Marrakesh Agreement of 1994 was against subsidies and it classified subsidies according to the distortion they caused to trade and production. The Uruguay Round on Subsidies Agreement made a distinction between three types of subsidies. First were the prohibited ones, that is, those which are export promoting or favoured domestic against imported goods (Article 3). These are to be eliminated within the prescribed time limits. Second were those described as non-actionable subsidies, that were not prohibited as such, but were actionable if they cause injury to the domestic industry of another signatory or seriously prejudiced their interest. If subsidies covered operating losses (except one-time ones) or provide debt forgiveness or grants for debt repayment or if the total ad valorem subsidisation of a product exceeds 5 per cent of the recipient’s annual sale of that product, or 15 per cent of the total invested fund, these are presumed to be prejudicial to the domestic industries of other countries (Article 6). The provisions on nonactionable subsidies were subjected to review after five years. The agreement appealed to members to desist from causing adverse effects to the interests of other members. Then there were permitted neutral subsidies, which were non-selective and were not directed specifically at some enterprises or industries (Article 2). There were others, which were not neutral and were specific in their impact, but were still tolerated, e.g., subsidies on industrial research, precompetition development activities, and those providing assistance to disadvantaged areas (Article 8). These exemptions were also rigorously defined: R&D subsidies were not to exceed 75 per cent of the specified costs of industrial research, and those on precompetitive development cost were not to exceed 50 per cent, regional aid could be given only to those areas where the per capita income was less than 85 per cent, or the unemployment average was more than 110 per cent, of the national average, and subsidies on safe harbour, that were to support environmental infrastructure and pollution control investments, are one-time and non-recurring ones (Article 9).

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Countries with less than $1,000 per capita GDP, including India and many other South Asian countries, were, however, exempted from the prohibition on subsidies that were contingent on export performance (Article 27). In this case, if a country reached a share of at least 3.25 per cent in world trade in a particular product for two consecutive years, it was required to phase out its subsidies in two years (and eight years for the least developed countries) (Schott, 1990; UNCTAD, 1994). Subsidies aiming at facilitating privatisation within a specified period were exempted from countervailing actions (UNCTAD, 1994). This brought the US, which wanted to slash subsidies, into conflict with the European countries, particularly France, which relied on subsidies for its producers, on the eve of the formation of the WTO. It also created a conflict situation between its past and present in the case of the US. Under the GATT regime, the US asked for an exemption on agricultural issues, but changed its position, when it found that it had to pay a heavy subsidy under the old GATT dispensation. However, in the agreement on subsidies, subsidies were divided according to the type under the WTO, as explained above. Since the rich countries framed the rules, it was no accident that most of the subsidies offered by the rich country governments to their agriculturists were found not to be trade or production distorting. On the contrary, smaller subsidies offered by poor country governments were found to be trade and production distorting.

India and the Subsidies The reduction of subsidies had been worked out by the Marrakesh Agreement as a percentage, 36 per cent in six years. This has helped the members with a high scale of subsidy. The rich countries like the USA, Japan and Europe, in particular, even after paying subsidies, had been able to offer their subsidies to their agriculturists at a high level. It should be pointed out that, given the share of a product in the world market, and the proportion of a product in the total amount of subsidy, under the WTO agreement, it was not necessary for India to reduce any of the subsidies, but the Indian authorities still reduced them to please the rich countries and the WTO.

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The subsidies are given for production and distribution of food products. The current structure of prices was set up in the 1970s to ensure remunerative prices for the producers. In any case, the government was careful to see that farmers were paid a good price for their production. Earlier, Dharma Narayan, David Hopper and others have shown that Indian farmers were as sensitive to the prices of the inputs and outputs of agricultural goods they produced. If the cross elasticity of the price of commodity A is higher than that of commodity B, then the farmer would produce commodity A, other things remaining the same. The prices were worked out by the CACP (Costs and Prices Commission), and, after their approval by the cabinet, announced by the government long before cultivation, so that the cross elasticities were known to the farmer before he undertook cultivation decisions. At this price announced by the CACP, as confirmed by government notification, the buying agencies, like the Food Corporation of India and the Jute Corporation of India, purchased wheat, rice, jute and other products from the farmers. Prices were fixed in such a way that the farmer earned 10 per cent on his investment; in other words, the price system ensured a remunerative price for the farmer. However, there were complaints that many farmers returned to their villages with their produce because the buying agencies ran out of their fund or the warehouses where the foodgrains were supposed to be kept ran out of space. In this situation, many farmers preferred to sell their goods in the vicinity of the market rather than carrying them back to their villages and thus bearing the transport cost. While the agriculturist gained from higher agricultural prices, there were other, poor and non-poor, households that suffered because of higher food prices. The distress-selling poor agricultural producer, who sold cheap during harvesting only to buy at a high price several months later, was one such segment of population. Among others, one can mention agricultural labourers, artisans, the urban poor and industrial workers who were hurt by the high agricultural prices. One way in which the agriculturist could be given higher prices for his toil, while not hurting the food-purchasing sections, was by putting in place a comprehensive public distribution system that covered basic needs such as those for food, kerosene oil, sugar

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and salt at reasonable prices. Tables 6.1 to 6.3 show that the agriculturist actually suffered from a decline in the supply of food and pulses though the supply of edible oil, vanaspati, sugar, cloth, tea, coffee and electricity had gone up. The commercialisation of Indian crops had increased. The trend under globalisation was not to build and develop a public distribution system, but to dismantle it wherever it existed. While the World Bank and its two ideological partners liked to dispense with the public distribution system, they knew that such a decision could not be easily implemented because of political opposition. Rather than asking for the dismantling of the public distribution system (PDS), which was not going to be popular, they asked for a ‘targeted’ public distribution system that would only supply the very poor around 35 kilograms per household for below poverty level consumer households (Reserve Bank of India, 2001–2002). But targeting involves the identification of the poor, and is often, as the experience of FAO with several countries indicates, given the weak administrative infrastructure in these, more costly. It is often cheaper to make no such distinction between the poor and the poorest and to provide PDS support to everyone who asks for it and thus make the administrative and other savings in terms of the costs of identification of the poorest in the village context (Development Committee, 1993; Islam, 1991; Knudsen and Nash, 1991). Table 6.1 Per Capita Net Availability of Cereals and Pulses in the 1990s

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999(P) 2000(P)

Per Capita per Day Net Availability of Cereals and Pulses (gm)

Public Distribution of Cereals and Pulses (Million Tons)

476.4 510.1 468.8 464.1 471.2 495.3 476.2 505.2 450.4 470.4 466.0

16.0 20.8 16.4 14.0 15.3 18.3 17.8 18.4 17.0 12.1

Source: Government of India, Economic Survey, 2000–2001, S-24.

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Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

Foodgrains Oilseeds

Groundnut

Sugarcane Cotton

Jute Tea Potato

127.8

24.1

8.3

3.7

7.4

1.0

0.4

0.9

123.7 121.0 123.6 123.8 125.2 123.1

25.3 26.0 26.3 26.1 26.2 23.2

7.8 7.5 7.6 7.1 7.4 6.9

3.9 4.1 4.2 3.9 4.1 4.2

7.9 9.0 9.1 8.9 9.3 8.7

0.9 0.9 1.1 1.1 1.0 1.0

0.4 0.4 0.4 0.4 0.4 0.4

1.1 1.1 1.2 1.2 1.3 1.3

Source: Government of India, Ministry of Finance, Economic Survey, 2001–2002, S-17. Table 6.3 Net Availability, Procurement and Public Distribution of Foodgrains per Head Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

Edible Oil Vanaspati Sugar (kg) (kg) (kg) 5.5 5.4 5.8 6.1 6.3 7.0 8.0 6.2 8.5 9.1

1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.3 1.3

12.7 13.0 13.7 12.5 13.2 14.1 14.6 14.5 14.9 15.6

Cloth (m)

Tea (gm)

Coffee (gm)

Electricity (kwh)

24.1 22.9 24.5 26.2 26.0 28.0 29.3 30.9 28.2 30.6

612.0 655.0 649.0 667.0 664.0 646.0 657.0 635.0 684.0 641.0

59.0 64.0 60.0 56.0 55.0 55.0 58.0 58.0 65.0 55.0

38.2 41.9 45.6 48.8 53.0 56.2 58.6 62.9 66.7 69.2

Source: Government of India, Ministry of Finance, Economic Survey, 2001–2002, S-23.

In fact, a kind of targeting is implicit in the way the PDS works. Given the quality of food supplied by the PDS, only the most desperate would be willing to take advantage of it. Even in 1999–2000, the off-take of rice and wheat combined was of the order of 23 million tons. In the following year it went down to 18 million tons, though in 2001–2002, it went up to 31 million tons, for a population as large as 100 crore (Reserve Bank of India, 2001–2002). The offtake usually goes down when people feel that they are better-off,

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and goes up in years of crisis. Such targeting always goes on, without incurring a heavy administrative expenditure to identify the poor. We are not suggesting that bad quality food should be reserved for the poor, nor that high quality basmati should be supplied via the PDS system. As the figures suggest, in normal times, only a part of the identified poor population rush for PDS supply. Those who can afford it move off the PDS system as soon as they can, only those in dire need remain. In other words, as long as the quality of PDS food is what it is, the off-take from PDS functions automatically and makes the distinction effectively between who needs PDS and who does not, in a sense more effectively than the official distinction between the poor and the poorest. The importance of providing food to the non-food producers and distress-sellers by way of a public distribution system (PDS) was debated, as also was the issue of optimal food reserve that took care of the needs of the PDS and emergencies, while keeping the cost of storing at its lowest. It was also asked whether everything should be left to the market and the PDS should wither away in course of time. Or whether PDS work should be narrowly targeted for the poorest? Was such targeting administratively feasible, some asked? (Dasgupta, 2001d). It is true that maintaining stocks involves money, and should be no more than is required for meeting the consumption needs of the target population and for relief work during flood and drought (Administrative Staff College, 2002). The second concern is about input prices for agricultural products. According to the NPE theorists, NPE frees agriculture from the high input prices of domestic import-substituting industries and provides the agriculturist with access to cheaper imports, as rent-seeking activities are discouraged under NPE. Here, the formal objective is to get rid of subsidies from indigenous production. Subsidies enter the production process in agriculture in a number of ways, e.g., as premium for agricultural production, as low prices for the consumers of local ration shops or as higher support prices. NPE argues for production, without subsidies entering production this way. It is assumed that the price paid by the consumer will cover all the input costs. In the case of electricity, it is assumed that all the costs of generation and distribution would be covered by the price paid by the consumer. Similarly, the consumer would pay for fertilisers, irrigation and credit subsidies.

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As for subsidies given to FCI (Food Corporation of India) and JCI (Jute Corporation of India), it is assumed that no state government would pay any premium to its agricultural producers or to shops on off-take prices (Dev, 1997). It is hoped that prices without subsidies would jump at first, but would then find their own levels. Even if as a consequence, some production would be priced out of the market that by itself may not be wrong, as it would show that the country should not specialise in these. Taking advantage of the studies which followed the Green Revolution technology based on high-yielding seed varieties and associated inputs, it was now argued that land reform was no longer necessary (Dasgupta, 1977a, 1980). In fact, an anti-land reform attitude formed among the government and bureaucratic leaders. While, during most of the 1950s and 1960s, land reform was talked about, there was noticeable silence on land reform in the subsequent years. There was also talk of undoing land reform by changing the laws on land reform that were enacted in the first flush of enthusiasm in the 1950s. In several states, land reform laws were indeed revised. There were also minor controversies. Again, there were two schools of opinion. There were those who believed that Indians were ‘other-worldly’ and did not care about what was happening to them in this birth. There were others, like David Hopper and Raj Krishna, who thought and proved with sophisticated statistical techniques, that Indians were no more ‘other-worldly’ than others, and responded to the stimuli of higher prices and higher relative prices like other farmers. Sukhatme, a nutritionist of repute, showed that ‘other-worldly’ behaviour went away with a pint of milk, in other words, ‘other-worldliness’ indicated lack of nutrition (Krishna, 1962). There was a big controversy regarding the mode of production of Indian agriculture. While a number of contributions were of the highest class, there were also weaknesses. For instance, there could not be, separately for Indian agriculture, a mode of production that was different from the non-agricultural one. Until recently, for about four decades, the concept of food security for a country like India was taken as quite a simple and straightforward one. It implied a goal of self-sufficiency to be fulfilled mainly by way of increased food production. Ever since India’s Independence, the achievement of ‘food self-sufficiency’ has been

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taken as a major goal of the Indian economy and of its Five-Year plans. Later, the term ‘food security’ came into currency, though, for all practical purposes these two terms were taken as being interchangeable; no one ever thought that food security could be achieved substantially except by way of increased food production. Internally, food security implied the maintenance of domestic food supply, both in order to provide protection against natural calamities such as drought, flood or earthquake and also to meet domestic consumption needs during normal years. Internationally, this raised the very important issue of achieving selfsufficiency in food production, and correspondingly, minimising reliance on food imports. Some of the largest countries in Asia, such as India, Pakistan or Bangladesh historically relied on food imports to bridge the gap between domestic demand and domestic supply. In all these countries, the underlying logic behind the drive towards self-sufficiency was that a country, particularly an agricultural one, should at least produce enough food for its citizens or should reduce import to the minimum, with food supply being too important an item to be left to the mercy of the foreigners. Food was considered to be the ‘basic’ of all ‘basic needs’, even more important than shelter, job, health, drinking water supply or education (Dasgupta, 2001b). There were other related issues, like the operation of Engel’s law, that the expenditure on food, as a proportion of the total expenditure was likely to decline with progress, and that, over time, there was likely to be a shift in food consumption towards a more diversified and better quality menu. Concern was expressed that the intra-family distribution of food was biased against women. There were debates on balanced diet, as to whether rice and wheat seeds should be so developed that a protein element was built into them, or that the menu itself, taking the cereals, vegetables, and pulses together, should provide such a balance. With agriculture being a way of life for more than two-thirds of the population, most of whom mainly produce for their own consumption, concern for food security was linked with that for agricultural development. Should the government bear responsibility for building rural infrastructure, for power, irrigation, fertilisers and what not, or should this task be left to the market, with the latter charging the consumers the full cost of such development plus normal profit? The population policy also featured in this

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debate, in order not to prevent the demand for food from going out of control. At the end, the issue of ‘poverty’ and ‘entitlement’ came to the fore, with the recognition that distributional issues could not be overlooked. Towering over all these was the issue of meeting the minimum calorie needs of every one, which was taken as a major goal by most poor country governments. The fact that per capita food availability per day, measured in grams, had declined since 1991, despite many successive good monsoons, a freak, worried planners. It also forced them to take account of the alarming possibility that, some time in the future, there is likely to be a succession of droughts, like what happened in the first half of the 1960s. What action should be taken now to avert a further, drastic, fall in food availability in the future years? In recent years, it is being said that such a quest for domestic self-sufficiency in food production is no longer necessary. It is being argued that, in today’s integrated world, it is possible to bridge the gap between domestic demand and supply by way of food import. This is described, in sophisticated international jargon, as food security ‘by way of trade’ view. One of the main exponents of this view is Ann Krueger, who sees this policy of ‘food security via trade’ as an integral part of a much wider policy towards the economy, in general, and agriculture, in particular. She takes the view that in most of the agricultural policies in the less developed countries is implicit a strong bias in favour of urban-industrial consumers. Food prices are controlled and not allowed to go beyond an upper limit, as it would affect the powerful urban consuming interests (Krueger, 1974, 1992; Krueger et al., 1991, pp. 1–10). The domestic production of agricultural inputs entails, according to this view, either subsidising the domestic industrialist or allowing the prices of the domestic production to be higher than the international ones. In order to protect the high-cost domestic industries, the cheaper foreign sources are barred from entering the market, by way of quantitative import restrictions or by subjecting them to high import duties. Both these make agricultural inputs costlier than they would have been had there been no control over imports and had the domestic industry not been protected. In other words, the policy of import substitution, and the accompanying controls and high tariffs, as also the control over agricultural prices, work for the benefit of the urban-industrial interests,

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and against the agriculturist. It also involves a policy of discrimination in favour of non-tradables, things that cannot be exported, and in which the country concerned enjoys no comparative advantage, and against tradable, e.g., much of agriculture. The removal of controls of all types would, therefore, reduce the cost of agricultural production, and make those agricultural products, not necessarily food items, cheaper and competitive in the international market. This new policy has a much older root. For a long time, the United States had been advocating that the poor countries should dispense with food self-sufficiency. John Block, the US Agricultural Secretary, said at the outset of the Uruguay Round in 1986, that ‘the idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on US agricultural products, which are available, in most cases, at lower cost.’ This was one of the first occasions that the ‘food security by way of trade’ argument was mooted, and the context makes it clear that one of the motives was to find a market for the US agricultural surplus (Watkins, 1992). The less developed countries account for half of the world’s food imports, and provide a large, actual as also potential, market for the US food exporters. There is a conflict of interest among the poor countries—between food importers and the self-sufficient and exporting ones—that helps to keep them divided in international forums, to the advantage of the rich ones. The food importing countries have a vested interest in cheap food prices, no matter where the food comes from (Hopkins, 1993). Such a view, arguing that food self-sufficiency was not necessary, and that food security can be obtained by way of trade, involves a number of important assumptions, including that: – – –

the global trade is so integrated that it is possible for any country to buy anything from any market, at a price ruling in that market; every country in the world makes production decisions on the basis of its ‘comparative advantage’, and imports the other required commodities from the integrated world market; non-economic factors, such as the needs for diplomacy or war do not influence the production and export-import decisions of a country;

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both the rich and the poor countries adhere to such rules of global trade.

Let us examine each of these assumptions in turn. The view that anybody can buy anything from the world market is, at its best, naive and unreal. At its worst, it has been concocted in order to serve neo-colonial interests. In one recent instance, in the early 1990s, India’s request for wheat was turned down by the USA on the ground that the year before India had permitted the supply of one boatload of rice to its arch enemy, Cuba (Mukherjee, 1994). Besides, the number of countries holding food surplus in the present-day world is alarmingly small, and most of these are rich, Western countries. The USA, Canada, Western Europe, Australia and Argentina are among the wheat surplus countries, while the number of rice surplus countries is even smaller, with Thailand and Vietnam being notable among them. Besides, food consumers like Russia and China are so large that they can mop up the entire global surplus production of a year when they are suffering from natural calamities. India too is so big and its demand is so large, that its sizeable entry into the world food market is capable of effectively raising global food prices, to India’s further disadvantage (Atkin, 1995). Thus, the option for the purchase of food in the world market is not as wide as the protagonists of food security via trade would make us to believe. Taking the history of the past five decades into account, food had always been an important ingredient of the foreign policy of the United States (Frankel et al., 1979; Webb and Krasner, 1989). Food was used as a weapon to force Pakistan and several other countries, facing severe drought in the early 1950s, to join military alliances led by the USA. In the 1960s, countries depending on US wheat imports under the PL480 agreement, had to orient their economic and external policies in tune with the US diplomatic, defence and economic needs. India, dependent as it was on PL480 in the 1960s, had to carry out a devaluation of its currency in 1966 that no one in India wanted (Mosley et al., 1991). What was more humiliating was that, India, a recognised leader of the non-aligned movement in the world, was forced to maintain its silence on the Vietnam war that was raging in the 1960s. This pathetic subservience was brought about by two successive droughts, and forced

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the government to rely for 10–15 per cent of the country’s food needs on the US bounty (Lateef, 1994). The Indian foreign policy changed again and the Indian government began speaking out taking a strong stand during the Bangladesh war in 1971, only after the country had achieved selfsufficiency in food, thanks to the new Green Revolution technology (Dasgupta and Dhar, 2003). Nor should one forget the anxieties that the government and the people of the time had to undergo, as the country’s survival was dependent on the next shipment of wheat from the United States. In terms of economic policy changes induced by wheat imports, in addition to the forced devaluation, the second Five-Year Plan had to be drastically pruned, and the planning exercise itself was made to lose its significance. That was also the time when the Paddock brothers, having carefully examined the demand and supply conditions for world food, found that these two were grossly out of balance with one another, and within a few years, by 1975, the food surplus countries (particularly the USA, the sole food surplus country by then) would have to make the cruel but inevitable choice as to which countries were to be ‘saved’ and which countries ‘could not be saved’. They concluded that, if such a decision had to be taken, it would be wiser to save a large number of small countries than a small number of large countries. It goes without saying that in the list they drew up, India was placed by them in the second, ‘cannot be saved’, category (Paddock and Paddock, 1967). Of course, with the coming of the ‘Green Revolution’, the international food scenario radically changed, and in India itself, the production tripled in three decades from the mid-1960s, but the potential danger of a large country with many hungry mouths in a world with few food surplus countries, cannot be underplayed. Today, with similar crop varieties being cultivated in a large part of the globe, in a particular year, the possibility of worldwide epidemics sharply bringing down food cannot be ruled out; and in such a contingency, India would be one of the worst sufferers, more so if it relies heavily on foreign sources for its food. As one commentator once observed, taking this historical experience into account, ‘to stave off hunger and deprivation, attention to rural development was critical’ (Lateef, 1994). What he meant was that the basic task of producing food for meeting domestic needs cannot be ignored. Only scholars blissfully

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unaware of this historical perspective would urge ‘removing controls and distortions associated with the “food security” complex’, as if the fear associated with the issue of food security was a figment of the imagination and not embedded in the reality of the 1960s (Dasgupta, 1998; Pursell and Gulati, 1995). In addition, such PL480 type food aid had several other negative consequences for all the aid recipient countries, e.g., these imports kept domestic agricultural prices low as also the incentive for domestic production (Kim, Si Joong, 1995). Although the rich countries render profound advice to the poor countries that they should not seek food self-sufficiency, as history shows, when it comes to the needs of their own economies and societies, they have always treated food security as one of the key national priorities. In 1988, the Japanese Diet passed a resolution confirming self-sufficiency in rice as a political objective. Its rice imports amounted to only 50,000 tons at that time, as compared with the domestic demand of around 10 million tons a year, thanks to their quantitative restrictions over rice imports. The Japanese had always been reluctant to replace such quantitative restriction by tariff, as tariffication alone would not dispel the Japanese fear of dependence on others for food. ‘The government maintained that to the Japanese public such a radical change of policy appears highly dangerous due to the vulnerability of the Japanese rice market to climatic changes and other factors liable to cause wide fluctuations in supplies and prices on the world market.’ Further, ‘there is the issue of food security. Any cut in domestic producer prices would reduce the area under rice cultivation’, while such land is not suitable for non-rice cultivation (Hemmi, 1994). Japan’s present level of tariffication for rice is perhaps the highest in the world. It sees a protectionist policy as being legitimate in the national interest (Hopkins, 1993). If Japan, one of the richest countries in the world, with a per capita income that is 100 times more than that of India, and which can buy anything from anywhere in the world at any price, continues to provide more than 1000 per cent cover to its domestic rice production, on the ground that rice supply is too important to be left to foreigners, then what ground could there be to abandon this target of food self-sufficiency in India now? (Hoekman and Cremoux, 1993).

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Historically speaking, one of the reasons why Japan carried out extensive land reform in both Korea and Taiwan, their colonies for the early part of the twentieth century until the end of the Second World War, was to ensure a steady supply of rice for Japanese consumers. The beneficiaries of land reform, small farmers, in both countries, were more open to training in modern technologies of rice production than the landlords they replaced, and helped Japan to maintain a good supply of the rice varieties of her choice within the territory she controlled (Amsden, 1988; Brautigam, 1995; Nafziger, 1995). Japan’s Food Agency has the monopoly to import and sell to domestic consumers at regulated prices (Atkin, 1993). Similarly, both the United States and Europe have, as the core of their agricultural policy, the objective of self-sufficiency in food. The Common Agricultural Policy (CAP) of the European Common Market was evolved on the assumption that the European economy would remain dependent on food imports for a long time to come. In their urge to reduce imports, domestic production was highly subsidised and imports of wheat were taxed fully to take away their competitive edge. However, in their over-zealous drive to boost domestic production by way of subsidies, Europe, a fooddeficit region even in 1970, achieved self-sufficiency in 1980, and became transformed into a food-exporting region—in cereals, beef, sugar and dairy products—in 1986 (Moyer and Josling, 1990). It is instructive to take note of four types of support mechanisms that were introduced in Europe in the late 1950s: (a) Minimum product prices were guaranteed, through variable levies, for cereals, sugar, milk, beef, pork, a number of fruits and vegetables and table wine; (b) for poultry, eggs, various types of fruits and vegetables, flowers and wines, it was agreed not to intervene in the domestic markets, and to limit support to external protection; (c) for durum wheat, olive oil, cotton, tobacco, oilseeds, and sheep, support was primarily given by way of producer subsidies (called ‘deficiency payments’). This enabled the food industry (bread from durum wheat, margarine from oilseeds) and the producers of animal feed (from oilseeds) to benefit from lower input prices;

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(d) a flat rate of ‘producer subsidy’ was given on the basis of the area harvested or on the production quantity for durum wheat, cottonseed, flaxseed, hops and silkworms (Folmer et al., 1995). Thus, what was originally a concern for food security had taken Europe beyond self-sufficiency. Europe had been transformed into a major exporter of wheat, milk and other primary products, mainly by way of heavy subsidy. In the USA also, the same concern for food self-sufficiency was so successful that, thanks to a colossal subsidy, it became the number one exporter of wheat in the world. The subsidy became so high, exceeding $40 billion a year, that even a very rich country like the United States found it hard to continue subsidy on this scale. It proposed in the mid-1980s to subsidise farmers, ‘not to plant and produce’ in order to economise on storage and subsidisation costs (Moyer and Josling, 1990). The Food Security Act of 1985 of the United States had restricted the scope for the entry of food products of the poor countries. A whole battery of non-tariff measures has been deployed by the rich country governments to keep the poor country food exports away from their own markets. Tapioca from Thailand was subjected to ‘voluntary export restraint’ (VER), by no definition a ‘voluntary’ trade restriction, in Europe. Thailand’s canned foods exports were subjected to chemical tests in the USA, while frozen sea-food and maize faced quantitative restrictions from Japan (Leeahtam, 1991). Of 236 VERs the world over in the mid-1990s, significantly 60 covered food and agricultural products (Low, 1995). The Western countries, generally speaking, have made far greater use of the ‘safeguard’ provisions in the GATT agreements to their advantage than their poor counterparts, including those relating to food products. In 1993, out of 18 safeguard actions taken by the EEC, 13 were on processed foodstuff, and in the case of the United States, one such action was against imported preserved mushroom (Schott, 1994). In both the US and Europe, the ‘farmers’ lobby’ is recognised as being politically powerful. ‘In the US, there is one bureaucrat for every five farmers and the budget of the US Department of Agriculture exceeds the net income of all farmers. In the European Community, two-thirds of the Community’s budget goes to support farmers’ (Atkin, 1993).

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One scholar echoed the official European sentiment on this issue as follows: ‘even if the EU (European Union) does not intend to be a major food exporter, it should not rely on the world market to satisfy its food needs under every emergency (like war, droughts, nuclear and other catastrophes in any part of the world) .... The EU should preserve at least its capacity to produce food, even when it chooses temporarily to allocate its arable land to other uses. Unless specific restrictions are imposed, it will hardly be possible to ever re-convert agricultural land back to food production once it has had a non-agricultural use. “Asphalt is the land’s last crop”, as they say. Therefore, the safeguarding of the productive capacity of land should become a major preoccupation of European agricultural policy in the future’ (Folmer et al., 1995)—an authentic advocacy for food security, by the rich countries themselves, that bears no resemblance to the globalisation rhetoric they deploy for the poor country listeners. For the rich countries the old-fashioned definition of food security would apply, globalisation or no globalisation. For the poor countries, it is food security ‘by way of trade’. This issue also raises the question: what is comparative advantage? In the case of wheat, neither of the two leading players in the international arena, the US and Europe, enjoys a comparative advantage in its production, but can still manage to make their costly production cheap in the world market by way of enormous subsidies, amounting to around $40–50 billion each, every year. In the case of the UK, subsidies to farmers that were equal to the difference between the ‘desired’ and the ‘average’ market price were in vogue even prior to its accession in the EEC, in order to maintain a low food price for the consumer. In the US, the floor price for wheat is determined by the ‘loan rate’, fixed by the Department of Agriculture, at which the farmer can secure a loan from the government against his crop. He can take back the crop if the market price is high. Otherwise, the stock accumulates in the hands of the government, and the latter sells or uses it as food aid or for subsidising exports (Atkin, 1993). Alhough Article 39 of the Treaty of Rome, signed in 1957 by the six original members of the European Community, incorporated an agricultural policy in general terms, the Common Agricultural Policy (CAP) was formalised in 1962. The main basis of CAP was a ‘target’ or desired price that provided a satisfactory return on

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agricultural investment by domestic farmers. CAP also referred to a ‘threshold price’ below which an import was not permitted, irrespective of the world market price. EC charged a ‘variable levy’ that was equal to the difference between the ‘world market price’ and the ‘threshold price’. ‘Intervention price’ was the price at which the member governments bought agricultural produce. Domestic prices fluctuated between the ‘threshold price’ and the ‘intervention price’. For export surpluses that arose because the domestic market could not absorb all that was produced and that were sold to the interventioning authorities, a subsidy was given to bridge the difference between the European and world market prices (Atkin, 1993, 1995). If these subsidies are withdrawn, not a single grain of wheat from these sources would be sold anywhere in the world. Taking the rich OECD countries together, in the early1990s, their aggregate subsidy for agricultural products amounted to $240 billion, which was equal to one-third of the income of their agricultural producers (Watkins, 1992).

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7 Industrial Reform The industrial policy in India from 1956 to 1991 had several components. First, the 1956 resolution, which formed the basis of industrial policy for several decades, assumed that the Indian private sector was small and was unwilling to invest in large enterprises with long gestation periods as the risk was high as compared to the alternative of investing in smaller and quick return activities. In fact, from the time of Independence in 1947 to 1991, India followed an industrial policy based on self-reliance and import substitution that was similar to the policies followed by the fast growing economies of East Asia. The public sector was the leading sector as it was assumed that the private sector was deficient in capital. In fact, the private sector followed closely on the heels of the public sector and expected the latter to guide it. Second, the Act of 1951, called the Industrial (Development and Regulation) Act was the first to provide for licensing. In the case of almost all the industries, the entrepreneur concerned had to apply for a licence before anything could be produced. The objective behind licensing was laudable, but its implementation gave rise to many fears. When capital, technology, management and many other things were in short supply, it made sense to use them judiciously, that is, not to spread them thinly in many activities. And who else could oversee national priorities, such as where to invest the scarce capital, scarce technology, or scarce management but the government? This is the ideal picture, but while implementing the licensing policy, such objectives were not always in the minds of many bureaucrats, who were more interested in the possibilities of making money from these restrictions on investment. Third, the licensing policy and the IRDA had to fulfil the development goals of the government. For example, if a power station

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was located in a backward area, attempts would have to be made to establish it in an advanced area, in terms of the profit possibilities. Developing backward areas was a declared development policy of the government. No import was permitted for what could be produced indigenously. Foreign companies were kept out through a high tariff wall or prohibition. Self-reliance through import substitution became a major policy objective. Fourth, while comparing large and small industries, it was found that while the large units were more capable of introducing modern cost-reducing technologies, the smaller units were more capable of employmentproducing technologies. While both employment and production were important, an economy needed both to be able to stand on its feet. Moreover, in such an economy, restrictions were placed on production or the production of some items to enable the small units to compete. Fifth, in India earlier monopoly was considered a dirty word, and the Monopolies Commission was set up to ensure that Indian firms did not become monopolistic. The Monopolies and Restrictive Trade Practices (MRTP) Act defined monopoly and made stipulations against monopoly and its restrictive practices. In other words, until the industrial policy of 1991, the Indian government was unashamedly interventionist and there was no difference between the policies followed by the South and Southeast Asian countries and India as far as the state and the market were concerned. All these were changed by the industrial policy announced in July 1991, which replaced the industrial policy of 1956. The IRDA was no longer necessary, as in most industries, licensing was no longer necessary. Making money was not seen as a crime. The large industries were allowed to become larger. The small industries now had to compete with the large units, and there were no longer areas wherein production was reserved for the small industries. The MRTP was scrapped as the cut-off point of the small unit was not defined. The economic reforms assumed that the private sector was more efficient than the public sector in India whereas the industrial policy of 1956 stated the opposite. We have to analyse why, with the pursuit of the same policies, the outcome was so different in India and East Asia. What the new post-1992 industrial policy in India envisaged was that the Indian private sector was no longer small and risk-shy. In 1991, after having learnt from past experiences, it

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was a different private sector from that which existed in the 1950s, willing to invest in large industrial undertakings over a long period, and this reality was reflected in the 1991 industrial policy resolution. The emphasis was now on market-oriented activities in place of state enterprises sheltered from competition. Here we take the example of Japan, whose per capita income now is hundred times that of India’s, to illustrate the possibilities and constraints that exist for industrialisation in India today. Japan was at its lowest point of economic well-being at the end of the Second World War. Almost all her towns and cities were razed to the ground by systematic and persistent Allied bombing sustained over several months, the factories in these cities were reduced to rubble, and the country was left with 20 million dead, mostly young. Many of those surviving among the youth were crippled and thereby incapable of contributing much of labour power. The prospects for industrialisation were undoubtedly gloomy. From this edge of the precipice, the emergence once again of Japan as one of the richest and most industrialised countries of the world is a fairy tale. This great turnaround after the country had lost almost everything was possible because compulsory free primary education, which was being enforced in Japan since 1876, ensured a sizeable supply of technical personnel of varying ages, some above the cut-off age for going to the war. With their help, Japan devised a unique strategy for industrialisation, the core of which came to be known as ‘reverse engineering’, in which contrary to regular engineering, the production process began from the end, that is, with the finished product (Hoggard, 1994). What reverse engineering meant in practice was as follows. Whatever came by way of imports, say a German machine, to their ports, was immediately stripped off its elements, after the interrelationships between the elements had been noted. The stripped individual parts of the machine were distributed among the assembled scientists and technologists, with a mandate to replicate those parts using the material available in Japan itself, within a given time frame. Once the replication was done, individual parts were assembled as in the original machine. Having learnt the art of making one machine, the Japanese now brought it to the production line, which churned off many more such machines. There was a saying in the world machinery market in those days, that it was no fun trading with Japan as it would purchase only one, and then would become your competitor.

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In the first phase, the quality of the copies that Japan made, were suspect, but in the course of time, the quality improved. Then came a stage when Japan’s machines and technology were emulated by others; they themselves stopped copying others and began inventing new products. Following the ‘flying geese’ model, South Korea, Taiwan, Singapore and Hong Kong joined Japan and followed her at a distance, to be followed later by the second tier of countries in South-east Asia, particularly Thailand, Malaysia and Indonesia. The whole region thus responded to the stimulus provided by Japan towards industrialisation (Easterly, 1995; Hobday, 1995). Technology was but one vital step towards industrialisation. Then markets had to be found for the products. Very early in their quest for industrialisation, Japan and the other East Asian countries had to form a view about their comparative advantage in terms of the items for production and exports. On the basis of their landman ratio, expertise and the given demand for their exports, the World Bank wanted them to specialise in textile production. But these countries, on the other hand, formed the view that they had to grow out of textiles, a low wage, and footloose industry, to get the real taste of industrialisation, in keeping with the global experience. In many rich countries of today like England, development began with textile production, but, after a stage, they found that at the higher wage prevailing then, textile was no longer feasible. Then they shifted to other products and diversified their production and export packages. With this experience in view, the Japanese knew, in their heart of hearts that in order to industrialise, they would have to bank on commodities other than textiles. Eventually, they took a ‘dynamic’ view of the concept of comparative advantage, and, on the basis of the expected world demand for new products, ‘created’ their comparative advantage in things like microwaves, computers, automobiles, and so on. They took the view that the concept of comparative advantage need not be a static one, based on resources and history; a dynamic interpretation of that concept is that comparative advantage can be created in certain situations, by investing in heavy industries, as indeed has been done in East Asia. To quote Helpman and Krugman, ‘competition in the international markets is typically imperfectly competitive and that trade is, to a considerable degree, driven by the economics of scale rather than comparative advantage.’ Therefore,

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it makes sense for a government to favour industries that generate externalities (Corbo and Fischer, 1992). This is how the OECD, in its 1972 study on Japan, concurred with a dynamic view of comparative advantage, The MITI (Ministry of Trade and Industry) decided to establish in Japan industries which require intensive employment of capital and technology, industries that are in consideration of comparative costs of production should be the most inappropriate for Japan, industries such as steel, oil refining, industrial machinery of all sorts and electronics…. From a short-run static viewpoint, encouragement of such industries would seem to conflict with economic rationalism. But, from a long-range viewpoint, these are precisely the industries where income elasticity of demand is high, technological progress is rapid, and labour productivity rises fast. It was clear that without these industries it would be difficult to employ a population of 100 million and raise the standard of living to European or American level with light industries. Whether right or wrong, Japan had to have these heavy and chemical industries (OECD, 1972). The East Asian countries did very well in those, so much so that even the rich foreign country markets were alarmed by their competitive efficiency; and imposed voluntary export restraints in terms of fixed quotas, which were not at all voluntary, to save their own industries from fierce Japanese competition. Some of the Western attempts to limit their efficiency or to divert their investment were strongly resented by the Japanese as the following quotation would suggest, ‘In Japan, the image of the United States as a fat, lazy, incessant nag that blames Japan for its own problems has steadily been gaining ground’ (Low, 1995). While the United States accused Japan of not consuming enough, Japan charged that the US did not save enough. A third aspect of their policy towards industrialisation concerned directed saving and directed subsidised investment towards selected industrialisation, much to the discomfort of the World Bank. Savings were mopped up largely by publicly owned banks; the share market barely existed and made a marginal contribution to savings. Savings were forced, in many cases, by way of the provident fund schemes, while investors were lured by subsidies

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and concessions to move in certain directions. As the World Bank latter admitted, ‘savings forced or not, generated high pay-offs based on consistently high rates of return to investments’ (World Bank, 1993). It further admitted, in East Asian Miracle, that recent assessments of the directed-credit programs in Japan and Korea provide micro-economic evidence that directed-credit program in these economies increased investment, promoted new activities and borrowers, and were directed at firms with high potential for technological spillover. Thus performancebased directed-credit mechanisms appear to have improved credit allocation, especially during the early stages of rapid growth (ibid., p. 20). Investment was encouraged by undertaking what the World Bank’s study of East Asian Miracle described as ‘financial repression’, that is, by keeping interest rates deliberately lower than ones at which the market would have been cleared. The excess demand for credit allowed the government to ration it through the banking system to desired industries and activities, mainly those with high returns, especially to exports. This financial repression, a clear deviation from the neo-classical model, did not inhibit growth in these countries, according to the World Bank study (ibid.). The fact that the government, in most cases, owned the institutions offering investment funds and gave guarantee credit or guaranteed the financial viability of a firm in various ways meant that the government was bearing a large proportion of the private sector investment risk (ibid.). Directed credit policy with subsidised interest rated (up to 75 per cent), coupled with export quotas and high prices in domestic market free from foreign competition (Amsden, 1989; Stein, 1995), had always been a major policy instrument of South Korea. Even in 1990, 47.5 per cent of the total bank loans were given to the priority sector, a figure much higher than India’s at 40.7 per cent (Agarwal et al., 1996). A fourth aspect was the support the country gave to its indigenous industries, scrupulously following the ‘infant industry’ case. A dynamic view of comparative advantage presupposes import substitution and protection from foreign predators in the early stage of development, and an active interventionist state capable

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of executing such policies (Dhar, 2003). This was a major argument of the Singer-Prebisch thesis, popular in the 1960s in Latin America and Asia. But even the formal neo-classical trade theory allows for the ‘infant industry’ argument, where protection is justified as a temporary, time-bound measure, with the longterm objective of strengthening domestic production (and also of export) capabilities (Low, 1995). It was recognised that a country had the right to protect its industries from foreign competition; this act was not taken as a crime and was fully approved by the neo-classical version too, provided in the long run, the industry was capable of standing on its feet and of facing competition without state support. In their case, they were allowed to operate in the domestic market, unhindered by foreign competition, only for a limited number of years, after which, the protection from foreign competition was withdrawn, and the commodity was expected to survive the rough and tumble of foreign competition without support. Export promotion was not differentiated from import substitution as a policy; both were taken as two segments of one common policy, of beginning with import substitution and ending with export promotion. The public sector played a crucial role in promoting indigenous industries. The Japanese state, as also others in East Asia, were unashamedly interventionist. They carried out the construction of steel, automobile and port chemical industries, to name a few, mostly under state ownership, despite opposition from the World Bank (Amsden, 1989). Taken in its entirety, the public sector had played a crucial role in the course of East Asian development, and still plays a very important role in the economy of these countries, more than it ever did in India. In Taiwan, even in 1980, the public sector accounted for 13.5 per cent of the GDP at factor cost and 32.4 per cent of the gross fixed capital formation, half of the country’s investment and 13 per cent of the workforce. Of the 10 largest enterprises in the country, seven were in the public sector. But unlike the Indian public enterprises, they made profits and made a 10 per cent contribution to the government revenue. Even as late as in 1987, seven out of 20 large firms were state-owned. However, the importance of the public sector was generally under-played in government pronouncements, so as not to invite the wrath of American patrons (Hobday, 1995; Wade, 1990).

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In South Korea too, heavy industries, mostly under public ownership, increased their share in industrial output from 40 per cent in 1971 to 56 per cent in 1980, and paved the way for the production and export of modern durable consumer goods that now compete fiercely in the world market (Amsden, 1989). The public sector accounted for 7–9 per cent of the GDP and 40 per cent of the investment during 1963–79, and most of these enterprises were engaged in various types of industrial infrastructure (Kim, 1995). Even in 1972, 12 of the 16 biggest industrial enterprises in South Korea were in the public sector, as also were 20 out of the biggest 50 (Wade, 1990). Apart from its size, the public sector in South Korea contained some of the most efficient industrial enterprises in the world, such as the POSCO steel plant. A fifth aspect was the way the foreign ventures were treated, when they were permitted to function in the economy. In Japan, foreign participation in a company was limited to 50 per cent while remittances were not permitted until 1963. In a sense, Japan’s control of foreign direct investment was more stringent than those applied by the other East Asian economies in the later years (ibid.). The ‘local content requirement’ was rigorous, some times running up to 90 per cent of the licensed parts over a period of five years (Nafziger, 1995; Singh, 1995). Almost invariably, the foreign enterprises were subjected to ‘local content requirements’, with the expectation that they would employ a certain percentage of the local material, engineers, etc., in their production plans. All these aspects of the Japanese industrial policy helped to once again make Japan one of the mightiest industrial powers of the world, whose competitive efficiency in producing and exporting high value-added industries continued, despite US attempts to undermine it, through Voluntary Export Restraint (VER) and MultiFibre Agreement (MFA) or the reservation of a part of the Japanese market for the rich countries of the West (Dasgupta, 1998; Development Committee, 1993; Low, 1995; UNCTAD, 1994). The reason why all these aspects relating to the Japanese economy are being mentioned here is to draw a contrast with the contemporary Indian scene. We will argue that none of the major policy initiatives taken by Japan in the course of development, as narrated above, is replicable in poor countries like India under the present climate of globalisation.

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Taking the policy of ‘reverse engineering first; in those days patent laws were national legislation. If under the national law, an act of copying a machine or its technology was not considered to be illegal or an act of piracy of the intellectual property rights, then by definition, it was not an act of piracy. Technology and intellectual property always travelled fast, for good or for bad, across the national frontiers, from the early days, though its movement was slowed down by the operation of the patent laws, over the past 150 years or so. Let us add that Japan was, by no means, the only country copying the technology developed by another. No rich country of today can claim that it only used the technologies developed within its borders, or that if it used the technologies of any foreign country, these were invariably paid for. As one scholar commented, ‘It is impossible to calculate how much of Taiwan’s early growth was fuelled by the learning that went on while trying to reproduce products protected elsewhere in the world.’ She went on to give the information, that in the early 1980s, the US Trade Representative’s office accused Taiwan of being responsible for 60 per cent of the counterfeit and pirated items in the world market (Amsden, 1988; Brautigam, 1995). Whether one can describe what the East Asians did as ‘piracy’ is, however, a matter of opinion, since they were guided by their own laws or the absence of laws, until the advent of the recent GATT decisions on intellectual property rights. It can be said that, until the Marrakesh Agreement of April 1994, not paying for the use of foreign technology, and not seeking permission for its use, were the norm. Some countries indulged in this act of ‘piracy’ more, like Japan, and some less, like the U.K., but no rich country can claim that it never used unpaid foreign technologies in the course of its development. The option of acquiring foreign technologies, and thereby extending their own frontiers of knowledge, was always available to the developed countries, in the course of their development. This option has been taken away by the Marrakesh TRIPs Agreement. While earlier the 1994 patent laws were nationally enacted, now an international patent regime has been devised, and every member of the WTO is required to conform to it within a specified time frame (Dasgupta, 1998). It is no longer possible, therefore, for a country to import a machine from another country and then to

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copy it; no matter what the national patent law permitted earlier, now such an act would be taken as a gross violation of the global patent regime, and be liable for collective punitive action (Dasgupta, 1998; Lesser, 1991). It is not necessary for the machine to be patented in each and every country in order to protect its intellectual property; a machine patented in any WTO member country would be as good as patenting everywhere within the domain of the WTO. To quote a joint IMF–World Bank staff paper, ‘Countries with less immediate scope for attracting high technology investment or exporting intellectual property tend to regard TRIPs as a mechanism for transferring economic rents to technologically advanced countries’ (Development Committee, 1994). Here we are not talking about the legality or otherwise of an act, or what construes piracy. We are making the single point, that before the Marrakesh Agreement, the option of acquiring foreign technologies without payment or permission was available to a country, in the course of its development, but it is not so any longer. India cannot take the East Asian route to industrialisation via reverse engineering; that road has been blocked or diverted. The second policy option was with respect to comparative advantage. We have seen that, in the course of development, several countries clutched on to textiles as the main item of production and export, and then a stage was reached when they had to grow out of textiles, as the level of wages in the economy grew. The secret of industrialisation lay, in their case, in deciding on the timing of this event, in abandoning textiles, in diversifying the products, and in building an industrial infrastructure, e.g., steel, chemicals, ports, transport, etc., that would permit such diversification. This also meant not listening to the World Bank’s advice. Japan, a part of the Western alliance and militarily heavily dependent on the alliance, performed this diplomatic requirement deftly and more adroitly than the so-called non-aligned countries. The Japanese government always used the public rhetoric of support to the World Bank, but defied it in practice. They said ‘yes’ to everything that the World Bank offered as advice, when they actually meant ‘no, thank you, this is none of your business.’ Countries like India do not possess the bargaining strength and the diplomatic skill of the Japanese. The World’s Bank’s

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recommendation for them is to rely more on trade and more on agriculture as an item of trade. In cases where these countries are insistent about industries, they are permitted to have small and light industries like textiles, but not heavier ones. The World Bank believes that the comparative advantage of a country like India lies in agriculture and light industries, and these can make enough money in the export market to carry the burden of the entire economy on their back. Structural adjustment by releasing agriculture from the burden of the pro-rich and pro-urban and highly subsidised import-substituting industrialisation can make agriculture cheap, efficient and export-oriented. The government and a large section of the academics are now blowing this particular World Bank trumpet—priority to agriculture at the cost of industrialisation. Every rich country of the world today, we mean ‘every’, became rich both: (a) by making agriculture efficient, and (b) by making agriculture contribute a small share of the GDP, smaller than those of the industrial and territory sectors. Every rich country became rich by diversifying its production and exports. In order to become rich, the poor countries of today cannot avoid the task of diversifying their economy away from agriculture. This is particularly the case in a globalised world where the terms of trade are inexorably moving against agriculture, according to the calculations done by the World Bank and the IMF. Given the generosity of their advice to all the poor countries, that they should confine their economic activities to agriculture, there is a serious risk of further decline in agricultural prices, with a glut in the world agricultural market. The poor countries would continue to export more and more of agricultural products to earn less and less. The third policy initiative undertaken by the Japanese was in the form of directed investment, coupled with subsidies and other concessions. The World Bank’s position is that any such direction and guidance, with suitable incentives, would be a distortion of trade and production. The direction of investment should, in no way, be influenced by government policy. The legal instrument in the hands of the Indian government, to serve this purpose of directing investment to places and areas which are in consonance with government priorities, was the Industrial Development and Regulation Act of 1951. This has been virtually

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abandoned by the government with the onset of globalisation. Almost all the areas of the government, but for a few pockets here and there, had been de-licensed to take them beyond the purview of this legislation. The fourth policy initiative of the Japanese was to use its import policy to safeguard the indigenous industries and to keep the foreign predators away, either by way of high import tariff or through quantitative restrictions and bans. Under WTO pressure, by early 2001, all the quantitative restrictions had been withdrawn in India. Although the option of high tariff remains, the government has decided to scale the tariff down to the East Asian level. Even under the WTO dispensation, it was possible to retain quantitative restrictions on the ground that the country’s balance of payments conditions were adverse. But rather than claiming this, the government claimed that its balance of payments condition was good, that the current account deficit was negligible as a proportion of the GDP, and that the foreign exchange reserve was hefty and highly comfortable. Having said this, the government could not plead any more that the balance of payments position was adverse and hence justified the continuation of quantitative restrictions. What remained unsaid was that the foreign exchange reserve, not built on the basis of the export surplus in trade, but built on the basis of loans, the conversion of black money into white by taking advantage of amnesty, NRI deposits and short-term capital movements lured by high interest rates, was vulnerable to speculation by the sharks of Zurich. The Indian economic diplomacy either failed in this respect, or got trapped by its doublespeak to diverse audiences. An impression has gained ground that, as a matter of principle, under the World Bank and the WTO dispensation, 49 per cent of the quota restrictions allowed under the Multi-Fibre Agreement (MFA) were in the interests of the rich countries, while there are rumours that the MFA would be renewed for some more years. The Voluntary Export Restraint (VER), similarly based on quotas in the US markets, mainly imposed on the highly competitive products of the East Asian countries such as automobiles, microwaves and computers, is likewise continuing merrily until at least 2005. It is doubtful whether the Indian officials have raised these issues in their negotiations (Dasgupta, 2001e).

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Local Content Requirements Make Way for National Treatment The fifth policy initiative taken by Japan was to bind foreign enterprises with various kinds of ‘local content requirements’. The latter entails asking the foreign companies to use a certain number or percentage of local manpower or material, and to transfer technology, to seek trade-balancing requirements, or involves measures against monopoly pricing or monopsonist hiring practices. The Marrakesh Agreement on trade-related investment measures (TRIMS), that accompanied TRIPs, now aims at ending these policies directed against foreign competition, which are considered to be trade-distorting and constraining. This, according to one United Nations agency, came as the culmination of repeated attempts by the developed countries, ever since the conclusion of the Second World War, to establish an international investment regime that favoured multinational corporations domiciled in their own countries (UNCTAD, 1994). The foreign investors are to be accorded national treatment as if they are indigenous and no discrimination is to be allowed against them. In other words, after the Marrakesh Agreement, the door of industrialisation has been closed for the poor countries. As we have attempted to show in this section, the policies followed by Japan, in the course of its development, are no longer feasible in the changed world conditions of today, with the advent of the WTO in 1995, following the Marrakesh Agreement of 1994.

The Licensing System The new industrial policy, while condemning subsidies, failed to account for large subsidies given by the rich countries, some concealed and some not so well-concealed, to their own industries. Two of the biggest schemes, based on Anglo-French collaboration, the Concorde and Channel Tunnel, are highly subsidised, as apart from the capital cost of their development, which has been sunk and gone, these cannot even fully cover their operating costs.

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There is some justification behind the criticism that the new industrial policy was made against the high tariff and import licenses in India. At one stage, the tariff rate reached an absurd level, exceeding 250 per cent of the fob price, and import licences helped, in the words of Anne Krueger, ‘rent receivers’ (Buchanan, 1980). Long before Anne Krueger’s description, the same phenomenon was described in India, rather bluntly and crudely, as the licencepermit raj, that encouraged corruption and bribery. The industrial licensing system, in its original conception, aimed at directing scarce capital resources towards areas of priority as delineated by the government. In practice, it gave corrupt officials the opportunity to make money in exchange for licences and the licenceholders to earn rent from their document, as the supply was limited. While there was need to re-orient the licensing system and to purge it of its abuses, by abandoning it altogether, the government seems to have thrown out the baby along with the bath water.

Industrial Sickness and the BIFR We have discussed five major elements of industrial policy before the 1991 reform. The sixth element was the Board of Industrial and Financial Reconstruction (BIFR) and industrial sickness, which are discused in this section. The government established the BIFR as a semi-judicial body, whose job was to close down, sell, declare bankrupt, change the management and technology and otherwise influence the efficiency of a sick industrial unit so that the latter would no longer be sick. In so doing, the BIFR received the concurrence of the management, labour, and financial institutions concerned to improve the chances of its success with its proposals. The body came into being with the passing of the 1985 legislation, but subsequently the 1997 bill was passed. The Act of 1985, which brought the BIFR into being, defined a ‘sick industrial company’ as one which had, at the end of any financial year accumulated losses equal to or exceeding its entire net worth (Chawla, 2000). The legislation of 1997 defined industrial sickness not in terms of the erosion of net worth but in terms of

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debt default. Thus an industrial company is termed as sick if it has either: (a) defaulted for four quarters or more on repayment of the principal and/or interest to one or more of its secured creditors, or (b) has been irregular on cash credit or working capital for four quarters or more. Such a default need not be continuous (The Economic and Political Weekly, 1997, p. 1244), from the time of reform the public sector units came under the BIFR. According to the Act of 1985, reference to the BIFR by the Board of Directors of sick and potentially sick industrial companies was mandatory within 60 days from the date of finalisation of the duly audited accounts for the relevant year (The Economic and Political Weekly, 1997, pp. 1244–45). The Central government, the RBI, the state government, a public financial institution, a state level institution or a scheduled bank (in respect of the companies assisted by them) could also make a reference of such a company to the BIFR. However, it was possible to appeal against the decisions of the BIFR. Appellate courts were formed under the 1985 legislation but were dissolved under the 1997 legislation. It was not surprising that the expression ‘non-performing assets’ became popular with the industrial units when a unit was declared sick, following its debt default, and its loan was no longer earning the financial institution any interest or anything at all. The main criticism of the BIFR was that very few units under its umbrella had succeeded in coming out of sickness. Being under the BIFR was considered to be a stigma, which led to the loss of clients and suppliers of various inputs. The inexorable delay in formulating revival plans often led to the demise of the industrial unit concerned. Now that there is a proposal before the government to disband the BIFR, many of the erstwhile critics of the BIFR are saying that at least it provided the opportunity for exploring sickness and undertaking remedial measures. Those who want the BIFR to be disbanded wish to incorporate within the Company Law itself the main provisions of the BIFR. The reasons for industrial sickness may differ from industry to industry, and within the industry, from one unit to another. These can be categorised as internal and external reasons. The internal reasons are mainly attributable to faulty planning in the promotion and management of a unit, delay in implementation of the project resulting in an increase in cost, under-utilisation of resources, diversion of funds, poor industrial relations, inadequate working

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capital, excessive overheads, insufficient provision for depreciation and wrong dividend policy. The reasons which cannot be controlled by the company are external in nature. Some of them are the shortage of manpower, raw materials, transport and power supply, delay in getting financial assistance, changes in technology and consumer behaviour, adverse government policies pertaining to production, prices and distribution, recession trend/adverse economic conditions and tough competition (Chawla, 2000). A study recently conducted by the Centre for Industrial and Economic Research (CIER) in association with the Standing Conference of Public Enterprises (SCOPE) has identified five types of sickness, viz., genetic, structural, operational, policy-linked and exogenous. Genetic sickness stems from inadequate strategy, faulty investment decisions and wrong technology selection. Structural sickness results from factors such as location, product mix and cost over-runs. Operational sickness occurs because of leadership failure, human resources aberrations, weak R&D and financial pressures. Policy-related issues include administered prices, procurement policy, tariff reduction and liberalised imports. Sickness can also result from exogenous factors such as technological changes, product obsolescence and aggressive competition. The study has also identified four phases of sickness, viz., symptomatic, incipient (or potential), organic (or cognisant) and terminal. Each one of these phases is expected to attract a unique form of intervention by the authorities (The Hindu, Business Line, 2001). In theory there should be no delay, as the times are fixed for various activities. A sick company has to make a reference to the BIFR within 60 days of finalisation of its audited accounts. The Operating Agency has to submit its first report within 60 days. Appeals to the AAIFR must be made within 45 days of a BIFR order. However, there are no bounds on the time taken by the BIFR and AAIFR. In practice, the BIFR has a low disposal rate of cases, which is a major criticism of the BIFR’s functioning. The BIFR has been unsuccessful in rehabilitating firms. Followup data on rehabilitation schemes reveal that many firms were making losses while in some other cases, the schemes failed and had to be re-opened. A majority of the sanctioned schemes failed one way or the other (Goswami, 1993). A study conducted by R.A. Yadav of the Faculty of Management Studies, University of Delhi, has shown the time gap between the

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first appearance of sickness and 100 per cent erosion of net worth in the case of financial data of 11 randomly selected sick industrial units. The first appearance of sickness is measured in terms of negative working capital followed by cash losses. The 50 per cent erosion of net worth takes 7–8 years. A unit at 50 per cent erosion of net worth is in a grave state of sickness because the stage from 50 per cent erosion to 100 per cent erosion follows in less than two years. This reveals that sickness, if identified in the early stages, can reduce cash losses and the erosion of net worth (Goswami, 1993; Yadav, 1991). Table 7.1 Status of Reference Registered by the BIFR

November 1999–December 2000 November 1998–1999 March 1998–November 1998 December 1996–March 1998

Total

Private Sector

Public Sector

455 437 259 292

450 424 254 285

5 13 5 7

Source: Government of India, Finance Department, Economic Survey, 2000–2001: p. 147; Government of India, Finance Department, Economic Survey, 1999–2000, p. 127; Government of India, Finance Department, Economic Survey, 1998–99, p. 111; Government of India, Finance Department, Economic Survey, 1997–98, p. 111; and Government of India, Finance Department, Economic Survey, 1996–97.

Table 7.1 shows that the overwhelming majority of the units registered with the BIFR are private sector units. Table 7.2 reveals that since its inception in 1987, the BIFR has 3752 cases registered with it. The largest number of sick industries registered with the BIFR is found in the case of chemical and allied industries (826 cases) followed by textiles (637 cases). Miscellaneous and metallurgical industries occupy the third and fourth positions with 570 and 568 cases, respectively. The next highest number of registered cases of sick industries is observed in food/ food processing industries (413 cases). Mechanical and electrical engineering industries have 254 and 170 cases, respectively, registered with the BIFR. The Government of India is contemplating disbanding the BIFR (Government of India, 2001d, 2002).

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

0 1 2 1 0 0 0 0 0 0

51 50 28 36 32 31 18 34 11 12

21 9 9 8 7 4 6 9 7 6

6 8 6 3 5 6 10 7 8 7

27 40 26 11 8 6 3 11 1 2

71 72 52 47 35 39 32 47 16 24

Year/ MetalElectrical Elec- Mechanical Chemical Induslurgical Engineering tronics Engineering and Allied try Fuel Industries Industries Industries Industries Industries 68 47 33 22 24 34 28 19 16 10

27 38 15 11 15 8 12 15 15 13

0 0 0 0 0 1 3 4 2 1

9 4 4 0 0 1 3 0 1 1

8 8 6 3 0 5 2 1 0 0

14 11 6 1 2 2 1 1 4 1

Globalisation: India’s Adjustment Experience

Table 7.2 contd.

9 10 15 8 27 40 34 45 34 20

Food/Food Tele- Leather and Glass Processing commuLeather and MiscelTextiles Industries nication Goods Ceramics Jute laneous

Table 7.2 Industrial Sickness: Sector-wise Classification Number of Cases Registered with the BIFR from 1987 to 31.12.2001

131

0 2 5 1 4 16

25 50 55 52 83 568

10 21 18 20 15 170

10 0 4 2 0 82

5 30 25 28 31 254

55 85 74 71 106 826

36 59 55 75 111 637

32 51 35 49 77 413

5 2 2 2 1 23

2 7 8 10 8 58

4 13 11 10 11 82

0 0 1 9 0 53

49 50 114 100 15 570

Food/Food Tele- Leather and Glass Processing commuLeather and MiscelTextiles Industries nication Goods Ceramics Jute laneous

3752

Notes: 1. Electrical engineering industries include boilers, steam generators and electrical equipment. 2. Mechanical engineering industries include transportation, machine tools, industrial machinery, agricultural machinery, earth-moving machinery, commercial, office and household machinery, medical and surgical appliances, industrial instruments, scientific instruments and miscellaneous mechanical engineering industries. 3. Chemicals and allied industries include chemicals, fertilisers, photographic raw film and paper, dyestuffs, drugs and pharmaceuticals, paper and pulp, cement, cement and gypsum products industries. 4. Food and food processing industries include sugar, vegetable oils and vanaspati, fermentation and food processing industries. 5. Miscellaneous industries include industrial gases, miscellaneous engineering industries, defence, timber products, glue and gelatine, soap, cosmetics and toilet preparations, and other miscellaneous industries. Source: Board of Industrial and Financial Reconstruction (BIFR).

1997 1998 1999 2000 2001 Total

Year/ MetalElectrical Elec- Mechanical Chemical Induslurgical Engineering tronics Engineering and Allied try Fuel Industries Industries Industries Industries Industries

Table 7.2 contd.

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8 Monetary and Banking Reform Statutory Liquidity Ratios (SLRs) and Cash Reserve Ratios (CRRs) One of the major objectives of monetary and banking reform in India was to create a level playing field for the private sector. Under the traditional system, a bank could increase its liquidity by making purchase of equity and debentures of the public sector companies. While this, on the one hand, increased the financial flow to the public sector, at the same time, it also raised the level of liquidity of a bank or of financial institutions. The latter were asked to maintain a certain liquidity ratio, which meant that they had to maintain their liquidity by buying from public sector companies. In 1991 Dr Manmohan Singh reduced the Statutory Liquidity Ratio (SLR) to 35 per cent. Subsequently, the SLR was brought down further. The ultimate objective was to make banks and other financial institutions independent of SLR in stages. Similarly, the Cash Reserve Ratio (CRR), was also brought down in order to fulfil the same objective. The government thought that, at lower SLRs and CRRs, the flow of credit to the private sector would grow. It was assumed that the retreat of the public sector would be more than compensated by the vigorous entry of the private sector, which was literally waiting in the wings, to take the place of public ownership. The finance minister, when making out a case for a change in the industrial policy, also commented that, since the days of the

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Industrial Policy Resolution in 1956, the private sector in India had ‘come of age’, and hence should be given space for growth and expansion, at the cost of the public sector (Government of India, 1997a). But, despite various incentives, both corporate saving and investment failed to raise the overall levels of saving and investment in the economy as proportions of the GDP. Both remained below the peak levels attained in the 1980s. These accorded with the global experience that, contrary to the expectations of the World Bank (Corbo and Rojas, 1992), the investment rate would decline. The explanation for this global phenomenon is quite simple. Unlike the rich countries, in the poor countries, the private sector, as we have seen, takes the government as its leader in the economic field and follows its signals. Public investment in a certain area is taken as an indication that private investment may be profitable there, while the retreat of public investment from that area emits the opposite signal. The massive curtailment of public investment in order to bridge the fiscal deficit, has mainly affected irrigation, power and other related agricultural and rural needs. This has not been compensated by increased private investment in these areas, thereby leading to a fall in the per capita daily availability of food and the rate of growth in per capita consumption of clothes and sugar, since 1991, which is why despite the lowering of SLR and CRR, the banks and financial institutions purchased public sector equity shares and debentures at a level higher than what was required. After an initial setback, when it declined from 4.7 per cent in 1990–91 to 1.1 per cent in 1991–92, the GDP growth rate recovered to 5.1 per cent and 5.0 per cent in the following two years. The figures for the following two years further improved to reach 6.3 per cent and 7 per cent, respectively, only to come down again. Questions have been raised about the source of such growth even in the years registering low growth figures for industry and agriculture. The tertiary sector in India is not comparable to that in a rich country, and cannot be counted as the main source of growth in those years. It is questioned as to how the GDP growth rate was high when the corresponding growth rates in agriculture and industry were low. In the sixth year, the growth rate had plummeted to a low of 4 per cent, though the target of the government, as we have seen, was for a higher annual growth rate.

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Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

Domestic Saving

Investment

Household

Private

Public

23.1 22.0 21.8 22.5 24.8 25.1 23.2 23.5 22.0 22.3

22.9 22.0 22.4 21.4 21.9 24.4 22.8 21.7 21.2 22.3

19.3 17.0 17.5 18.4 19.7 18.1 17.0 17.8 19.1 19.8

2.7 3.1 2.7 3.5 3.5 4.9 4.5 4.2 3.7 3.7

1.1 2.0 1.6 0.6 1.7 2.0 1.7 1.5 –0.8 –1.2

Source: Government of India, Finance Department, Economic Survey, 1999–2000, S-8.

The Gross Domestic Investment as a ratio of the GDP, steadily declined from 22.9 per cent in 1990–91 to 22.0 per cent and 22.4 per cent in the first two years, and fell further to around 21.4 per cent and 21.9 per cent in the subsequent two years, then rose to 24.4 per cent in the fifth year, only to come down in the subsequent years to around 21–22 per cent. Earlier, the worry was that the curtailment of public investment, rather than crowding in, was actually adversely affecting private investment (Joshi and Little, 1995a; Stevens and Solimano, 1992). But that was proved wrong. In fact, both public and private investments moved together as the private investment in the poor countries took the lead of public investment and avoided the path not followed by the latter (Dev, 1997). Similarly, the Gross Domestic Saving as a ratio of the GDP, declined from 23.1 per cent in 1990–91 to 22.0 per cent and 21.8 per cent respectively in the first two years, and then jumped to 22.5 per cent, 24.8 per cent and 25.1 per cent, respectively, in the following three years (Joshi and Little, 1995a). This highly positive turnaround was not consistent with the global experience. However, it went down to around 22 per cent in the next four years and the domestic saving in India in the 1990s was less than the peak during the pre-reform period. It was much less than the comparable figure in the East Asian countries, and should have been in the region of 30 per cent. If the total domestic saving is desegregated into its component parts, that is, public, private and

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household, then in comparison with the East Asian economies, we find that in terms of all these components, the saving is higher in East Asia, but among the components, the public sector performs very badly in India.

The Concept of Universal Bank The government’s eagerness to place the private sector banks on the same footing as the public sector banks, led to a deliberate blurring of distinctions between the two. The working of banks for profit in the private sector was to become the norm. Accordingly, subsidisation of interest in the case of the public sector banks was no longer permitted, nor was intermediation for a specific cause like sickness or smallness permitted. The distinction between banks and non-banking institutions was similarly blurred. It was ordained that banking activities could be taken up by institutions which were not even primarily banks, like insurance companies. Like banks, they had to compete with other banks and financial institutions without any safety net. Universal banks are entitled to offer an entire range of financial services (apart from commercial banking). They may sell insurance, underwrite securities and carry out securities transactions on behalf of others. They may own equity interests in firm, including non-financial firms.

Share Market: Why Is It Not Growing? The share market was launched with SEBI as its spearhead in 1991, with the understanding that it would become a major source of funding for industries. A company, rather than seeking state funding or subsidy, would get whatever it needed from the share market. In order to serve this purpose, the share market was made modern and fully computerised; the ancient tribal bidding on the floor was discounted, the dealers were encouraged to transform their private proprietorship enterprises into joint stock limited liability

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companies with a one-time waiver of their capital gains, depositories of shares were set up, and the SEBI was given extensive powers to handle the abuses of the share market operations. Still, what the share market set out to do was not achieved. It failed to raise the country’s overall level of saving: within the overall level, the share of the share market rose at the cost of banks, insurance companies, provident funds, and other sources, from where savings were diverted to this channel. A great deal of this saving went into the hands of the ‘fly-by-night operators’, whose well-written glossy prospectuses attracted the savings of many, but the companies they sponsored went out of business. These were regular phenomena that could not be effectively regulated by the regulatory body. But more serious was the impact of a series of share scams that violently shook the confidence of the middle class investors, who had deserted the banks in search of a higher yield in the share market. The report of the Joint Parliamentary Committee on the ‘share scam’, which held ‘unregulated liberalisation’, in general, and four major foreign banks, in particular, responsible for engineering illegal and unethical dealings in share markets, somewhat dampened the enthusiasm of a large section of the middle class in the share market. Restrictions put on investment of public sector and pension funds in speculative activities, in the aftermath of the scam, as also the abolition of exemptions to certain categories of saving in the income tax legislation have also hindered the flow of funds to the share market. Even if the small investors had begun coming to the share market, in the early days of structural reform, corruption in high places and the wide publicity given to various scandals by the media created a climate of uncertainty about political leadership that also had a negative impact on investment decisions by both Indian and foreign investors. While referring to the East Asian experience, it has also been pointed out that banks are more stable and reliable than stock markets in providing funds for industrial investment. On the other hand, the takeovers and mergers, which are regular features of stock market operations, often reflect a company’s success more in terms of financial engineering than production. Share prices do not always reflect the long-term expected earnings, with the operators in the share market typically taking a short-run view of the affairs of a company, and basing themselves on the present

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discounted value of future earnings, ignoring the earning potential beyond, say, a period of 10 years. Banks generally take a longerterm view, but also suffer from ‘crony capitalism’ (that is favouritism), particularly when industrial and financial interests get merged with political patronage, leading to imprudent and nonviable lending (Singh, 1995). Another factor is the dominating role played by Foreign Institutional Investors (FIIs) in the share market. For the market as a whole, their gross contribution does not exceed 6 per cent, but they play a more crucial and decisive role at the margin. In some of the high-saving East Asian countries such as Singapore, institutional sources, such as provident fund, account for the bulk of saving. In the rich countries too, institutional savers, such as pension funds, are more important in mobilising savings than the noninstitutional sources in the capital market. In the United States, in 1989, pension funds amounted to a mindboggling sum of $7.5 trillion, and grew at the rate of 15 per cent per year (ibid., 1995). This alarmed the Indian dealers, who were unable to compete with the companies having vast resources and access to international banks at low interest rates. Fears were expressed by Indian stock brokers that foreign companies, with longer credit lines, were increasingly dominating the share markets.

Macro-economic Overkill When the government is forced to reduce its expenditure, its axe has often fallen on capital expenditure, such as on irrigation, power and other major rural infrastructure, to the detriment of production (Dell, 1983; Killick, 1992a). Social expenditure on education or health has also been curtailed, as in many other countries operating under structural adjustment (Mosley et al., 1991). The global experience shows that a fiscal adjustment that falls disproportionately on capital expenditure tends to reduce private investment and hinders export promotion by leading to exchange rate appreciation in some cases (Foroutan, 1993). The balance achieved between imports and exports, in this situation, often reflects a low capacity to import because of a slow rate of growth of GDP. As two scholars from within the World Bank

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once pointed out, ‘There is little merit in having a low budget deficit and a low external account deficit if the outcome is a low level of saving and investment in the economy’ (Chibber and Khalizadeh–Shirazi, 1991). Some have argued that the last thing a country needs when facing an adverse external account along with a low growth rate is an IMF-prompted deflationary policy (Williamson, 1983a). While a high dose of deflation helps to restore the external balance, in the process, it jeopardises the internal balance, and outweighs the expansionary effects of devaluation on the demand for domestic goods (ibid.). Some even describe the excessive demand compression prescribed by the IMF as ‘macro-economic overkill’ (Dell, 1983; Killick, 1992a; Mosley et al., 1991). As one important study on the IMF concluded, Lending by the IMF has not made a significant contribution to financing balance of payment deficits in developing countries as a group during much of the 1980s and 1990s, either in terms of the size of the financing needs that these countries have faced or in terms of other financial flows. At a time when countries had severe payments difficulties, often associated with attempts to escape from the problem of external debt, the IMF took more money back from them than it made available in the form of new loans (Bird, 1993). If the sad sub-Saharan experience under structural adjustment has not been repeated in the Indian case, that is largely because of the slowing down of reform after the first three years in the face of a strong political opposition.

FDI and Other Foreign Investments While welcoming FDI, as a part of the globalisation process, the indigenous producers have had various standpoints. Some see it as inevitable that the giant MNCs would dominate the world, with their size, resources, patent and technology. It was wise to accept the inevitable and find a niche for oneself as collaborator in this over-arching framework. Some resent the MNC takeover and the

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end of their nationalist dreams; they would argue for the minimisation of the role of the MNCs and of globalisation in the national economy. A third group, perhaps the majority, is all for globalisation, provided it does not affect its domain. According to this group, globalisation is good for others but not for itself. Examples of this are legion, with the most prominent being the ayurvedic (exempted from the patent law concerning EMR) and printing (which are opposed to foreign newspapers and news agencies) industries and the legal profession (which is opposed to foreign lawyers practising in India) who do not always perceive the double talk that they are engaged in. In any case, politically also, opposition grew against MNC domination, as with time more and more indigenous firms were subject to merger or takeover by them. The consensus among the business community in favour of reforms began to crack and a section began doubting the wisdom of the pace and magnitude of liberalisation and globalisation. There was also a feeling that they and the MNCs were not playing on a level playing field, as the concessions were loaded in favour of the latter. When the new economic policy was introduced in 1991, the Finance Minister was highly eloquent with his nationalist rhetoric: ‘We should welcome, rather than fear, foreign investment. Our entrepreneurs are second to none’, he said (Government of India, 1997a). After a series of mergers and takeovers, the mood changed. Alarmed by these the Companies Act was amended to introduce a new group of shareholders who would be denied vote, hence the control of the company, in exchange for a premium over dividend. Further safeguards were introduced against take over by stealth, by buying the majority shares of the company without the knowledge of the erstwhile sponsors. Whatever be the implications of FDI on the Indian economy, there is a view that the Indian industrialists are fighting against a shadow, because FDI would never be high in India. Each of the Western countries has its own set of clientele, with whom it is used to conducting business over a very long period of time. The Japanese contribution to Indian development, though growing, is a small proportion of the total aid disbursement by the OECF; the Japanese would prefer to devote their surplus funding to East or South-east Asia. Similarly, the Germans would prefer to devote their surplus to the countries around them, that is, those of central

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and east Europe, with which it is familiar, and most of the surplus US funding is likely to find its way to the countries of Latin America with which they are used to engaging in business deals, or to countries formerly belonging to the USSR, for political reasons. Had the UK been richer, a part of their surplus could have come to the Commonwealth countries including India. The very large FDI that China obtains is mainly from its expatriates, living in different countries of the world but having close attachment with their motherland. We can only wish that NRIs were equally large in number and richer.

Development Financial Institutions It was realised, soon after the country’s Independence, that the gap between the rich countries and the poor ones could not be bridged without a massive public sector investment, for two reasons. First, in order to catch up with the advanced countries, India required a much faster rate of growth than was possible under the former. Second, the domestic capitalist sector was virtually conspicuous by its absence. The public sector had to play a more vigorous and active role than was the case in the advanced countries during the process of their growth. The advent of Development Financial Institutions (DFIs) in India was in response to this situation. It was felt that the existing institutional framework was inadequate to efficiently address the longterm resource requirements of industrial projects. Indian DFIs thus gradually evolved, since 1948, as largely government-owned specialised financial institutions with the principal objective of providing term finance for fixed asset formation in industry along with extension services in the fields of entrepreneurship and consultancy for the small and medium sectors. All these were changed with the publication of the report of the Narasingham Committee, 1991. Interestingly, the report was completed in four months, while it usually takes years for a committee report to be ready. The report was modelled on ‘financial sector reform’ suggested in numerous World Bank documents; this explains why the report took so little time to complete. The report

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contested the prevailing theory that financial institutions are institutions of development in the hands of the government. On the contrary, Narasingham held that the main objective of a financial institution would be to make money for its owners, shareholders and account holders. In other words, the Narasingham Committee ruled out development as an objective of financial institutions. From this, it concluded that there was no need for development financial institutions, and still less for institutions, which played a specialised role for small or sick industries. So these specialised institutions like the IIBI, and the Small Industries Development Bank of India (SIDBI) had no role in the scheme devised by the Narasingham Committee, they had to be disbanded and they would be no different from other banks. In other words, the Narasingham Committee brought about a sea change in the operational environment of these financial institutions. The subsidisation of interest was no longer permitted, nor was intermediation for a specific cause like sickness or smallness. Further, banking activity could be taken up by institutions which were not primarily banks, like building societies or insurance companies. Like banks, they had to compete with other banks and financial institutions. Some would survive and some would not, but this was like what it was, good or bad, following the report of the Narasingham Committee, 1991. The Committee remarked, ‘As industrial development proceeds and the economy acquires greater sophistication the need for further banking activity can be taken up by institutions which are not primarily banks, like building societies or insurance companies.’ The Committee further remarked, ‘As industrial development proceeds and the economy acquires greater sophistication, the need for specialised financial institutions focusing their attention on promotional and developmental roles is likely to diminish .…’ The Khan Committee Report on ‘harmonisation of the roles and activities of banks and DFIs’ talked of banks and DFIs as entering into each other’s fields of operation (Government of India, 1998). The traditional distinction between them was already blurring. While many of the non-banking institutions were adopting banking as a major activity, the banks too were increasingly encroaching into areas which were not strictly reckoned as banking activities in the past.

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The second Narasingham Committee (1998) took the view that, historically, DFIs had done enough to boost Indian industry and there was no further requirement for such institutions. Rather it preferred to bring about a systematic order in the operations and to provide a level playing field to all the major financial market intermediaries (Reserve Bank of India, 1999). After the introduction of the financial sector reforms in 1991, the access of DFIs to the assured source of long-term and low-cost funds was modified. They were required to go primarily to the capital market for resource mobilisation, like other institutions. The tax-free status of the Industrial and Development Bank of India (IDBI) was withdrawn to provide a level playing field to its competitors, thus impairing its ability to provide long-term finance at relatively low costs. However, selected DFIs (IDBI, ICICI, IFCI, SIDBI, Exim Bank and NABARD) were permitted, in October 1993, to access shortterm funds by way of CDs/FDs and term money borrowings for three to six months within the stipulated instrument-wise limits. In May 1997, the system further changed and the instrument-wise limit had been replaced by umbrella limits making it more restrictive. In March 1994, the DFIs were advised by the RBI to implement prudential guidelines on capital adequacy and income recognition, asset classification, provisioning and other related matters in a phased manner from the accounting year 1993–94. From 1997 onwards, ‘term lending’ institutions and three re-financing institutions have been subjected to mandatory credit exposure norms earlier applicable only to commercial banks. From March 1998 onwards, it was stipulated that the issuance of bonds by the DFIs with either a maturity of less than five years or of five years and above, but having special features like options or bearing interest rates exceeding 200 basic points over the yield on government of India securities of equal residual maturity, would require the prior approval of the RBI, which had not been required earlier. Further, financial sector liberalisation led to a change in the ownership pattern of the DFIs; DFIs now changed their constitutions and made public offerings to raise capital from the market. Today, in order to survive, DFIs are making efforts to diversify their range of activities and are entering into new areas. Both IDBI

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and ICICI have set up banking and brokerage subsidiaries, while, at the same time, as in the past, reflecting national priorities, they are adopting capital-intensive and long-gestation infrastructure financing as a thrust area. What is the experience of other countries with the development finance institutions? The Japan Development Bank (JDB), a DFI in that country, continues to provide long-term, low-interest loans (in conjunction with other Japanese and foreign banks) as supplemental lending to projects which are unable to obtain financing from other sources because of factors such as high risk, long maturity periods, low profitability or high initial investment. Like the Indian development institutions before 1991, the JDB’s lending policy is not dictated by primary considerations of profit and its entire funding requirements are met by the government (apart from recycling of rapid loans) (Government of India, 1998). Similarly, the Industrial Financing Corporation of Thailand (IFCT), like its Indian counterparts, offers concessional loans, primarily for exports and environmental protection, to small-scale industries, with concessional funds from the Bank of Thailand (BoT). The debt instruments issued by the Corporation enjoy privileged status, as they are treated as liquidity assets required to be held by banks, financial institutions and insurance companies under BoT regulations, as in India. The Thai government also guarantees borrowings from IFCT subject to a cap of 12 times the capital base. Besides, the Corporation enjoys exemption from income tax, certain withholding taxes and stamp duties (ibid.). For the Korean Development Bank (KDB), long-term equipment financing has been the main lending activity, with increasing emphasis on thrust sectors like infrastructure, technology development, environmental protection and telecommunications. The South Korean government allocates funds in its budget to the KDB to undertake such directed lending. The KDB also has access to special purpose funds such as the Petroleum Business Fund, Tourism Promotion Fund and Special Industry Supporting Fund directed towards specific industries designated by the Korean government. According to the KDB Act, the government has an obligation to replenish any deficit if the KDB’s legal reserves are insufficient to meet its accumulated losses (ibid.; Hajra, 2002).

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Non-Banking Institutions There is often a misconception that equates the non-banking entities with chit funds and illegal operations (Government of India, 1998). The fact is that chit funds account for a small proportion of the activities of this sector. A large and heterogeneous set of nonbanking financial institutions, which include the Unit Trust of India (UTI), other mutual funds, the life and general insurance corporations, investment corporations, and hire purchase and leasing companies, constitute the third major component of the financial system. For some of these, mobilisation of savings is the prime activity, while others aim at rendering financial assistance. While some commercial banks have been providing merchant banking services and housing finance for quite some time, some other commercial banks have diversified and expanded their activities into related areas, such as leasing, mutual funds, venture capital and miscellaneous financial services (in addition to housing finance and merchant banking) by establishing non-banking subsidiaries for the purpose. Beside these components, there is a large number of non-financial companies in the public and private sectors, which raise loans or debenture or bond capital and deposits directly from the market. For example, the Post Office Savings Bank, Provident Funds, other small savings and certain special bonds constitute important avenues for financial savings by households, as also important sources of finance for the Central and state governments, apart from the dated government securities. Apart from the organised financial system, moneylenders and indigenous bankers, trading, leasing, hire purchases, investment loans and mutual benefit companies and chit funds continue to play a role in the unorganised financial sector.

State Financial Corporations The State Financial Corporations (SFCs) Act was passed in 1951 to cater to the needs of medium- and small-scale industries. At present, there are 18 SFCs in the country whose management is in the hands

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of the state governments but the concerned law also enjoins upon IDBI the responsibility to supervise and monitor them. State Industrial Development Corporations (SIDCs) were established in the 1960s and 1970s under the Companies Act, 1956, as wholly owned state government undertakings, for the promotion and development of medium and large industries in their respective states. There are 28 SIDCs in the country and out of these, 11 are performing as SFCs too. The State Small Industries Development Corporations (SSIDCs), established as a state government undertaking under the Companies Act, 1956, cater to the needs of the small, tiny and cottage industries in the state/union territories under their jurisdiction. Over the last three decades and more, these state level agencies have contributed substantially to investment activity in the industrial sector, especially to the medium- and small-scale sectors. At the end of March 1997, the cumulative assistance sanctioned and disbursed by SFCs and SIDCs aggregated Rs 396.578 billion and Rs 305.984 billion, respectively. Although the performance of the SFCs and SIDCs has been impressive in terms of growth, and sanctions and disbursements, their performance with respect to recoveries and collection of dues remain unsatisfactory, particularly in the case of SFCs, resulting in high NPA levels and poor profitability. The reforms in the financial sector at the national level have led to market orientation in the operations in state level institutions too. Now re-finance support from the IBDI/SIDBI to state level institutions has been reduced. As a consequence, some of these institutions have been forced to access the market for raising resources. In order to consider the problems of the state-level financial institutions in the changed environment, a meeting of the heads of these institutions was held in Delhi in 1993, under the chairmanship of the Union Finance Secretary, where a high level committee was formed to look into the matter. The committee recognised that, in the changed context, SFCs would have to diversify their operations and get into newer areas; their resource base would need to be broadened and their over-dependence on the state government and the IDBI would need to be gradually reduced. These institutions, it was believed, needed to be organised more properly, supported by the continuity of the top management,

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and operational autonomy and flexibility. Some of the recommendations of this committee have already been operationalised, while others are yet to be adopted.

Values of Globalisation The most significant contribution of the globalisation debate has been towards the attitude of the people. While globalisation is yet to be accepted, the values and norms of a globalised society seem to have been more readily accepted by the masses. An apt example of the values and attitudes shaped by globalisation are the advertisements being dished out by Onida, a television company of Japanese parentage. The advertisement shows that those who have purchased Onida do not mind the stones with which they are pelted by envious neighbours, as if proving that a right purchase has been made. The motto is not to keep up with the Joneses, but to do better than them. If your neighbour’s television has a screen of 14-inch width, you should want one with a 21-inch width. If your neighbour already has one with 21 inches or more screen width, you should have one with wheels so that it can be taken from one room to another, and so on. Look at the signage at the back of lorries and some cars. There was a time when those who were envious of your car would be admonished by warnings that their faces would be ‘blackened’ because of their envy. This was the maximum threat given to the envious. Today, an envious neighbour, who blows up like a hot luchi in his envy shows, with his envy, that a right purchase has been made. Envy is thus no longer considered to be a negative emotion. It is reckoned to be the norm in daily life. Such are the values that globalisation has brought with it.

9 Fiscal Reform For a long time, fiscal issues dominated Indian thinking. In the early days, the planners were worried about how to make ends meet when devising the budget for the year. From the 1991 budget onwards, the expression ‘fiscal deficit’ has come into vogue. All kinds of borrowing are added up, to work out the ‘deficit’. A good finance minister is believed to be one who can eliminate or minimise such a deficit, and, accordingly, balance income and expenditure. He is considered to be more successful if he can raise tax as a proportion of the GDP or keep the fiscal deficit low. Deficit is measured in several ways, as a proportion of the GDP, including primary, fiscal and budget and revenue deficits. In each case, a deficit is measured by a gap between income and expenditure and is expressed as a proportion of the GDP. Budget Deficit measures the difference between total receipts and expenditure of the government. Revenue Deficit measures the excess of expenditure over revenue receipts. Fiscal Deficit is the excess of total expenditure of the government, including loans, over revenue receipts and non-debt capital receipts. Sometimes distinction is made between ‘gross’ and ‘net’ fiscal deficits; the latter represents the difference between gross fiscal deficit and net lending. Primary Deficit is the difference between the gross fiscal deficit and the interest payments. It indicates the borrowing requirement of the government in the absence of the debt service burden of past borrowings by the government. Deficits can be covered in a number of ways: by way of an increase in tax rates, by bringing foreign saving into the economy, and so on, including public borrowing. If everything else fails, the

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Central government has the option of printing notes of the required amount to bridge the gap, which is the same as taking a loan from the Reserve Bank of India, a power not shared and often resented by the states. This way of bridging the deficit creates inflationary pressure on the economy. The choice is thus between the money so created and the additional output generated from that money (Buiter, 1990). In the early days, a great deal of discussion took place regarding deficit financing, and whether it was proper for the authorities to allow the Reserve Bank or the Central government to print money in order to bridge the deficit. There was an asymmetry in the relationship as regards money between the Central and the state governments. While the former had the ability to print notes, the latter did not. As a consequence, the Central government could spend what it wanted, but the state governments could not print money and had to balance their expenditure against their income. The Central government felt that it was wrong to ask for fiscal discipline only from the states, while the Central government continued to use the note-printing machine and incur deficits. One way in which this could be avoided, the government thought, was by binding itself through a legislation to keep deficits in check. Apart from the question of bridging the deficit, what bothered the government more was that a large part of the government expenditure was sucked by labour costs and did not add to the output. An important question pertained to how more of the government’s expenses could be devoted to output-increasing activities. The Plan expenditure, as a proportion of the total government expenditure, continued to decline until the end of the decade, when it became a quarter of the total government expenditure. Second, not only was the wasteful non-Plan expenditure high, three items—interest payments, subsidies and defence expenses—accounted for more than three-fourths of the non-Plan revenue account. There was no way that expenses on these could be reduced. The interest payments could not be curtailed as these were covered by long-term legal contracts, and failure to meet these commitments would immediately raise the question regarding the capacity of the government to honour its commitments. The expenses on defence could not be reduced without compromising the defence of the country, and so they could not be touched. The only item on which the estimated

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expenditure could be reduced was on the subsidies. So, the axes could only fall on the subsidies. Third, equally important, was the question as to how the tax revenue could be increased. The tax to GDP ratio was around 10.5 per cent, in the late 1990s, a low figure indeed (Government of India, 1997a). By the end of the decade, it fell to less than 9 per cent of the GDP (CMIE, 2002a). Table 9.1 Government Tax Revenue as a Proportion of the GDP in the 1990s Tax Revenue (Rs billion)

Year 1979–80 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

As a Proportion of the GDP (%)

120.13 575.76 673.61 746.37 757.43 922.94 1,112.24 1,287.62 1,392.21 1,437.97 1,717.52

9.94 10.12 10.31 9.97 8.82 9.11 9.36 9.41 9.14 8.26 8.50

Source: CMIE, 2002a, p. 149. Table 9.2 Revenue from Corporation Tax Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000 Source: CMIE, 2002a, p. 150.

Corporation Tax (Rs billion)

As a Proportion of the GDP (%)

53.35 78.53 88.99 100.60 138.22 164.87 185.67 200.16 245.29 306.92

0.94 1.20 1.19 1.17 1.36 1.39 1.36 1.31 1.41 1.59

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Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

As a Proportion of the GDP (%)

53.71 67.31 78.88 91.23 120.25 155.92 182.31 170.97 202.40 256.54

0.94 1.03 1.05 1.06 1.19 1.31 1.33 1.12 1.16 1.33

Source: CMIE, 2002a, p. 151. Table 9.4 Expenditure and Wealth Taxes Proceeds from Taxes Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

Expenditure (Rs billion) 0.82 – 1.51 2.29 1.97 2.28 2.93 98.34 3.95 2.72

As a Proportion of Tax Receipts

Wealth (Rs billion)

Expenditure (%)

Wealth (%)

2.31 3.07 4.68 1.54 1.05 0.74 0.78 1.13 1.62 1.33

0.09 – 0.14 0.17 0.12 0.14 0.16 4.22 0.14 0.09

0.25 0.29 0.42 0.12 0.07 0.04 0.04 0.05 0.06 0.04

Source: CMIE, 2002a, pp. 158, 159. Table 9.5 Gift and Service Taxes

Year 1990–91 1991–92 1992–93

Proceeds from Taxes Gift Service (Rs billion) (Rs billion) 0.03 0.08 0.09

– – –

As a Proportion of Tax Receipts Gift Service (%) (%) – 0.01 0.01

– – – Table 9.5 contd.

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Table 9.5 contd.

Year 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

Proceeds from Taxes Gift Service (Rs billion) (Rs billion) 0.05 0.15 0.11 0.10 0.09 0.10 –0.03

As a Proportion of Tax Receipts Gift Service (%) (%)

– 4.07 8.62 10.59 15.86 19.57 21.28

– 0.01 0.01 0.01 – – –

– 0.25 0.51 0.56 0.68 0.70 0.72

Source: CMIE, 2002a, pp. 160, 162. Table 9.6 Plan Expenditure Plan Expenditure (Rs billion)

Year 1995–96 1996–97 1997–98 1998–99 1999–2000

463.74 535.34 590.77 668.18 761.82

As a Proportion of the Total Expenditure 0.26

Table 9.7 Subsidies on Various Items

Year 1980–81 1981–82 1982–83 1983–84 1984–85 1985–86 1986–87 1987–88 1988–89 1989–90 1990–91 1991–92 1992–93

Total Input Subsidies (Rs billion)

Pubic Investment in Agriculture

15.15 16.18 20.83 27.06 36.64 42.88 50.77 65.71 75.91 86.34 101.62 118.67 141.28

1796 1934 2109 2246 2463 2621 2667 3057 3162 2989 3193 3230 3750

Source: Dev, 1997, p. 6.

Subsidies as a Proportion of the Agricultural GDP (%) 3.25 3.19 3.71 4.0 5.08 6.13 6.82 7.87 7.29 7.48 7.52 7.45 7.94

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Number of Assessees 143,230 182,260 2,118,100 24,800 300,020

It was noticed, almost soon after the country’s Independence, that only 1 per cent of the population paid taxes and the vast majority, that is, more than 99 per cent, paid no income taxes. Even in 1997, only 12 million were assessed for income tax purposes, and only 12,000 assessees had an income exceeding Rs 1 million. This was alarming as it not only kept the tax revenue low, and consequently, pushed up the proportion of indirect taxes in government receipts, but also made a microscopic minority participate in the development process. By now, the number of people paying taxes has gone up to 30 million, and the government wants to make it close to 50 million by 2004–2005, if possible. The government set out to do this by making the use of the permanent account number (PAN) compulsory in some transactions, widening of TDS (tax deducted at source), inducing the companies to file tax returns, carrying out selective surveys and searches, and effective implementation of the one-by-six scheme, a scheme by which a person is required to file tax returns if even one out of six listed items is possessed by the person (see Table 9.8). Of course, the common people paid indirect taxes when they purchased goods from the market, and a large part of indirect taxes were contributed by them. To that extent their contribution to the national exchequer went up in direct proportion to the rise in indirect taxes. But indirect taxes, by all canons of taxation, were regressive and reactionary, as they made no distinction between those with high earnings and hence a higher income, and a greater ability to pay taxes, on the one hand and those with a higher utility of money because their income is low. It was therefore important to raise the proportion of direct taxes in government receipts, which were, almost by definition, progressive and made such a distinction. It was found that taxes on income, property and assets accounted for more than half the tax income in most of the developed countries (World Bank, various years).

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Historical Analysis of Taxation To look at it historically, in the early 1950s (1954), a Taxation Enquiry Committee (TEC) was set up, which formed the basis of taxation (Thimmiah, 2002) in the early years. The TEC, like Kaldor afterwards, wanted a tax on consumption and a tax system which maximised saving while, at the same time, reflecting a person’s ability to pay taxes. The TEC wanted more of conspicuous consumption to be diverted to productive saving (ibid.). However, the emphasis was on private saving and taxes were not allowed to create any disincentive as far as private household income or saving was concerned. In 1957, Nicholas Kaldor, a Hungarian economist based in Cambridge University, suggested that expenditure was a good proxy for income and, unlike income, was less liable to underestimation (ibid.). And he suggested the levying of some new direct taxes on the expenditure side of income generation including wealth tax, expenditure tax, gift tax and capital gains tax. All these four taxes were imposed promptly but most of them were also withdrawn on various grounds, mainly on the ground that the yields were low. But it was said that these four taxes were not properly implemented. In 1970, the Minister of Finance, C. Subramaniam, thought that the direct taxes were too high and appointed a Direct Taxes Inquiry Committee for looking into the matter. ‘Compliance’ became the catchword, and it was recommended that the rate of taxation should not be so high as to encourage tax evasion. He brought down the marginal rate of income taxation from 97 per cent, which was absurd, to 75 per cent, which looked reasonable (ibid.). The fourth phase, under V.P. Singh as Finance Minister, brought down the number of slabs to four and the marginal tax from 67 per cent to 50 per cent in addition to introducing a modified version of VAT called MODVAT for the first time (p. 132). At some stage, it became a doctrine that the rural population should not be taxed directly. This, in effect, meant that the rural rich were not liable to pay direct taxes, though the share of taxpayers could not be raised in an agricultural country like India without somehow bringing the rural rich into the tax net.

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Furthermore, the rural rich, living in rural areas in the middle of poverty, gained immensely during the Green Revolution years from subsidies given to agricultural imports and customs, but, in return, did not pay the government back in the form of taxes. It was high time that they paid taxes, but the government in Delhi lacked the political will to impose taxes on them as they controlled votes in the countryside and were known as ‘vote banks’. In the fifth, that is the structural adjustment, phase many changes were initiated. First, like the Narasingham Committee for banks, a committee was appointed for the purpose of fiscal reform under Professor Raja Chelliah, which gave its report in two parts, about one year after it was appointed. The main burden of the Chelliah report was to make the tax system simple, efficient and transparent, and at the same time, productive in terms of the revenue generated for the government. Moreover, he felt that a good tax system was one wherein most of the earnings of the government came by way of direct taxes. As for indirect tax, taking simplicity and transparency into account, the committee recommended a system of taxation that was based on value added at every stage. The minimisation of fiscal deficit was seen as a major goal of the government, and it was assumed that the fiscal deficit, which, at 8.2 per cent in 1990–91, was high in the beginning, would be reduced to 6.2 per cent by the end of the year and would further go down below 5 per cent within a short time. However, the fiscal deficit remained higher than this target and the more the government tried to reduce the gap between the demand for and the supply of goods, the higher the fiscal deficit remained. It was not possible for the government to maintain a low figure for fiscal deficit and at the same time, to raise its production and export levels. There were other problems from the beginning that got compounded over time. For instance, the proportion of planned expenditure in the overall government expenditure had been declining for several decades, while the interest payments had been rising, thereby creating a situation of internal debt trap, where more and more would be needed to pay the internal debt.1 Dr Manmohan Singh’s solution was to make the government free of internal borrowing, hence making the latter no longer vulnerable to interest payments, but this solution did not work.2 The foreign debt, once the third highest in the world after Brazil and Argentina, and overtaken by China and Indonesia too in later years, is still high

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and alarming. One measure of the incidence of external debt is the debt-service ratio, which is the ratio of debt service (both principal and interest) in a year to the export earnings in that year. In the 1990s, all the finance ministers reduced income tax rates, and it was thought that the lower rates would bring compliance to the extent that the tax yield would go up despite the lowering of rates. Such a policy was effective up to a point, but beyond that it could not possibly work. At its extreme, it meant that a zero rate of income taxation would maximise compliance, which is absurd. The income tax yield stopped increasing in the late 1990s. Another tendency was to make ‘black money’ white, and productive through various amnesty measures. It started with Mrs Indira Gandhi’s proposal to convert such black money into anonymous ‘bearer bonds.’ During the early 1990s, one proposal was to make the National Housing Bank the main beneficiary. Whatever was given to the National Housing Bank, 40 per cent of it was immediately deducted for use as a fund for urban renewal of the slums while the remaining part was converted into lily white money with no trace of black (Government of India, Economic Survey, 1991–92). More successful was the proposal that, like the black money-holder in the case of the National Housing Bank, amnesty be extended to the person who received a certain amount from someone (maybe his uncle) abroad. In the second case, money was usually transferred through the hawala market to a foreign country and then advantage was taken of the amnesty within a time period. A third proposal was to permit a passenger to carry five kilograms of gold into India, where the prices of gold were high. Both Mr Chidambaram of the United Front government and Mr Yaswant Sinha of the BJP followed the same policies with respect to the conversion of black money into white. In 1997, Mr Chidambaram formulated a ‘voluntary disclosure’ scheme, under which interest and penalty would be waived, immunity would be declared, and the person concerned would pay tax at 3 per cent on the defaulted amount, within a certain time period (Government of India, 1997a). In 1998, Mr Yaswant Sinha of the BJP similarly made use of a bargaining policy with the tax evader wherein his past record of evasion was made clean provided he paid the taxes due to him. In the 1990s, the Finance Ministers were also busy imposing presumptive taxes on small businessmen with small turnovers.

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The service tax for three categories of professionals was introduced in 1994–95. At present, it covers 51 services. In 2003–2004, seven more services were added to the list. The ultimate objective is to cover all the services, including doctors and lawyers. In 1996–97, small businessmen, whose business turnover was within Rs five lakh but who avoided paying taxes because there was no proper accounting of their income, were brought within the tax net; for this, they paid Rs 1,400 each and complied with the basic formalities. The presumptive taxes helped to raise the proportion of taxpayers in the population to about 20 million. However, since the revenue yield was low, despite the rise in the number of taxpayers, this policy was discontinued from the following year. It was replaced by a scheme that enabled a retail trader to pay 5 per cent of his income as tax provided his turnover did not exceed Rs 1 million; those whose turnovers were Rs 0.8 million or less did not have to pay taxes (Government of India, 1997a). Another device used in the 1990s was the so-called one-by-six criterion which induced more people to fill the tax return. It began in 1997 with only two criteria relating to foreign travel and house ownership. Those undertaking foreign travel and those who owned houses were supposed to fill in personal income tax forms, thus widening the base of taxes. This was applied to only 12 urban areas. Next year, the scheme was extended to 23 other cities. Soon six criteria were used and in 1999, over 54 cities were covered by the scheme. In the following year, the coverage was extended to 79 additional cities (Government of India, Economic Survey, 2000–2001; Government of India, 1997a). By 2001–2002 the scheme was applied to 4,989 urban areas each covering more than 5,000 people. The six criteria involved home ownership, phone ownership (cellular phone ownership from April 2002 onwards), car ownership, foreign travel, membership of any important club and membership of a credit card. Those who fulfilled one of the six criteria had to submit a tax return. The one-by-six scheme has been successful in increasing the number of assessees in a spectacular manner. Besides, the tax collection has gone up after introduction of this scheme. Many of those who paid direct income taxes were opposed to ‘search and seizure’ on the ground that such powers are often misused by the tax authorities and help to strengthen the bureaucracy. The argument on the side of the tax authorities is that there is no

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alternative to ‘search and seizure’ for checking tax evasion. However, one solution is to raise the ranks of the officials involved, so that the search and seizure operations are undertaken only by responsible officials. The tax system has been modernised over time with the use of computers and the broader use of the number given by the tax department. In 2000–2001, 54,805 assessees showed income exceeding 1 million while 843,514 assessees showed an income exceeding 0.2 million. Both figures went up the following year to 62,027 and 1,243,335, respectively. Two other things came up during the United Front rule. First was the devolution of the Central government schemes to the states, like those on agriculture, which are primarily implemented by the state governments and which are supposed to be the responsibilities of the state governments under the Indian Constitution. However, the states were unwilling to assume the responsibility of these schemes if they were not accompanied with funding, and the discussion between the Centre and the states floundered on the question of how the funding should be calculated for various years. The second issue concerned dividend taxes imposed by Mr Chidambaram. Those opposed to this tax talked of ‘double taxation’, first on the dividend of the company and then on the amount distributed to shareholders. Those supporting the tax pointed out that no double taxation was involved as it was the duty of all the citizens, corporate bodies and individuals, to pay taxes. However, alarmed at the opposition that this tax evoked, the government withdrew it after several years. In the Budget for 2003–2004, value-added tax was introduced, though some indications that it was going to replace indirect taxes were there in the earlier Budgets. The VAT or value-added tax is what its name implies, that it is a tax levied at every stage, particularly, on the value created at every stage. Any tax collected in excess of the tax on value-added is refunded. This tax makes tax evasion difficult, if not impossible, and is neutral towards both the producer and the consumer, an added attraction. It is an appropriate replacement for Central Sales Tax and makes it possible to add services. The number of slabs in the direct tax bracket was reduced to three (10 per cent, 20 per cent and 30 per cent) and in indirect

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taxes on tariff, was reduced to four: 8 per cent, 16 per cent, 24 per cent and 35 per cent, to make them comparable with taxes in the East Asian countries.

Government Binding Itself to Reduce Fiscal Deficit During the period 2000–2002, the main legislative aim was to bind the government in such a way that its ability to incur deficits was reduced. In the Lok Sabha session of December 2000, a bill on fiscal management was passed, and was approved by the Rajya Sabha in August 2003. Through this, the BJP government and the subsequent governments proposed to bind their own hands, and to set a limit to the amount they would be able to borrow from the Reserve Bank of India. By this act of self-discipline, the government proposed to keep the fiscal deficit down. While this act of selfdiscipline was laudable, as also the pious intention to keep the fiscal deficit in check, given its record and the international experience, it was doubtful that the government would succeed in its endeavour, and whether it was desirable that the government succeeds (Government of India, 2000a; Government of UK, 1998). This is not the first time that the government decided to impose discipline on itself. In his budget speech in February 1994, Dr Manmohan Singh, who was the Finance Minister at the time, proposed a similar self-discipline. He said, ‘I have long felt that Government should not be able to finance its deficits by creating money, through unlimited recourse to the Reserve Bank, by issue of ad hoc Treasury Bills.’ He wished to phase it out within three years (Government of India, 1997a). He proposed that if the government was unable to redeem treasury bills within 10 days, the Reserve Bank of India would automatically sell those. He also proposed that the government would cease to have recourse to the Reserve Bank of India, from 1997–98 onwards. At that time, these proposals were not translated into a bill and no attempt was made to get them passed by the Parliament. Perhaps, after second thought, the government decided to shelve it for the time being. It

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is a moot question as to why the same idea is being revived now, after eight years, and by a different party. What changes have prompted the present government to take another look at an old idea? One reason for this could be the continued lack of success with the fiscal deficit. When a stabilisation agreement was signed with the IMF in 1991, it was expected to bring down the fiscal deficit to 4.7 per cent by 1993–94, an expectation that was not met. In fact, the fiscal deficit climbed back to a figure very close to the original pre-reform figure. The figures were quite low for some years, but then again took an upward turn in 1998–99. Having failed to control the deficit on its own, the government is now seeking an external compulsion which would limit its capacity to borrow, and hence this bill (Government of India, 2000a). It has been found that the years when success was achieved with the fiscal deficit are those with low growth. It seems that the government is incapable of solving these two major problems, of high deficit and low growth, at the same time. The control of fiscal deficit is to be at the cost of growth, at low levels of demand and supply. But once the government decided to push hard to secure a high growth rate for the economy, it seemed to lose control on deficits. Another issue relates to the sovereignty of the Parliament. In the case of fiscal deficit, either the government has the political will to control fiscal deficit or it does not. If the government has the political will, it may be argued that this bill is frivolous and unnecessary. If the government does not have the political will, no matter what legislative efforts are undertaken, the provisions of this bill would not be implemented. If tomorrow this government can pass this bill, in order to impose fiscal discipline on itself, then, it is equally possible for it to withdraw the bill day after tomorrow. As long as the government enjoys a majority in the Lok Sabha, it can make and unmake a bill umpteen times. There is no restriction according to the Indian Constitution. It seems, from the reading of the bill, that the government is not averse to borrowing as such, but is averse to borrowing from a particular source, the Reserve Bank of India, at a cheap rate. This bill would not object if the money were to be borrowed from the privately owned and controlled capital market at the market rate

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of interest. One wonders if the objection is not so much to borrowing, but from whom and at what rate, why the problem cannot be solved by raising the interest at the market level for the borrowings from RBI by the government, rather than taking recourse to this clumsy bill (Government of India, 2000a). It is argued that while the deficit is incurred by the present generation, the future generations become responsible for the repayment of the amount borrowed with interest, though the decision to borrow was not theirs. This raises an important point regarding intergenerational issues, that is, whether the present generation has the right to borrow what it cannot redeem itself (ibid.). It was felt that the time had arrived for this bill, which was in conformity with Article 292 of the Indian Constitution, that allows for imposing a limit on public debt, should it be necessary (ibid.). There was also the feeling that the issue of borrowing should not be left to the discretion of the RBI or the government. There had to be rules constraining their discretion (ibid., 2000a). Table 9.9 Fiscal Deficits

Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000(re) 2000–01(be) avg(91–92 to 98–99)

Fiscal Deficit

Primary Deficit

Gross Net (Rs billion)

Gross Net (Rs billion)

Credit Deficit (Rs billion)

Net RBI Revenue

.083 .589 .569 .701 .571 .051 .049 .587 .643 .559 .051

.573 .399 .428 .535 .399 .359 .341 .416 .454 .493 .046

.432 .158 .129 .274 .135 .086 .053 .154 .201 .09 .046

.335 .145 .165 .283 .119 .0091 .0066 .015 .182 .199 .164

.275 .0089 .006 .0003 .0021 .168 .0014 .0085 .0067 –.0029 .–

.347 .264 .263 .381 .307 .252 .024 .306 .385 .377 .355

.583

.416

.149

.015

.0064

.03

Notes: The GDP figures are based on new series with 1993–94 as the base year from 1993–94 onwards. Prior to that, the GDP base is at 1980–81 prices. Source: Reserve Bank of India, 1999–2000, PG 214.

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The three main features of the bill are as follows: (a) to reduce revenue deficit by an amount equivalent to onehalf per cent or more of the estimated GDP at the end of each financial year, and to reduce it to nil within a period of five financial years; (b) to reduce fiscal deficit by one-half per cent of the GDP at the end of each financial year, and to reduce it to not more than 2 per cent; and (c) to accomplish within ten years a target of 60 per cent of the GDP for the total debt and liabilities.

Experience in Other Countries In a number of countries there are similar, transparent rules that bind the government, and add to the resolve of their governments to keep deficits in check. This is a new phenomenon. But for one or two countries, these rules are a comparatively new experience, since most such rules or legislations were promulgated in the 1990s, and are largely confined to the developed countries. Besides, their full outcome has not yet been evaluated. In the case of the poor countries who promulgated similar laws, perhaps an important factor was the influence of the IMF-World Bank conditionalities, under which these operated. The most important experience from our point of view is the Maastricht Treaty of 1992, which enabled many countries of Europe to join the European Union by January 1999, provided their fiscal deficit was below 3 per cent of their GDP and the public debt was, in aggregate, less than 60 per cent of the GDP. It is known that many countries, particularly those of South Europe, struggled to fit their accounts to this criterion. To quote The Economist, ‘Between 1982 and 1996, the Euro area governments, taken together, breached the 3 per cent ceiling every year. Heroic efforts during the preparations for EMU cut the average deficit to roughly 2.5 per cent of GDP in 1997 and about the same in 1998 (The Economist, 9 January 1999). Some of them took

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recourse to ‘creative accounting’ by offloading some of the items from the central budget, and in several other ways. It is to be noted that the final figure of 2 per cent in the proposed Indian law, is even below this limit, which most of the members of European Union achieved with great difficulty. New Zealand is considered to be one of the most successful countries in implementing the law on fiscal responsibility. In 1994, the relevant law was passed which enunciated five principles: (a) to reduce public debt to a prudent level, that is 20–30 per cent of the GDP, and until that level is achieved, to keep the operating costs less than the operating revenue, (b) to sustain a higher level operating revenue over costs even after that prudent level has been achieved, (c) to achieve and maintain levels of crown net worth, (d) to manage prudently the fiscal risks facing the crown, and (e) to pursue policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years. Australia enacted the Charter of Budget Honesty in 1998, which required fiscal strategy to be based on principles of sound fiscal management and public vigilance. The legislation provided that the net debt would decline from 20 per cent in 1996–97 to 7 per cent in 2000–2001 in order to achieve fiscal balance over the economic cycle. Japan introduced a similar legislation in 1997, prescribing a 3 per cent limit, but quickly suspended it in 1998 in the wake of the economic crisis visiting that country at that time; and instead opted for a fiscal stimulus package. USA is guided by a legislation that was passed as far back as 1985, which prescribed balanced budget by 1991; but this target could not be met even by 1993. This rather unsuccessful legislation was replaced by the Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987 and the Budget Enforcement Act of 1990, which required an automatic percentage reduction in expenditure corresponding to a shortfall in revenue, with the target of a balanced budget in 2002. With this policy, the debt to GDP ratio was expected to come down from 68 per cent in 1995 to 60 per cent in 2002. In 1997, the Balanced Budget Act was passed and for the first time in 29 years, the budget was balanced, wiping out the deficit of $247 million.

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England enacted a similar bill in 1997, which brought down the debt to GDP ratio to 36.8 per cent in 1999–2000, while the prudent level was 40 per cent (Government of United Kingdom, 1998). Several developing countries have also passed similar laws imposing self-discipline on their governments on fiscal issues, including Indonesia, South Africa, Kenya, Argentina, Peru and Brazil. But these countries are also under the IMF-World Bank obligation to reduce their fiscal deficits. It is not clear what the outcome of these legislations was, whether these worked, and if they did, how far these were due to the pressure exerted by the IMF-World Bank and how far they were due to the relevant law.

Implications of Curtailing Government Expenditure to Meet Deficit Irrespective of its merits, the timing of the bill is questionable. This kind of bill is usually introduced when the economy is on the upswing, and the government is attempting to restrain its buoyancy through its policies. Seldom are such bills passed by any country in the middle of an economic depression. This bill can give a wrong signal to the economy at a critical time, and unleash a deflationary process, when prices, wages and incomes would be depressed, investment would suffer, and economic growth would decline while unemployment would rise. This is not merely a hypothetical possibility; deflation has visited many countries who have been in a hurry to reduce fiscal deficit over the past two decades, all over the globe, in compliance with the World Bank directives, thereby reducing their economies to a miserable state. It has happened in a big way in the sub-Saharan countries, which are fast ‘under-developing’, as also, to a lesser extent, in the Latin American countries. Just now the world is in the middle of a severe depression that has also affected the Indian economy. It is also a global experience, repeated time and again, that when public investment is curtailed in order to reduce fiscal deficit, the guillotine falls on public expenditures on areas like education, health and irrigation (Killick, 1992a; Zaidi, 1994). Already our figures on some of these, as proportions of the GDP, are pitifully small, as compared with those for other, neighbouring countries.

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Any further reduction would create havoc, affecting the ‘human dimension’ of growth in the short run and the growth rate itself in the long run. No economy can ignore social expenditures except at its peril. Amartya Sen keeps on repeating this point because this is the global experience. The deflationary policy might help in balancing imports and exports, and internal demand with supply, but at what cost? As two scholars from the World Bank once commented, ‘There is little merit in having a low budget deficit and a low external account deficit if the outcome is a low level of saving and investment in the economy’ (Chibber and Khalizadeh-Shiraji, 1991). On the other hand, it may be argued that it is improper to bind the government by passing this kind of a bill. By tying the hands of the government, are we not reducing flexibility in the government’s day-to-day operations? Supposing, though we hope not, that the Indian economy takes a nosedive, and the recovery requires a massive investment by the government, funded by fiscal deficit. What would the government do in such a situation; would it have to wait for months for undoing the bill and taking appropriate action?

Other Consequences of the Bill It might be asked: what is wrong with fiscal deficit that the policy makers intend to put right? There is a view that such borrowing gives rise to a situation wherein too much money chases too few goods, thereby leading to inflation. Fiscal deficit creates a demand that is not satisfied by the existing supply. The higher interest rate resulting from fiscal deficit might lead to higher prices everywhere, thereby making the authorities lose control over money supply (Patnayak, 2000; Rao and Shubhada, 1998). The budget deficit is held responsible for higher inflation, lower growth, a current account deficit, and the crowding out of private investment and consumption. Money creation leads to inflation, while domestic borrowing pushes up interest and leads to a credit squeeze. External borrowing leads to a current account deficit, appreciation of the real exchange rate and the balance of payment crisis (when

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foreign resources are run down) and to a external debt crisis if the debt is too high (Administrative Staff College, 2002; Jha, 1998). It might be argued that much depends on what is done with the money generated by fiscal deficit. If the fund thus created is fruitfully used for productive purposes, this would lead to substantial production, the inflation would be temporary, and in the long run, the fresh supply of goods would correct this inflationary process. If, on the other hand, the money thus generated is used for meeting deficits on revenue account, or for the army and defence expenditures, or for a hike in the salaries of government officials, the inflation would persist (Buiter, 1990; Tobin, 1987; Zaidi, 1994). In the case of Pakistan, it has been estimated that a one-time fall in defence expenditure of Rs 5 billion (out of Rs 80 billion spent in 1991–92) would have eliminated net domestic borrowing and the budget deficit, up to 2000 AD (Bacha, 1983; Wade, 1990; Zaidi, 1994). It is also a moot question as to whether inflation of a small dose is desirable or not to activate the economy. Despite a growing budget deficit in the USA in the 1980s, inflation there has declined sharply; in fact, bigger deficits have come with less inflation and smaller deficits with more inflation. Further, US deficits over the last several decades have stimulated growth, consumption and investment. Some would even argue that inflation per se is not injurious to the rate of growth. Budget deficits tend to be high in multi-party coalitions, without having any adverse impact on growth (Roubini and Sachs, 1989; Zaidi, 1994). There are cases of countries which registered a high growth rate despite accompanying high inflation. In fact, economics does not answer all the questions that arise in the course of development. In Pakistan, fiscal deficit and inflation, each at 7 per cent, had accompanied an average 6.5 per cent growth in the 1980s. During the first three years of the 1990s, the deficits had been 8.7 per cent, 7.5 per cent and 7.9 per cent, but the private sector growth rates were 19 per cent, 30 per cent and 13.7 per cent, respectively. Did the budget deficit matter in those years in the Pakistani context (Zaidi, 1994)? There are, thus, two contrasting views on fiscal deficits. These are: (a) fiscal deficits are the primary cause of the major ills in the economy, and (b) ‘much of what is written and said about the

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damage done by federal budget deficit is sheer nonsense, no matter how often repeated’ (Eisner, 1993). A third view, the Ricardian view, is that deficit policy is a matter of indifference.

Brazil: The Case of High Growth Accompanying High Inflation Brazil, the Latin American giant, physically almost as large as the US or China, is an enigma, as far as its economy is concerned (Dasgupta, 1998). Although crippling since the 1980s, during the preceding three decades, particularly during 1955–80, Brazil’s real growth averaged 8.5 per cent, a very high figure by any criterion, that was achieved by flouting all World Bank norms and logic, with an inflation rate of 40 per cent (Dornbusch, 1992; Stevens and Solimano, 1992). Its rate of inflation, considered quite normal when maintained within 50 per cent, sometimes reached astronomical figures, but still had no bearing on the economic growth during this period. While the question as to why things went wrong after 1980 is relevant, more relevant is the question as to how the economy managed to work so well with such a high level of inflation for such a long period. What made Brazil’s economy work despite high inflation was its method of wage-price indexation. As prices moved, the companies added predictable mark-ups to their prices, while the nominal values of wages were raised in a predetermined manner (Bacha, 1983). All these increases were structured, transparent and predictable, and so did not create uncertainties or lead to perverse speculations (Dornbusch, 1992). According to the post-1964 wage policy, once in every 12 months, on a specific date for a category of industries, a decision was taken on wages at the labour court. The wage hike consisted of three parts. First, it equalled 50 per cent of the cost of living in the previous two years. This was aimed at bringing the real value of the wage at the time of the re-adjustment to its average real value during the previous two years. The second part was an additional hike of 50 per cent of the inflation predicted for the coming year. The third part, the wage bonus, corresponded to the yearly increase in aggregate labour productivity. These together, in theory, helped to

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maintain the constancy of the wage share in GNP, but, in practice, inflation was under-estimated in the prediction, and wages lagged behind prices. By 1973, there was a wage loss over time of 38 per cent in terms of what should have been the wages under the formula. Still, the lag could have been greater without indexation (Bacha, 1983). Although on several occasions, Brazil went to the IMF during this period of high growth, to rectify temporary shortfalls, that was more as a precautionary measure or to improve its creditworthiness. Of the eight IMF standbys, between 1965 and 1972, Brazil drew on only two (Marshall et al., 1983). Inflation actually declined from 80 per cent to 40 per cent, the country registered a balance of payment surplus in all but one year, and private capital continued to flow in, despite policies of protection and import substitution, as its policies enjoyed credibility (Marshall et al., 1983). However, a negative feature was the regressive distribution of income and wealth. Participation in the national income of the poorest 50 per cent declined from 18 per cent in 1960 to 12 per cent in 1976; for the next 30 per cent from 28 per cent to 21 per cent; while, of the richest 5 per cent, it increased from 28 per cent to 39 per cent (ibid.). There has been no clear analysis of the factors that led to a reversal of growth since 1980. Between 1980 and 1991, the GNP per capita grew by only 0.5 per cent, one of the lowest growth rates. One reason for this could be the late effect of the oil crisis of the 1970s. Although a large producer of oil itself, producing around 30 million tons a year, its oil consumption is double that figure. Another could be the failure to maintain macro-economic balances. Both external debts and balance of trade deficits went out of control. Its $117 billion debt in 1991 was, by far, the highest among the countries, and the debt-service ratio, at a mindboggling figure of 63.3 per cent in 1980, climbed down to a figure of 30 per cent in 1991. The compulsion to balance the external account in Brazil has succeeded to a great measure, but at a heavy cost, since 1980. Year after year now, exports far exceed imports, e.g., in 1991, exports accounted for $32 billion while imports for $23 billion, thus producing a surplus of $9 billion. This net resource outflow is also indicated by the saving and investment figures. Between 1970 and 1991, gross domestic saving increased sharply from 20 per cent to

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30 per cent of the GDP, while gross investment declined from 21 per cent to 20 per cent (World Bank, World Development Report, 1993). A series of programmes have been undertaken to rectify macroeconomic imbalances in the country. For instance, trade reform from 1985 onwards has produced the results indicated above. Tariff was reduced to an average of 14 per cent by mid-1993, while export incentives have been eliminated since the mid-1980s. However, despite tighter macro-economic control, more in line with the IMF-World Bank guidelines, inflation now is much higher than it was during the period of high growth—another puzzle. The average annual rate of inflation has increased from 38.6 per cent during the period 1970–80 to a figure nearly 10 times higher, at 327.6 per cent, during the period 1980–91 (World Bank, World Development Report, 1993). High inflation seems to co-exist with all kinds of growth levels. Demand constraint has not influenced the ‘rhythm of inflation’, while devaluation seems to fuel inflation by raising the cost of imported inputs (Bacha, 1983). The Brazilian case illustrates how little we know about the cause– effect relationships that influence macro-economic management. And, therefore, why a monolithic view of global macro-economic norms is misleading.

Rural Wealth Tax: A Way of Bridging the Deficit Lastly, a deficit, whether by a family, enterprise or a government, can be bridged in the following ways: (a) by raising the income, (b) by reducing the expenditure, and (c) by a combination of these two. Yet, the emphasis in the bill has been more on reducing expenditure in order to balance the budget, than on augmenting income. We are not suggesting that the government has completely ignored the issue of increasing income, but these have been usually by way of presumptive taxes and income from disinvestment. While the vast majority living in the countryside lack the capacity to pay taxes, there are also those in the countryside who are stinking rich, and have benefited from the rural development and banking policies of the government in the past. The rural rich, patronised by most of the political parties, pay neither income tax nor wealth

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tax. It is unfair that a sizeable section of the Indian population with taxable capacity would remain outside the tax net (Jha, 1998; 1980). The last time a study was carried out on this issue was four decades ago, by Professor K.N. Raj. He found calculating agricultural income for tax purposes a hard task. His suggested alternative, an agricultural holding tax, could not be followed because of changes in the land use pattern. Besides, agriculture was a state subject. On the other hand, rural (or agricultural) wealth tax would present fewer problems. It is very much within the jurisdiction of the Central government. Moreover, items of rural wealth, such as tractor, combine harvester, seed drill, tubewell and pesticide spray are sold in shops and information on those can be more easily obtained if the tax PIN is insisted upon each time such a sale takes place, and the wealth can be easily calculated.

Notes 1. For example, in the 2000–2001 budget it was found that the share of interest payments was 44.3 per cent of the non-Plan revenue expenditure and 69.3 per cent of the total tax receipts. The interest payments accounted for 4.6 per cent of the GDP (Government of India, Economic Survey, 2000–2001, p. 37). 2. In his budget speech, in July 1991, Dr Manmohan Singh said that interest payments accounted for 42 per cent of net revenue receipts in 1991–92, and, if no action was taken, by 1994–95, the interest payments would account for more than half the net revenue receipts. He recommended a strict discipline on public borrowing over the coming three years to avoid this (Government of India, 1997a).

10 Trade Reform Trade reform occupies an important place in the NPE literature (Bhagwati, 1991; 1993). This is for a number of reasons. First, it is assumed that trading leads to gains for all the parties concerned, though some gain more than others. It is held that autarchic policies are wrong and should be replaced by policies that favour trade. It is also held that some trade is better than no trade and that the economic policies of a country ought to favour trade policies. Similarly, between tradable and non-tradable, the country should favour the former in order to gain from trade. Tradables like agricultural goods should be freed from restrictions like import control that force them to buy agricultural inputs from import-substituting domestic industries like fertilisers at higher prices or their high prices are artificially kept low with subsidies to make urbanindustrial interests happy, according to this view (Dasgupta, 1998; Krueger, 1990; 1992). A country should produce according to its comparative advantage, according to this view. If the landed price of an import is cheaper than domestic production, then the country concerned does not enjoy any comparative advantage over imports in this and should desist from producing it. If, on the other hand, the landed price is higher than domestic production, one can conclude that the latter enjoys a comparative advantage over the former. Taking everything into account, the rich countries took the position that the poor countries enjoy a comparative advantage in agriculture, and not in industry and activities with low capital intensity. Hence, they should specialise in agricultural goods and make sufficient money from its earnings to buy and import other things that the economy required; there is no need for self-sufficiency.

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We have already seen that many countries, particularly those of East Asia, do not subscribe to this view of comparative advantage, and find it too static and too firmly moored in the recent past to be of much use in policy formulation (Dasgupta, 2002a). They, therefore, take a dynamic view of the concept of comparative advantage, and would like to create one for their own country, rather than taking it as given. In any case, exports were expected to go up with this policy as also sales in place of subsistence production. In fact, as the figures for some of the major industries show, this was the way it turned out towards the end of the decade for some of the major industries (CMIE, 1992b).

Convertibility of Currency The ultimate test of global integration, in the opinion of the World Bank and the IMF, is the full convertibility of all currencies, after allowing for some variations in exchange rates (Hajra, 2002). According to the Feldstein–Horioka hypothesis, which is the basis of such optimism, perfect capital mobility across country borders would make domestic savings and national investment in any place not correlated. However, it is not at all clear from the statistical evidence that the world is moving irrevocably towards that hypothesis. The data show that, contrary to this hypothesis, these two—domestic saving and national investment—are indeed highly correlated in most cases, thus proving correspondingly that capital mobility is still of a low order. There is also a clear North-South divide on this issue. While the correlation is declining in the North, indicating increasing integration, it continues to be high in the South, which shows that mobility of capital is relatively much lower in the less developed countries (Vas, 1994). While the developed economies of the North are integrating faster, those in the South and the not so developed economies are still dependent on their own savings for development. In India, in particular, the correlation between domestic saving and investment is very high. What is invested usually bears a close relationship with what is saved, with foreign saving amounting to no more than 2–3 per cent of the amount required for investment.

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Keeping this hypothesis of global integration in mind, almost all the Finance Ministers of India since 1991 have promised capital account convertibility within a short period. In fact, several actions have been taken to reduce the gap between the official and unofficial values of the domestic currency, to expedite convertibility. One of the earliest measures was to entitle a person earning foreign exchange by selling his goods, to a transferable scrip, for import entitlement up to that amount. With the scrip being transferable, those who earned foreign exchange but did not need to import up to that amount, could sell their surplus import entitlements at a marketable value. On the other hand, those not earning foreign exchange but requiring it could thus secure it from the market provided they could afford it. The Union Finance Minister during the United Front rule, Mr P. Chidambaram, who belonged to a party that was different from the party to which Dr Manmohan Singh belonged, but nevertheless supported the structural adjustment programme of the IMF and the World Bank, had indicated in his Budget Speech for 1997–98 that the regulations governing foreign exchange transactions needed to be modernised and replaced by new laws consistent with capital account transactions. As we shall see in the last part of this chapter, what was described as ‘foreign exchange rules’, was now described as ‘foreign exchange management’. To quote him: I also believe that the time has come for preparatory work towards capital account convertibility. This is a cherished goal. It is also a matter of great sensitivity. Hence, I shall not make any commitment. For the present, I am asking RBI to appoint a group of experts to lay out the roadmap towards capital account convertibility, prescribe the economic parameters which have to be achieved at each milestone and work out a detailed timetable for achieving this goal. I believe that the appointment of such a group would send a powerful signal to the world about our determination to join the ranks of frontline nations (Government of India, 1997a, Paragraph 41). Accordingly, Dr C. Rangarajan, Governor of the Reserve Bank of India (RBI) at that time, appointed a Committee on Capital Account Convertibility under the Chairpersonship of Mr S.S. Tarapore.

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While addressing the Committee, Dr Rangarajan recalled that India had already undertaken a move towards current account convertibility and, in fact, there was a formal acceptance by India of the IMF obligations under Article VIII, in August 1994. Dr Rangarajan further noted: There is a proposal to amend the Articles of Agreement to incorporate capital account convertibility as one of the obligations of the Fund membership. Mr Chairman, as you know the government of India has already announced certain steps towards capital account convertibility. Thus purely from the Indian perspective, we welcome the move towards capital account convertibility. However, he added, several staff studies have shown that there are important preconditions for introducing capital account convertibility. Given the differences among countries with regard to progress made towards structural reform and stabilisation, it may be unwise to put all the members in a straitjacket where they lose their independence to take corrective action in times of crisis. This is particularly so when the ability of the fund to come to the rescue of its members in case of the balance of payments crisis is somewhat limited (Reserve Bank of India, 1997). Coming back to the Feldstein—Horioka hypothesis, Frankel is of the view that it rests on the crucial assumption that, with perfect mobility, real interest rates would become equal everywhere. If real interest rates are high, investment flowing in from other areas would eventually bring those down. If, on the other hand, real interest rates are low, investment will go up, while saving will crowd out investment, thus forcing the interest rates to go up again. Recent IMF studies show that within the industrialised world, interest rates are converging, but for some differential to allow for exchange rate risk premium. However, this is far from true in cases of the less developed countries (Frankel et al., 1979). A major obstacle in the way of interest rate convergence is the fluctuation in exchange rates, which can put off the movement of capital towards high interest areas. In a situation of exchange rate

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volatility, the capital markets will remain segmented even when there are no restrictions on capital movement, and a forced capital market integration might give rise to, or at any rate add to, the interest rate and exchange rate instability (Vas, 1994). As regards investment, the study by Griffith–Jones shows that the private capital market tends to operate pro-cyclically, and offers no help when the money is needed most, and the capital market can even make matters worse. Generally, periods of over-lending alternate with periods of under-lending. When things go wrong, given their pro-cyclical inclinations, the commercial bank lending to the less developed countries’ markets has proved to be an unstable source with a systemic risk of producing debt crises (ibid.). Further, the private capital market, reluctant to take avoidable risks, generally concentrates on lending to the bigger and economically stronger among the less developed countries. The East Asian countries, and the big ones like India, Brazil and Mexico are favoured, but not the smaller and/or poorer ones such as the sub-Saharan African countries with a low credit rating (Griffith–Jones, 1993).

History of Convertibility History shows that the industrialised countries of the North had been quite slow to liberalise their capital accounts. It was not until 1958 that the process of liberalisation of capital accounts was initiated and then, in 1961, the OECD decided on a code of liberalisation. Still, most industrialised countries were cautious in making their capital accounts free. In the 1970s, several countries, including the UK, introduced restrictions on capital movements in the aftermath of the oil crisis. In fact, most of the liberalisation took place in the 1980s, only two decades ago. The progress towards capital account convertibility was slowest in the southern European countries; at the beginning of the 1990s, France, Portugal, Spain and Ireland still maintained some restrictions on the movement of capital across the border. In other words, the Bretton Woods twins are now asking the poor countries to do, and immediately without delay, what the rich countries took many decades to carry out even after their economies had become industrialised.

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In several instances, a premature opening up of the capital account has been followed by a hasty retreat from convertibility when the experiment has made the economy of the country vulnerable, as in Argentina, Chile and Mexico in the mid-1970s (ECLAC, 1994). The process of liberalisation of the capital account did not gather momentum before the 1980s and early 1990s, contemporaneous with the globalisation of financial markets. However, it was not until 1995 that all industrial countries had eliminated restrictions on both capital inflows and outflows. At the same time, some of the non-industrial countries also began to liberalise the capital account, under pressure from the Bretton Woods institutions, and have moved fairly rapidly to institute capital account convertibility, more rapidly it seems than their counterparts in the North. We hope that they do not have to beat a hasty retreat like their predecessors in the earlier years and that they are able to withstand the speculation on their currencies.

External Value of the Rupee The exchange rate remained remarkably stable for a long time, at around Rs 31 per US dollar. However, in October 1995, the value of the rupee began falling, partly by design to compensate for domestic inflation and partly because the process, once initiated, went out of the control of the Reserve Bank of India. The exchange rate was eventually stabilised at around Rs 34 per US dollar, but at the cost of $3 billion of foreign exchange reserve needed to buy the Indian rupee in the foreign markets. Since the second half of 2000, the rupee has again come under pressure and the value of the rupee with respect to the dollar has gone down again.

Most Experts Advise Caution Most experts on international finance, who are otherwise strong protagonists of structural adjustment, advise the less developed countries not to rush into making capital account convertible.

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This convertibility transfers power from the government into the hands of the companies. To quote John Williamson, It is now generally agreed that the capital account is the last thing that should be liberalised. Failure to heed this advice in an era when funds were readily available on the international capital market led to over-valued currencies , erosion of the productive capacity of the tradable goods sector, and excessive buildup in foreign debt (much of which was used to finance capital flight) (Williamson, 1983a, p. 60). Another word of caution comes from the ECLAC: It should be recalled that Latin American history has been marked by periods of large-scale capital inflows, followed on a number of occasions, by periods of debt crisis. This has sparked a wideranging debate on the dynamics of the process of opening up the capital account. The process must be tailored to the economy’s capacity to absorb and efficiently allocate external resources (ECLAC, 1994, p. 21). In view of the fact that capital movement contributed to disaster in several less developed countries, some argue that, until the banking system has been strengthened, ‘control should be retained over the acquisition of foreign assets and liabilities by residents. This is consistent with giving non-resident Indians and foreigners guarantees of convertibility at the market rate when they buy assets in India (Joshi and Little, 1995b). To quote T.N. Srinivasan, In my view, it would be extremely unwise to rush into this for several reasons. Let me just mention two. First, as was argued some time back by Brecher and Alejandro, in a situation of continuing protection of capital-intensive import-competing sectors, any foreign capital, particularly foreign direct investment (FDI), that is attracted to protected sectors would be welfare-reducing. Thus until such protection is removed, increased capital inflows, following capital account convertibility, would not be beneficial. Second, unless our macro-economic situation is brought firmly under control (Srinivasan, 1991, Chapter 5), the convertibility should not be introduced.

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Elimination of the Hawala Markets One major advantage with capital account convertibility is that it eliminates the gap between the official and unofficial exchange rates, and thereby puts an end to the thriving business of the hawala market in India. It thus makes life easy (Bhagwati, 1993). However, the question is whether we are moving away from the jaws of small sharks called hawala merchants only to court bigger sharks, the international speculators. Would these currencies not be vulnerable to speculation by some of the mightiest economic forces at work in the world, the international dealers in foreign exchange? The question always is, can such convertibility be sustained in case of a weak currency? As experience shows, these dealers tend to be, wrongly in some cases, very sensitive to political changes, weather variations, epidemics, riots and a variety of other factors. Their subjective assessment about the relative strength of a currency, irrespective of whether it is right or wrong, becomes an objective reality as speculation turns against a currency. Even the UK had to opt out of ERM (Exchange Rate Mechanism) of the European Union several years ago when, despite frantic attempts to shore up the value of the sterling by buying the pound in the global market, which led to a loss of £7–8 billion in a matter of a few days, the slide of the currency driven by powerful speculation could not be stemmed. Similar was the experience of Malaysia when it faced the speculation of a key speculator towards the end of the 1990s. In the case of a poor and weak country, such adverse speculation can do incalculable and, perhaps, irreversible, harm to the country’s economy. If the UK and Spain had to come out of ERM, unable to handle speculation, what chance would poor countries have of resisting such speculation (Killick, 1992a)? As ECLAC observes, full convertibility on capital account is a high-risk strategy as money supply is taken out of the hands of the government and is left entirely to the market (ECLAC, 1994). Estimates about the size of the hawala market vary, but the best possible guess is that, around July 1991, about Rs 35 billion were employed in this market, almost the whole of it in Mumbai, India. In addition to this, about Rs 25 billion was, perhaps used outside this market all over the country. Government of India sources claim

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that after a few steps were taken towards the capital account convertibility, the size of the hawala market has decreased and its growth has stopped. But such a claim may be disputed. Over the last 50 years or so, it may be argued that the hawala market has spread substantially throughout the globe and has entered many new fields. Hawala transactions have now become the popular hunting ground of terrorist groups, drug syndicates and other international mafia gangs. The secrecy that the hawala market provides is its main attraction for such players. They are so big by now that by merely making the capital account convertible, it is virtually impossible to control the hawala market.

Operators in the World Exchange Market The operators in the foreign exchange market are bigger. The powerful institutional investors and the hedge funds operating in this market are free to borrow and invest practically everywhere. Their strategy is to notice and exploit small yield and price discrepancies in bonds and currencies with programmed buying and selling based on certain assumptions on the future. There are various estimates of their number and resources; they range up to $400 billion unregulated hedge funds. This is more than the World Bank estimate of the outstanding bond market debt of the developing markets. This is also more than double the combined equity market capitalisation of Thailand, South Korea and Indonesia at the start of the Asian crisis in 1997.

Exports and Imports Exports did very badly to start with, but ended the period of five years with a bang, with growth averaging 20 per cent in the last three years. But the growth could not be sustained for 10 years, and in the subsequent years the rate of export growth slumped (see Table 10.1). There were few new export items; growth came mainly through the export of engineering, textiles, gems and

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jewellery, cotton and yarn, and leather products, the traditional export items. Overall, the rate of growth in the 1990s was 9.3 per cent, which was more than 7.9 per cent for the 1980s, but less than 15.3 per cent recorded for the 1970s. The rate of export growth for India in the 1990s was, however, higher than the figure for the entire world during the 1990s (CMIE, 2002b). Table 10.1 Exports and Imports Year

Exports

Imports

Invisible

Trade Balance

1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

18,477 18,266 18,869 22,683 26,855 32,311 34,133 35,680 34,298 38,285

27,915 21,064 24,316 26,739 35,904 43,670 48,948 51,187 47,544 55,383

–242 1,620 1,921 2,898 5,680 5,449 10,196 10,007 9,208 12,935

–9,438 –2,792 –5,447 –4,056 –9,049 –11,359 –14,815 –15,507 –13,246 –17,098

Current Account Balance –9,680 –1,178 –3,526 –1,158 –3,369 –5,910 –4,619 –5,500 –4,038 –4,163

Sources: Government of India, Economic Survey, 2000–2001, p. 102; 1997–98, p. 78 (only for 1991–92 and 1992–93). These are provisional figures.

Among the exports, gems and jewellery, which registered 10.3 per cent growth during the 1990s, constituted the largest category. There was a definite limit to the amount that could be earned from gems and jewellery by way of export earnings because the demand for this item worldwide cannot be too high. Moreover, India had to import intermediate goods in the form of intermediate gems and jewellery in order to polish and export them (CMIE, 2000). As for leather goods, India enjoyed a comparative advantage in this sphere, given the country’s large livestock population, as the supply of hides and skin was high in the country. However, not much was done to make leather goods an important export item. As for the engineering industries, India’s exports were varied. Once upon a time, India was supposed to enjoy a comparative advantage in steel making, mainly because of the presence of coal and iron deposits in close proximity and the availability of the necessary technical manpower to transform these into finished products at competitive world prices. While, as in many other fields,

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that hope was not realised in India, South Korea, with no such mineral base, and beginning as late as in 1973, has built a public sector steel company—Pohang Steel Company (POSCO)—that is reckoned to be among the most efficient in the world. Textiles alone cannot take India very far. We have seen that nearly every developed country of today, at some stage of its development, specialised in this footloose industry, but then graduated from it to higher, more sophisticated productions based on higher technologies. East Asia too has grown out of textiles in due course. One of the biggest advantages of the countries of East Asia is their ability to offer an array of export items in the world market, not all of which are likely to be subjected to slumps in the world market at the same time. Any effort towards the diversification of exports is closely linked with the technological upgradation of the domestic industry and the existence of a supporting infrastructure in terms of heavy industries. Naturally, there is a limit beyond which Indian exports cannot go unless, following the East Asian experience, something is done to make a break with the static concept of natural comparative advantage downstream interaction that keeps both fit to survive the rough weather in the world market (OECD, 1992b). The invisible income by way of tourism and factor income became an important factor in the 1990s. After negative growth in the first year, invisible income mounted in the subsequent years. In 1999–2000, it reached Rs 129.35 billion, but the exports remained more or less where they were. The current account balance, which was low in the early years, became high in the latter years as a proportion of the GDP. Correspondingly, taking into account the ‘invisibles’—non-factor services, investment income, private transfers and official grants—the current account balance declined from $9.68 billion in 1990–91 to $1.18 billion in the first year of reform and to only $0.32 billion in the third year, but then rose in the subsequent years (see Tables 10.2 and 10.3). The expected surge in agricultural exports did not materialise. It was about 6 per cent in the 1990s, far below the expected figure in terms of its role in the new economic policy, and consisted mainly of vegetable oils and pulses. Despite some increase in rice, oil cakes, soybean, cashew kernels and shrimp exports, agricultural exports did not give the appearance of a sector that could carry the load of the Indian economy on its back. With the Indian share of the world

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Table 10.2 Selected Indicators of External Trade Growth of Exports Imports

Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

9.0

14.4

20.2 18.4 20.3 5.6 4.5 –3.9 11.6

10.0 34.3 21.6 12.1 4.6 –7.1 16.5

NRI Deposits/ TC %

Short-term Debt/FER

Debt Service Payments

146.5

35.3 30.2(p) 28.6(p) 25.6 26.2 24.3 21.2 19.0 18.0 16.0

18.3 6.1(p) 47.0(p) 12.2 2.1 37.1 32.1 12.0 22.1 20.8

18.8 16.9 23.2 25.5 17.2 13.5 10.6

Source: Government of India, Economic Survey, 2000–2001, p. 103. Table 10.3 Selected Indicators of External Trade as a Percentage of the GDP

Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

Exports Imports Trade 5.8 7.3(p) 7.8(p) 8.3 8.3 9.1 8.9 8.7 8.2 8.5

8.8 8.3(p) 9.8(p) 9.8 11.1 12.3 12.7 12.5 11.4 12.3

–3.0 –1.1(p) –2.0(p) –1.5 –2.8 –3.2 –3.8 –3.8 –3.2 –3.8

Current Invisible Account –0.1 0.7(p) 0.2(p) 1.1 1.8 1.6 2.7 2.4 2.2 2.9

–3.1 –0.4(p) –1.8(p) –0.4 –1.0 –1.7 –1.2 –1.4 –1.0 –0.9

External Debt

Debt Service as % of the GDP

28.7 41.0(p) 39.8(p) 33.8 30.8 27.0 24.5 24.3 23.6 21.9

2.8 30.2(p) 28.6(p) 3.1 3.4 3.4 3.0 2.7 2.6 2.4

Source: Government of India, Economic Survey, 2000–2001, p. 103; 1996–97, pp. 85–86.

trade being so abysmally low, around 0.7 per cent, which is still an improvement over the latter part of the 1980s and most of the 1990s, there is some space for increase without doing much, but such an increase cannot be sustained for long unless exports are diversified. We discuss marine exports below. The cacophony around export growth drowns the figures for imports. But imports fell faster (–19.4 per cent) than exports in the first year and then grew faster than exports in the subsequent years.

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For the 1990s as a whole, the imports grew at 10.1 per cent, higher than the exports. The balance of payments therefore shows a big and consistent deficit throughout the 1990s. The sharp curtailment of imports in the first year affected growth and exports, but in the subsequent years, higher exports, because of their import intensity, compelled higher levels of imports. Among the imports, the highest was the category of crude oil, lubricants and oil products, to be followed by the food industry, as expected. Sugar was among the imports in some of the years. Every year, the government had to find resources to pay for imports and thereby to cover the imbalances in the trade.

Foreign Exchange Reserve, Direct Foreign Investment and Foreign Debt India’s foreign exchange reserve rose from a pathetic figure of $1 billion, with the stock for two weeks available, at the beginning of the NEP to nearly $21 billion in 1994–95 and then temporarily declined to $17 billion in 1995, only to reach $35 billion by March 2001 and $70 billion dollars towards the end of 2002 (Government of India, Economic Survey, 2000–2001). This increase did not come by way of trade surplus, but was largely a sum total of various types of foreign borrowing—from the IMF, the World Bank and other international agencies and foreign governments, from NRI deposits and from unstable foreign portfolio investments. Only a small part was due to an increase in direct foreign investment (DFI), viz., $6 billion in the first seven years under structural adjustment. A certain amount also came by way of the time-bound amnesty declared by the government to holders of black money, which, passing through several hands in the infamous hawala market, returned to India as foreign exchange. In other words, despite its present, reasonably high, volume, India’s foreign exchange reserve is unstable and unreliable. The total accumulated debt burden was $92 billion in early 1997, making India the fourth largest borrower after Brazil, Mexico and China. This was a progress over 1991 when, among the countries of the world, India had the dubious distinction of being the third

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after Brazil and Argentina. By 2000, the debt burden had become $98 billion and India had been overtaken by several countries including Russia, Turkey, Korea and Argentina, in addition to Brazil, Mexico, China and Indonesia, which relegated India to the ninth position (Government of India, Economic Survey, 2000–2001). The debt to GNP ratio, at 23 per cent, was higher than China’s 16 per cent, but quite low by Indian standards and the debt service ratio was small. The most effective way of reducing this debt would be by way of export surplus, sustained over many years, but the possible deflationary impact of such a policy cannot be overlooked. The governments tend to think that as long as growth is sustained at a high rate and the current account balance is maintained at a reasonably low level, other things such as foreign or internal debt burden would take care of themselves in due course (Alesina and Tabellini, 1989; Government of India, Economic Survey, 1999–2000). In January 2002, the Finance Minister announced a mediumterm export strategy for five years. Through this strategy, the government aimed to increase its world share of exports by 1 per cent from 0.0675 per cent (Reserve Bank of India, 2001–2002). In the same year, on 31 March, the government announced its export and import policy. This policy eliminated all quantitative restrictions on exports except on a few things.

Software Exports Now we can turn to new export opportunities in the fields of software and marine fish. While we discuss software exports now, our discussion on marine fish exports will follow (Patibandla et al., 2000). A great deal of hope has been reposed on software exports, wherein India is expected to do well given her background. With software being a modern industry, India’s performance in this modern field is expected to revolutionise Indian exports (Dasgupta and Chakrabarti, 2002). Software exports are taken as being in line with India’s comparative advantage. Historically, Indians are known to be good in

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arithmetic and mathematics. It is expected that the vast army of India’s skilled manpower can be devoted in this field. The Indian software industry is not only growing but is also continuing to get international recognition for its quality in software development. Out of the top 300 software companies in the country, more than 170 have already acquired ISO 9000 certification. Out of 23 worldwide companies having SEI CMM (Software Engineering Institute Capability Maturity Model) level 5, 15 are located in India (Nasscom, 2001). Qualitatively, Indian software experts are as good as one can find elsewhere in the world. Indian exports in software have indeed gone up since 1991 and, as a proportion of exports, its share is increasing rapidly, but India’s share in the total world software revenue is still pitifully small (Tables 10.4, 10.6, 10.8). In 1999–2000, Indian software exports accounted for about 10.5 per cent of India’s total exports but five years ago, they accounted for only about 2.5 per cent of the total exports (Dataquest, 2001; Nasscom, 2001).This shows that software exports are increasing. In that year, India exported software worth around US $8.39 billion, the highest so far, but in the second part of the year software exports fell (Nasscom, 2000). In 2000–2001, software exports from India amounted to US $6.2 billion and about 22 per cent of India’s total exports, thereby proving to be not only a high value-addition, net foreign exchange earning and employment generating industry but also creating a history of sorts in the Indian stock exchanges (ibid.). Soon India is expected to reach a figure of US $10 billion exports. Table 10.4 Expected Growth in Software and Service Industry in India, 2001–2008 (US$ billion) Year 2001–02 2002–03 2003–04 2004–05 2005–06 2006–07 2007–08

Exports 9.5 14 20 27 35 43 50

Domestic Demand

Total

3.5 5 8 14 20 28 37

13 19 28 41 55 71 87

Source: Nasscom, 2000, Press release of November 21.

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Table 10.5 India’s Software Exports as a Percentage of the Total Exports of India Year 1995–96 1996–97 1997–98 1998–99 1999–2000 2000–2001(Projection) (April–November)

Per cent 2.31 3.24 4.99 7.98 10.6 22.01

Sources: Nasscom, 2000; 2. Government of India, Economic Survey, 2000–2001; S-82 (data for India’s total exports).

There are many explanations for India’s low share in the world trade software exports. According to the government, this is due to its lower volume and attendant high cost. Indian software exports are not as large as they could become (Government of India, 2001a). It is hoped that, over time, the volume will grow and the cost will fall. However, the fact remains that today the Indian IT export is very small as compared to the USA’s IT (Information Technology) exports. In 1995–96, India’s IT exports generated a revenue of US $775 million which was 0.48 per cent of the USA’s IT export of US $160 billion. In the year 1999–2000, India’s IT exports (US $ 4.113 billion) accounted for a mere 1.71 per cent of the USA’s IT export of US $240 billion (Export-Import Bank of India, Annual Report, 1996; Nasscom, 2000). Some attribute this low proportion to the feeble presence of India in the hardware market. In 1995, it was only 0.43 per cent of the world software industry, but in the year 2000, it was expected to seize 1.65 per cent of the world market. Unlike South-east Asia, computer hardware has not become a familiar sight in India (Nasscom, 2000). Most of the software exports, viz., 83 per cent, are in the form of services for the US computer companies. The industry seems to have evolved from staffing in the early days to software development to integration and IT business consulting now. Still its sales have depended not on its own goodwill and name, but on the company for which it is sub-contracting (Export-Import Bank of India, 1996). When a US firm decides to develop a product, it hires the skilled Indian workforce (enters into a contract with an Indian software

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firm) to do a particular part of the work and the Indian firm does not get the satisfaction of developing the entire product. The higher end work (mainly system analysis and system design) is done in the foreign country whereas the lower end work (which constitutes coding) is done in India. Thus the future of the Indian software sector is dependent entirely on the contracts it gets from US and other foreign software firms. In this way, the Indian economy depends on the US economy for its survival. For the same job, the Indian personnel are paid less than their US counterparts. The development of the IT sector also depends on the development of the non-IT sector and thereby on the overall development of the economy because only if the non-IT sector expands will it demand IT inputs. In short, sub-contracting implies that India has all the necessary inputs to produce a software product (low-cost, high quality workforce) but is denied access to the product market. Vigorous protection of intellectual property rights (which include patents, copyrights, trademarks, trade secrets and semiconductor mask works) is critical to trade in software. In fact, the success of the US software industry is due, in large part, to its commitment to strong intellectual property protection (Nasscom, 2000, Press release of November 27). Table 10.6 shows the export-oriented nature of the Indian software industry. Table 10.6 India’s Software Export Revenue as a Percentage of Indian Software Industry Revenue Year 1995–96 1996–97 1997–98 1998–99 1999–2000 2000–2001

Per cent 59.97 61.82 65.54 67.95 70.18 75.06

Source: Nasscom, 2001.

The export orientation of the Indian software industry is increasing over time. The declining role of the domestic market in India’s software industry’s revenue should not be ignored. This is a major drawback for an industry that is engaged in sub-contracting.

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Table 10.7 Revenue of Software Industry: India and the World

Year 1995 2000(P)

Revenue of World Software Industry

Revenue of Indian Software Industry

India’s Software Revenue as Per Cent of World Software Revenue

$285 billion $530 billion

1.22 8.75

0.43 1.65

Sources: Export-Import Bank of India, 1996, p. 9; Nasscom, 2001.

During the last few years, the Indian software industry has grown at an impressive rate of over 50 per cent. After the world slowdown, the growth rate fell to about 45–50 per cent, which is by no means slow, considering the average industrial growth rate in India. It is possible that smaller players will be affected by the slowdown. Those who were heavily dependent on dot-coms or were purely into body-shopping (especially, those who were not dealing with clients directly) are likely to be the worst hit. Software majors like Infosys, Satyam and Wipro, the prices of whose shares went down dramatically in the early part of this century, recently released their third quarter figures for 2002. All have reported strong growths and profits, with Infosys recording over 100 per cent growth in profits, and more than 60 per cent of their revenue coming from the US, underlining its dependence on the US. No less significant is the fact that none of the top Indian IT companies has issued revenue warnings for the future (Dataquest, 2001).

Marine Exports The main problem with marine exports is that they are concentrated in the USA and Japan. So, if the demand for shrimp exports declines in these two regions, the world demand for shrimp also comes down. The multinational companies operating in these areas are always looking for cheaper sources of shrimp and transfer their production to cheaper areas. They came to the coastline of India, because it was found to be cheaper. There was always the risk that production from India or some of its centres would cease. In such a situation, it was not possible

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for the farmer who had chosen shrimp exports to switch back to paddy cultivation in sweet water in place of saline water required for shrimp production. Further, it was found that a farmer often had to destroy nontarget organisms in large number, to collect a certain amount of shrimp spawns. Among the other environmental measures, there was the risk that many non-target organisms would be liquidated to obtain a certain amount of spawn. The pond cultivation of shrimp also had other risks, such as of diseases which visited the pond shrimps once in a few years. The fact that shrimp production often takes place in areas where the land meets the sea, near mangroves which are plenty in those areas, is worrying because we simply do not know the full range of the impact of shrimp production on the environment of the place. Consumers in developed countries like Japan, United States and Europe, are particular about the way the packaging is done; for instance, whether those engaged in packaging are supplied with adequate drinking water and clean water for packaging. It is not widely known that India’s supply of shrimp was banned in 1997 by European consumers and, after only great difficulty were the shrimp exports resumed (Table 10.8). Table 10.8 Marine Exports (Particularly Shrimp Exports) in Various Years Year 1995–96 1996–97 1997–98 1998–99 1999–2000

Shrimp Exports (Rs million) –101.5 116.1 69.8 –141.1 140.5

Source: CMIE, 2002, p. 17.

Among other agricultural exports, basmati rice went up. However, it created controversies as it was patented by a US company. Taking agricultural exports as a whole, they do not seem to be high and capable of sustaining or augmenting Indian imports. They remained at six-sixteenth to one-fifth of the GDP during most of the 1990s (CMIE, 2002b).

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Foreign Exchange Rules Before the reforms of 1991, the foreign exchange rules regarding the use, accumulation and distribution of foreign exchange, referred to the following two laws: FERA and COFEPOSA. And violation of foreign exchange rules could lead to the imprisonment of the person concerned. After the reforms, these two laws were changed to suit the new environment. The Foreign Exchange Management Bill, to replace FERA (Foreign Exchange Regulation Act) and the Money Laundering Bill (MLB), to stop illegal dealing with the rupee in foreign markets, were two of the major pieces of legislation that were passed by the Parliament to take their place. Both of these dealt with economic offences and were to be seen as parts of the package to further liberalise the economy. Two important aspects of the FERA bill were: (a) changing the name in such a way that it looked attractive to foreign multinationals; it was not ‘regulation’ any more but a question of ‘management’, better and efficient use of foreign exchange; (b) the offences for violating foreign exchange rules were no longer to be treated as ‘criminal’ ones, but as ‘civil offences’ such as breaking parking and other traffic rules; and the offender would not normally be sent to jail for his offence. It is not clear what the government was expecting to gain from the change in nomenclature in (a) unless it transmitted a kind of signal to foreign investors that the government was friendly to them. In (b) the government was adopting a compassionate attitude towards hawala operators and other violators of foreign exchange rules, including foreign companies who are expected to conform to our national laws. As for the money laundering bill (MLB), it lacked focus. It included many things that were not expected to be there, while completely excluding the major types of money laundering that had been experienced over the past few years—Bofors and hawala types. In the case of Bofors, no one has denied that bribe had been paid and that the proceeds of that illegal transaction had been laundered through a chain of fictitious accounts in the names of a large

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number of ‘shell’ companies that had no other existence but to make such money laundering possible. To identify the ultimate recipients one had to trace this chain of shell companies from the source of the money to the ultimate destination. Being complicated and requiring detailed knowledge about foreign banking and trade and the mode of functioning of the multinational companies, this exercise could only be done by a specialised agency set up under this law. As we all know, Bofors was not an exception, and a large number of defence contracts have been subjected to similar suspicion. Nor was Bofors a typically Indian affair, in fact, it is a part of the practices of many large multinational companies (e.g., Lockheed) to bribe in order to get contracts. Globalisation had widened the scope of such practices. In the Jain hawala case, the link between money laundering and terrorism was established, as also the fact that hush money was paid to many important individuals; though the evidence contained in the diary, through cryptic references, could not be corroborated by other evidence. The CBI, which was more interested in public relations exercise and busier in addressing press conferences, did not carry out the necessary investigative homework before or after preparing the charge sheets. As a result, the guilt of those named could not be proved. The questions that arose from this episode were: (a) How to evaluate documents such as the Jain diary as important pieces of evidence, and how to differentiate those from concocted diaries prepared to mislead the investigation? (b) What should be the nature of corroboration, if need be, in this kind of case, from a purely legal point of view? The third kind of issue was related to over-invoicing and underinvoicing, widely resorted to by businessmen dealing with foreign companies. The over-invoicing by a foreign company when selling to an Indian company allowed for the transfer of the excess, that was the difference between the figure quoted and the actual price, to foreign accounts in the names of those Indians, which they used when going abroad. Similar use was made of under-invoicing by an Indian company for commodities sold to a foreign company. While it was known that such malpractices were widespread,

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eradicating them was not easy. What was ‘over-invoicing’ and what was ‘under-invoicing’ could only be established by way of knowledge of the global market and its prices at a particular time and place. This too was a highly specialised activity and should have been the task of a separate, independent agency of experts set up for this purpose. The law on money laundering has completely bypassed these three major types of money laundering, through a chain of shell companies to conceal the origin and the destination of ill-gotten money, the illegal conversion of one type of currency into another, and by way of over- and under-invoicing. The stated objective of the money laundering law was confined to meeting international obligations under the UN General Assembly resolution of 23 February 1990, to handle criminal acts relating to drug and arms trafficking and terrorism. It did not respond to people’s sensitivities and concern regarding money laundering. There was no need to confine the law only to that mandate, and it was possible to go far beyond that. But, even going by this narrow consideration, the issues raised above could not be bypassed. The hawala case came to light because the Kashmiri militants were using hawala money to finance their arms purchase, and actually the arrest of two militants led to the discovery of the Jain diary. There were also reports that a part of the Bofors money went to finance hawala operations. Drugs, gun running, hawala, they were enmeshed in a frightening world of crime and violence. There was also the related issue of blackmailing. Offenders often become the prey of blackmailing by unscrupulous officials who gained access to confidential information in their official capacity. That this happens in a big way is known, but given the vulnerability of both the parties—the blackmailing official and the offender— under tax or foreign exchange laws, this issue is seldom brought to the surface, analysed and legal remedies suggested. Further, seldom is a distinction made between small and big offences relating to the foreign exchange of the country. This law had to deal with this issue in some form, but that has not been done. One of the major flaws of these two bills was that ‘falsification of accounts’ was not considered an offence. One can argue that falsification of accounts is the essence of money laundering, and to omit that is to strike at the root of any legal action against money laundering. Obviously, one has to distinguish between minor

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accounting lapses and the major ones that can be labelled as money laundering, but this is a matter for lawyers to sort out, by finding suitable safeguards for minor offenders and incorporating those in the legislation. Further ‘cash transactions’ had not been defined in the money laundering law. If it means ‘currency notes’ carried in a suitcase and handed over at the bank counter, only a fool (and money launderers are not fools) would be engaged in such acts. If it also means ‘bearer cheques’, these are transferable and are as good as cash. One does not see what objection there could be to report ‘all’ transactions, when in many countries such provisions exist and are implemented. Further, the provision that confined the records only for five years was too restrictive. The Jain diary was unearthed in 1991, but it did not come to the court until early 1995.One could alternatively argue that bank documents supporting or falsifying such allegations should be maintained for 20 years, and this too was not a difficult exercise in this age of the computer. Obviously, the other side of it was the development of healthy banking norms and practices that respected privacy when no crime was involved, and in the case of crime did not allow bank officials to profit from blackmailing. The presumption of the existence of mens rea, when someone is found in possession of black money, was a serious violation of a cardinal principle in criminal jurisprudence that a person is innocent unless found guilty. On the other hand, in the case of money laundering the investigating agencies are operating in an unknown territory. A man with his hand in the till or with a smoking gun in his hand, probably has the responsibility to explain how his hand got into the till or how he got to have such gun in his possession. He cannot simply plead ignorance or remain silent in this case. Maybe the lawyers can find a solution to this dilemma, of not letting him remain silent (as almost all the accused in the hawala case did) and forcing him to explain his involvement, while, at the same time, not presuming that he is guilty. These are some of the issues that arise from these two new laws. Both of them are eyewash, and are, in the name of liberalisation, aiding and abetting criminal conduct.

11 Public Sector Reform We have already seen that the policy adopted since 1991 is opposed to state ownership and prefers market level demand and supply interactions over the state doing things on practically anything. While the governments since 1991, generally speaking, have preferred market-oriented policies, they have also realised that the privatisation of all the public enterprises of India’s vast public sector is not possible. As a consequence, they have had to devise policies for public enterprises that were still existing under public ownership (Government of India, 1997a).

How the Large Public Sector Came into Being in India It may be asked how this vast public sector came into being. After independence, it was found that the country did not have enough capital or capable private enterprises to ensure high growth. Saving foreign exchange became a major objective of the government and from this followed the objectives of self-sufficiency and the 1951 legislation. Since the private sector was weak and small, the state had to play a leadership role in economic matters (Brautigam, 1995; Mookherjee, 1995). The motto was that anything which could be produced within the country was to be produced within and not to be imported. Imports by foreign multinationals, while keeping the cost low, involved dependence as the latter shunned technology transfer and kept their Indian collaborators at a low level

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of technological awareness and a high level of dependence. Such policies gave rise to development economics wherein the state had to play a leading role in economic matters. Of course the World Bank and the rich countries of the West were capable of sharing their technology and foreign exchange with India. When the Indian Prime Minister approached the latter for help in terms of technology and foreign exchange to build the public sector for the industrialisation of the country, the World Bank refused such help on the grounds that: (a) it was not necessary to industrialise as India’s comparative advantage lay in agriculture, (b) that if India nevertheless wanted to industrialise, multinational companies with their vast resources and technology were there to help, and (c) it would, in any case, be wrong to squander India’s limited resources on public sector investment. The attitude of the World Bank and the developed countries was hostile to the public sector in India. The World Bank and the developed capitalist countries were unsympathetic to public sector leadership, and wanted the poor newly independent non-aligned countries either to abandon the search for industrialisation or to rely on the West-based multinational companies for industrial investment. This prompted India to turn to the USSR and East Europe for help. So soon after its Independence, the country was not prepared to play a subservient role vis-à-vis the rich countries. From 1956, the latter launched a trade offensive whose beneficiaries ranged from capitalist Italy to socialist countries of the Third World. In other words, Soviet help was given to divergent countries, and was not motivated by ideological considerations. Such help took the following directions. First, countries like India now could buy or sell things that was not possible in the capitalist markets. The Soviet Union and other East European countries were prepared to build ‘turnkey’ projects and leave the keys to the host country governments, and asked for no royalties or shares. As for trade, they believed in barter, which opened export opportunities for goods that had no markets in the West. Second, things bought and sold could now be made a part of the barter arrangement of the latter, and thus trade deficits were avoided, and markets were created for non-traditional exports. Third, the Third World countries were offered loans at very low and subsidised rates of interest.

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As a consequence, many countries took Soviet help even though ideologically they were not sympathetic to the Soviet Union. However, in India’s case, this explains why non-alignment and socialism found a place in Indian policy. Towards the middle of the 1970s, the term TCDC, meaning technical co-operation among developing countries, became popular. What TCDC implied was that the developed countries were not interested in parting with their technology, and there was no alternative to technical co-operation among the developing countries. India was identified, along with Brazil, among the poor countries as a poor country capable of selling its own technology. There was also another consideration—time was not on the side of the newly independent states. They did not enjoy the luxury of slower growth over a long period of time. They had to grow faster over a shorter period, to reach the same position as the developed countries of today. Besides, they had no captive markets or colonies wherein their wares would be sold, unlike the developed economies of today. Import substitution as a strategy was adopted by many countries of the Third World as a route to swift industrialisation (Government of India, 1997a). Dr Raul Prebisch and Dr Hans Singer were among the economists to extol the virtues of such a strategy of import substitution for rapid industrialisation. In India’s case, such a policy of self-sufficiency via import substitution made sense for a number of reasons. First, the size of the country’s population was large enough to sustain a demand for various goods at a high level. Second, the country was geographically large enough to produce every conceivable mineral deposit somewhere in the country. Third, the vast population of the country ensured that, despite widespread illiteracy, enough skilled manpower was available to perform a variety of jobs. In other words, though low on a per capita basis, India’s large population ensured, on an absolute term, a large population of skilled manpower of doctors, lawyers, accountants, economists, computer experts, besides a large market, and a large GDP, among other things. If the markets in the US and the USSR were self-reliant, so was the Indian economy. Among the poor countries, India, China and Brazil, it was thought, had the best chance of succeeding with a policy of self-reliance.

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The Birth of the Welfare State In other words, the existence of a large public sector was not unusual in a large number of countries. It was not only those countries with socialist pretensions, but others too who found that by manipulating the expenses of the public sector, it was possible to influence the employment levels in a given country. The 1920s and even more, the 1930s, witnessed mass unemployment and bitter confrontation between the labour and management in the United Kingdom and prompted John Maynard Keynes to write his General Theory on Employment. One major contribution of Keynes was to show that the role of the government is anti-cyclical, which meant that the government was more active when the economy was down, and less when the economy was buoyant. During World War II, a coalition ruled the United Kingdom as the protector and partner of the people and took on the responsibility for the wellbeing of its citizens to a far greater extent than had been the case before the war. At the conclusion of the war, in the general election, the party of Mr Churchill, the great hero of the war, was defeated, and a new government of the Labour party was formed. The new government took the initiative to form a welfare state without any ideological bias despite its anti-Communist character. But they had to match the rights given by the nascent socialist state in the Soviet Union to the workers in the welfare state. One of the first acts of the new British government was to appoint a Commission under William Beveridge, the architect of the welfare state in the United Kingdom, which significantly enlarged the economic realm of the government. The Labour politicians who were in power then were determined to create a welfare state which eliminated the five ills of want, disease, ignorance, squalor and idleness from society (Yergin and Stanislaw, 1998). In 1948, the new Labour government converted a limited health insurance scheme for working men into a comprehensive and freeon-demand health service for the whole population under the National Health Service. Free secondary education for all children, irrespective of the means of their parents, was also enforced as part of a comprehensive educational system. Public housing authorities were called upon in 1945 to build houses for everyone and not just for the working class people. Moreover, the government sought to deliver on its commitment to full employment. All these

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and many other changes in the direct and publicly accountable instruments of social policy led to the notion that, in the year 1948, the ‘welfare state’ had been established in Britain (Titmuss, 1968; Yergin and Stanislaw, 1998). The ideal of achieving social cohesion through welfare became the principal motif in social administration for the next 40 years (Hewitt, 1992). The state was no longer a silent spectator, but became an active welfare agent. It was considered the duty of the state to reduce the difference between the rich and the poor, and to satisfy the minimum needs of a citizen for food, education, housing, drinking water and other basic things. A distinction was made between public good and private good. The former, with large externality, was subject to diminishing returns and hence was rightly under public ownership. Coal, steel and many other industries were supposed to be subject to diminishing returns and yielded returns only in the long run. These industries were ideally under public ownership and one by one, they were taken over from their private sector owners. Post-World War II, the United Kingdom was the first country to develop the idea of a welfare state as also a large public sector despite its capitalist character. The idea of a welfare state was also necessitated by the presence of a socialist state in the Soviet Union, which conferred some fundamental rights on its working people. The welfare state was eventually dismantled in 1968 by Margaret Thatcher and her Conservative Party, almost 20 years after the idea of the welfare state was first mooted (ibid.). She arranged to sell council houses to its tenants, and brought steel, coal, gas, telephones, ports, public transport, hospitals and other publicly owned activities to work under private ownership. This way, she destroyed the basis of public ownership in many activities (Culpitt, 1992; Hewitt, 1992). In the National Health Service, which every citizen was entitled to, an option in the form of private health appeared, to which regular contributions were to be made.

Changes Brought about by Reforms in India All these things changed in India after 1991 when market-oriented policies became the ethos, as also did market-based rules. Rule

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number one, from the time of Manmohan Singh as Finance Minister, through M. Chidambaram to Yashwant Sinha, was that they proclaimed that, in future, there would be no blanket ban on the private sector or foreign companies in their functioning in any field. There would not be something like the nationalisation of 14 private banks in 1969. The message was conveyed that the private sector of India and foreign companies were welcome. The industrial policy resolution of 1956 was, in effect, nullified, though the makers of such a resolution were congratulated for laying the foundation of industrialisation with the public sector in leadership when the private sector was weak. Now that the private sector of Indian origin was growing and gaining in experience, there was a case for a market-oriented approach under private sector ownership. The public sector was to be confined to strategic areas like the armament industry (Government of India, 1997a). The second rule was to ensure that whatever remained of the public sector would behave like the private sector and the government would refrain from subsidising the state enterprises. For example, state-owned banks were asked to become universal banks, that is, no different from the private banks that only specialised in banking operations. Banks subsidising sick and small enterprises were asked to refrain from these specialised activities and to convert themselves into what is now known as universal banks. The third rule, on one side, bound the state-owned enterprises with a memorandum of understanding, and on the other, gave them autonomy, particularly in terms of decisions relating to staff strength, promotion and wages. The financial support of the government to publicly-owned enterprises was limited to the memorandum, which meant that, like any private sector enterprise, a public sector enterprise too had to raise funding from the capital market and pay back the capital market with interest. Gone were the days when such a loan was taken as a government loan and constituted a part of the budget of the government. This also helped the government concerned to show a low figure on the fiscal deficit apart from the other issues confronting the government. However, the right of autonomous decisions was circumscribed by the hierarchy in the bureaucracy. Even after signing the memorandum of understanding, the head of a state enterprise could hardly ignore the advice of the former, particularly when the civil service bureaucracy had a say in his appointment and transfer at the end of

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the period as the head of a public enterprise company. In fact, in the 1997 budget, Mr Chidambaram announced that nine of the public sector enterprises, described by him as navaratnas, namely the IOC, ONGC, HPCL, BPCL, IPCL, VSNL, BHEL, SAIL and NTPC, had the opportunity of becoming ‘global giants’. The help of the government would thus be extended to them to achieve such an objective, he declared. (Government of India, 1997a). After the regime changed, and the BJP came to power, naturally they had other priorities, and several of the navaratnas were now listed for sale. Again, after the 2004 election, the Congress party has come to power displacing the BJP in the government. After coming to power, Mr Chidambaram, the new Finance Minister, has revived the idea of navaratna, while the Prime Minister Dr Manmohan Singh has shelved the disinvestment ministry. So the changes brought about by the BJP government have been cancelled. The fourth rule is, of course, the privatisation of a large number of state-owned enterprises (in fact eventually all the non-strategic PSUs) through the oddly called Ministry of Disinvestment. India is the only country in the world which can boast of such a ministry. Although the Finance Minister assured in his budget speech of the year, that the money raised from disinvestment would be spent only in the social sector or for restructuring the PSUs or for retiring debts, generally speaking, the sale of public enterprises shows that sleaze in various forms is almost always present when public companies are sold. But, in India, to show that sleaze is not involved, several stages are followed in the sale process. First, the companies slated to be disinvested are listed by the Disinvestment Commission itself. Second, these enterprises are evaluated for sale in the market by using objective quantitative methods. Third, a respected foreign concern is given the task of evaluation for sale. Despite all these, criticisms have been voiced regarding the method of evaluation, the choice of concern for evaluation, and so on. But this has not deterred the critics of disinvestment. In particular, the critics ask whether all items of the asset have been accounted for, what the basis of selection of a particular quantitative method is and why a particular foreign concern is chosen. There was the case of the Bailadila mines, located in Madhya Pradesh, that produced the best quality steel, which were made into the captive mines of Nippon Denro Ispat Limited, a company

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owned by Mittal, the giant steel producer of the world. The National Mineral Development Corporation (NMDC), a public sector company, agreed to a joint venture with Nippon Denro Ispat Limited at 11 per cent equity. The Ministry of Finance, NMDC and the Ministry of Labour opposed the deal though the Ministry of Steel wanted the deal to be sanctioned by the Cabinet. Luckily, the Cabinet did not consider the proposal of the Ministry of Steel (Irani, 1995).

The Decline of the Public Sector The shift away from the public sector and a policy of downsizing it is part of the new industrial policy. While the staunchest of defenders of the public sector in India would hesitate to describe it as a paragon of virtues, and many of the criticisms directed against it are valid, including its failure to generate savings, publicly owned enterprises and institutions have genuinely played an important role in the industrial development of the country, while also contributing a substantial amount of savings to the national exchequer. If the public sector is performing well in East Asia and badly in India, then one has to consider something other than ownership as being responsible for the failure of the public sector in India, such as poor management. As admitted by a major World Bank document, ‘The key factor determining the efficiency of an enterprise is not whether it is publicly or privately owned, (but) how it is managed.’ It adds, that once barriers to entry, which can be created by the state or by the monopolists or oligopolists, have been removed, there can be no a priori presumption as to whether better management will be found in the public or the private sector. Was the private sector any better? Indeed, a part of the reason why the public sector expanded and made losses was because many of the failed private sector units were passed on to the former. Comparing like with like, for instance, the balance sheet of the entire public sector with that of the entire private sector including both the efficient units and those which were sick or closed down, would probably leave the matter inconclusive, or even in favour of the public sector.

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Countries like India, Brazil, Argentina or Egypt, that were pursuing import substitution until recently, have managed to build some industries and also to achieve self-sufficiency in quite a few industries. Lessons from the last majority of market-friendly countries where public sector units maintain a low profile, including India’s neighbours such as Pakistan or Bangladesh or the Central American republics, are anything but inspiring.

Disinvestments: The Same Old Story of Sleaze Privatisation of losing public concerns, it is argued, would improve their efficiency, while disinvestments with the revenue-augmenting objective would necessitate the selling of the most efficient and profit-making public enterprises that are in demand in the market. While the efficiency-augmenting objective would require offloading of the least efficient ones, the public enterprises which have been sold so far are the profit-making ones that have a demand in the market. Most documents, even from World Bank sources, and from those who are otherwise supportive of the structural adjustment programmes, advise caution before undertaking the programme of disinvestments. Many states, goaded by the World Bank, tended to dismantle the public sector hastily, even when the private sector was not ready to offer services that were until then delivered by the state-owned units (Mosley et al., 1991). As one World Bank document concluded, ‘When the immediate alternatives are limited, however, it is not always advisable to dismantle public agencies’ (World Bank, 1999). Another World Bank document takes the view that privatisation is not always a necessary strategy. In China or South Korea, the private sector grew without privatisation. More important is the stress on restructuring and upgrading public administrative capacities. It also admits that the attitude regarding privatisation has been changing in the light of the East Asian experience. (Development Committee, 1993; Dhameja and Sastry, 2002). It is instructive to make note of the following observations on the divestiture of public enterprises by the World Bank staff paper, that are usually overlooked, ‘First, the ultimate goal should be

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efficiency—not divestiture in itself’. Monopoly rights, favourable financing terms, and protection from imports will attract buyers, but they will also curb competition and reduce the efficiency gains from divesting. Second, successful divestiture takes time. Attempts to privatise quickly without due process and without transparent, orderly procedures can lead to transferring firms to buyers that lack the capability to operate or finance the enterprises. Third, adequate preparation is essential. Experience shows that prior restructuring of the enterprise (for example, rationalising the labour force or financial restructuring) may be essential for the negotiation of an agreement that is politically acceptable and that also produces an efficient firm. It then goes on to add, Finally, though most countries have focused on sales and liquidation, other mechanisms—such as management contracts, leases, asset stripping (selling peripheral assets of a state firm), and contracting out billing, maintenance, and so on, can also bring important efficiency gains and may be less politically contentious (Development Committee, 1990). A senior economist with pro-privatisation views like Arnold C. Herberger has cautioned: Even people as generally market-oriented as myself are advising governments to move carefully, to go slowly and to think about the prices they are getting and alternate terms on which to achieve privatisation. Governments should, in particular, try to have a saleable asset before putting it for sale (quoted in Corbo et al., (eds), 1992). As someone commented, ‘The World Bank should continue to move away from specifying the number of public enterprises to be sold by a particular date; this approach is counter-productive’ (Nellis, 1991). The success achieved with this programme so far, in about 31 countries concerned, that are supported by the World Bank, has been quite modest. A 1991 study of eight Commonwealth countries shows that, of about 2000 public enterprises, only 80, mostly small, have been privatised, mainly by way of direct sale.

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Only in Jamaica and Trinidad and Tobago did the sales proceeds exceed 1 per cent of the GDP. And in nearly all, the public property has been under-priced. In Kenya, foreign control has expanded through privatisation, as also in several Latin American countries under the debt-equity swap arrangement. In Chile, the number of public enterprises was brought down from around 500 to only 13 between 1973 and 1978, after the coup led by Pinochet, but raised only $585 million because of under-pricing, while the auction of forests and national parks led to environmental degradation. In Bangladesh, under General Ershad, a major programme of denationalisation led to a deterioration in terms of output and financial performance, particularly of jute and cotton textile mills (de Castro, 1994). The drive towards privatisation under the World Bank mandate fails to take into account the circumstances that led to the proliferation of public sector units in many of these less developed countries. Very few of these were set up by way of takeover of private units, and a large number of them were transferred from the private sector at its request as the unit concerned was making losses and was unable to keep going. A number of the bigger units with high capital and knowledge intensity and long gestation periods were brought into being because the domestic private sector was unwilling to undertake the task, while the government was unwilling to accept foreign concerns in control over the commanding heights of the economy. If these units are not running with a desirable level of efficiency, there is no guarantee that the private sector would perform any better (Boratav, 1993). In India, the selling of shares of some public enterprises became a regular feature of the national budget from 1991 onwards; but the amount collected under this head almost always fell short of the targeted amount (see Table 11.1). The achievement fell far short of the financial target for raising resources in seven out of 10 years since 1991–92. The total amount raised between 1991–92 and 2000– 2001 was $ 4.42 billion as against the target of $ 11.86 billion (Government of India, 2001c). While deciding on what enterprises to sell, revenue considerations weighed heavier than the efficiency of the public sector. Thus, it was not the losing publiclyowned concerns but the profitable ones with demand in the market that were chosen. The disinvestment effort was confined to

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Globalisation Table 11.1 Disinvestment in India in Different Years

Year 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000

Disinvestment in Equity in PSU (Rs billion)

Disinvestment of Equity in PSU (% of Net Capital Receipts)

Disinvestment of Equity in PSU (% of Total Receipts)

– 30.38 19.61 –0.48 50.78 3.62 3.80 9.12 58.74 17.24

– 7.89 5.42 –0.09 7.39 0.62 0.62 0.92 4.52 1.49

– 2.91 1.78 –0.04 3.18 0.21 0.20 0.39 2.10 0.58

Source: CMIE, 2002b, p. 169.

profit-earning enterprises. Out of the 72 public sector undertakings that were referred to the Disinvestment Commission, 47 were profit-making. Out of the 58 undertakings on which the Commission gave its report, 38 were profit-making (Government of India, 2001c). In other words, making the loss-making units efficient and profitable was not one of the objectives behind the sale of PSUs. This system of disinvestment was streamlined in 1996, when the Disinvestment Commission was appointed for three years, which produced 12 reports; the reports made the list of firms which were ready for disinvestment (Government of India, 1997). In due course of time, 72 PSUs were referred to the Disinvestment Commission out of which it gave a report on 58. Of these, the Commission recommended trade sale in 8 PSUs, offer of share through capital market in 5 PSUs, strategic sale in various proportions in 29 PSUs, closure/sale of assets in 4 PSUs and deferment of disinvestment in 11 PSUs. No investment was recommended in the case of one PSU (Government of India, 2001c). Up to the last quarter of 2000–2001, disinvestment had taken place in only 42 companies (Government of India, 2001h). Other than Lagan Jute and Modern Food, only minority stakes in different PSUs were sold (Government of India, 2001f; 2001e). During the last quarter of 2000–2001, 51 per cent shares of BALCO were sold

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to a strategic investor (Government of India, 2001e). In February 2002, privatisation of VSNL and Indo-Burma Petroleum (IBP) were completed. Indian Petrochemicals Corporation Ltd. (IPCL) and Maruti Udyog Ltd. (MUL) were privatised in May 2002. The list of PSUs likely to be disinvested in 2003–04 is as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

Hindustan Organic Chemicals Balmer Lawrie Engineering Projects Instrumentation Control Valves NEPA Tungabhadra Steel Products Engineers India Limited Bharat Petroleum Hindustan Petroleum Maruti Udyog Ltd. State Trading Corporation Hindustan Copper Shipping Corporation MECON Manganese Ore India Burn Standard Sponge Iron India National Instruments National Fertilisers Fertilisers and Chemicals ITDC—Hotel Jaipur Ashok ITDC—Hotel Kalinga Ashok ITDC—Hotel Nilachal Ashok Hotel Anandapur Ashok

The World Bank insists that a regulatory authority has to be in place before disinvestment is carried out.

Insurance Business The insurance business in India was in private hands until the mid1950s, when a spate of bankruptcies, and the consequent failure

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of the private companies to make payments to the clients, forced the government to nationalise this sector (All India Insurance Employees’ Association, Vol. 1, 1994). Before privatisation, the state-owned insurance business was, principally divided into: (a) life insurance, operated by the Life Insurance Corporation of India (LIC), and (b) non-life insurance, operated by four public sector companies that were joined together by a holding company, known as the General Insurance Company (GIC). These companies were regarded as two of the most successful public sector enterprises in India, that made profit and contributed significantly to the country’s development by way of investment (All India Insurance Employees Association, Memorandum submitted to the Committee on Petitions, 2001). LIC, which began with a very modest capital base of Rs 50 million in the mid-1950s, now handles thousands of crores of rupees, and invested Rs 1 trillion during the Ninth Plan period. GIC extended its business to many new areas, and to other countries such as Singapore and Kenya, and was doing very well in these highly competitive markets. Its mission was ‘to spread the message of insurance as far and wide as possible’, according to the preamble to the LIC Bill of 1956, as presented in the Parliament (All India Insurance Employees’ Association, Vol. 1, 1994). In addition, GIC had been paying the government of India a handsome dividend of 25 per cent on its equity, paid Rs 37.1 billion as tax, conducted business in rural areas of the order of Rs 3.36 billion, and sponsored crop insurance schemes covering more than 20 million farmers, in 1997–98. Further, the record of settlement of insurance claims is quite good in the case of both LIC and GIC, at 97 per cent and 74 per cent, respectively, as compared to the international average of 40 per cent (All India Insurance Employees’ Association, 2001). The first salvo to end the state monopoly in the insurance business was fired by the Malhotra Committee in 1994, which, while lauding the performance of LIC–GIC, took the view that the insurance business could have done better in a competitive environment. The Committee alleged that the insurance coverage was quite low by modern standards, and that the opening up of this sector to private companies—both Indian and foreign—would succeed in rapidly expanding the business and bringing the benefit of insurance to a very large population. The Committee, however,

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did not recommend the dismantling of LIC–GIC, but advised them to compete with the private Indian and foreign concerns (Government of India, 1997b). By all accounts, the choice was not principally between the public and the private sector, but between the Indian public sector and the foreign private sector. The Indian private sector did not have the expertise or the competence to compete with either LIC–GIC or with foreign insurance firms on their own. Even if opportunities were to be created for their participation, they would be operating only as appendages of multinational firms (MNCs). Nor was there much doubt as to why the United States was so keen to enter the Indian and other markets. Over the past few decades, the Western economies have undergone a significant structural transformation—around two-thirds of their GDP and employment are accounted for by the ‘service sector’ while industry and agriculture have been relegated to lowly positions in comparison. They felt that, on the basis of the experience and efficiency that they have acquired in their domestic markets, they were capable of profitably exporting their ‘services’, and thereby making themselves bigger and richer. The growth rate of international trade in services, at 15 per cent annually, was much faster than the corresponding rate for goods, at around 9 per cent. In 1992, with the United States exporting $162 billion worth of services, a very large figure indeed. ‘Financial services’ including banking and insurance, constitute a significant component of the ‘service sector’ in these countries. In order to achieve this growth, the government of the United States launched a two-pronged attack from the mid-1980s. The first step was the successful insistence that ‘service’ should be included in the agenda for the Uruguay Round of GATT negotiations, and its incorporation into the General Agreement on Trade-related Services (GATS), that was signed as a part of the Marrakesh Agreement of April 1994. The main implication of introducing services has been that it has opened up the entire economy of a membercountry of WTO to foreign economic agents. Services include practically everything that was not earlier included under industry or agriculture, ranging from transport, communications and computers to schools, hospitals and groceries. While GATT seeks the free flow of services across national boundaries, it does not include the unrestricted flow of labour services; immigration laws continue to be enforced with full vigour in the rich countries. While

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TRIMs, another agreement signed at Marrakesh seeks ‘national treatment’ for ‘foreign capital’ in every country, and shuns ‘local content requirements’ that put conditions on capital flow in the natonal interest, in the case of labour, the only other mobile factor of production, such local content requirements are permitted as also the denial of national treatment. The second form of the attack took the form of ‘super 301’. Section 301 of the US Trade Act gives the President of that country the broad authority to retaliate against other countries for ‘unreasonable and unjustifiable’ trade practices affecting the commercial interests of the United States (All India Insurance Employees’ Association, Vol. 1, 1994). What constitutes unreasonable or unjustifiable trade practices, is to be defined by the US authorities themselves. Countries found guilty by the United States on this ground are usually put on a ‘hit list’, and once they find their names figuring on this list, they are expected to come running with folded hands to the negotiation table and then to agree to remove the ‘objectionable’ features of their trade policy to the satisfaction of the United States. In 1990, the only country named in this ‘hit list’ of super 301 was India—for allegedly creating barriers to foreign investment and to foreign participation in the Indian insurance market. India’s name figured in the ‘hit lists’ of the next two years too, until the Indian government agreed to open up the insurance sector to the MNCs. In other words, for nine years since 1990, the US multinational insurance companies have been knocking at India’s doors, seeking entry into the country and their government has been threatening economic sanction in case of non-compliance. Usually, in India and elsewhere, the establishment of regulatory authorities nearly always precedes liberalisation in a given sector, as in the cases of SEBI for the share market or for telecommunications. At the outset, the formal, obviously misleading, argument given for setting up an insurance authority was based on the issue of civil service ranking—that the officer acting as ‘regulator’ under the old insurance legislation was junior to some of the officers holding ex-officio positions in the LIC or four GIC companies, and so an amendment was needed to rectify this anomaly. It was not till 1996, that it was admitted that the principal objective of this bill was to regulate the Indian private sector to be engaged in insurance. But the government was careful to add in 1996 that it

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would not globalise and would not bring in multinationals. By 1998, when the BJP, and its allies came to power, it was clear that IRA was a prelude to the opening up of the insurance sector to the foreign MNCs, as the 1998 version allowed for a certain proportion of foreign ownership. While earlier, during the debate on the 1996 IRA bill, the BJP made a distinction between Indian private participation and globalisation under the MNC umbrella, supporting the former and opposing the latter, such a distinction was now removed. The argument of ‘external compulsion’ replaced the fullthrottled advocacy of swadeshi by some in that party. The objective of this legislation was no longer a matter of conjecture, or hidden behind fulsome rhetoric. It is not important whether the share of the foreign component would be 26 per cent or 40 per cent with NRI add-ons. As experience tells, there would be incremental increases in the foreign share, in budget after budget, and eventually, one would reach the magic figure of 51 per cent in due course, thus permitting the foreign companies—with their vast experience and tentacles spread throughout the world—to take over the insurance business in the country. The argument that the coverage of Indian population by the LIC– GIC was very low, and the expectation that the entry of MNCs would significantly increase such coverage, was first advanced by the Malhotra Committee. This is a view that treats insurance coverage in isolation from the rest of the economy, and makes an absurd comparison of India’s figures with those of the much richer and developed countries. The fact is that India is one of the least developed countries in terms of practically all the major indicators of development, such as per capita GNP, literacy, infant mortality rate, share of global exports, and what have you. The performance of the insurance sector cannot be de-linked from the overall performance of the economy. India’s insurance coverage would look quite good if a comparison were to be made between comparables, that is with Bangladesh, Pakistan, Nepal, Sri Lanka, Burkina Faso or Zimbabwe. If the GDP remains so low, and becomes even lower in per capita terms, if the organised sector constitutes a negligible proportion of the Indian multitude, if the salaried component in the population continues to be equally negligible, and the proportion of income tax payers remains pitifully

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small, how can the insurance coverage be raised only with the aid of MNCs? The same argument applies to savings. There is an implicit assumption that the foreign companies, working efficiently, and in competition with one another and the Indian firms, can raise the level of savings in India. The worldwide experience is that the savings ratio does not increase without an increase in the level and the rate of growth of GDP. As a study of the East Asian countries would show, the level of savings was very low to start with, even less than 6–7 per cent in the 1960s, and then increased with a high growth in the GDP, reaching the dizzy heights of around 35–40 per cent after two decades. Further, the overwhelming part of these savings in East Asia was tapped by public sector banks and central provident fund schemes and not by foreign private banks and insurance companies. It is clear that the flow of funds from foreign sources entering our insurance business would be no more than a trickle. Assuming a capital base of Rs 1 billion, and a foreign share of 40 per cent, that would only contribute Rs 400 million for a company. By paying this meagre amount of Rs 400 million, the same company would handle may be a few thousand crores of rupees of the insurance business, mobilising all but that paltry amount from our own domestic savings, and that too by diverting savings mobilised by other sources including share market, banks and other insurance companies. Customer services will improve under the foreign companies, but how much of that increased efficiency would be translated into a higher rate of savings and how much would that contribute to financial outflow by way of profit remittance is not clear. It may also be asked as to how many of the ‘new products’ to be launched by the MNCs are really necessary, when the more urgent need is to spread the coverage even on the basis of a few basic products. The ‘new products’ might be in demand at the upper end of the elite market, but would make little difference to the economy and society, as a whole. It is tantamount to making huge investments in curing rare diseases such as blood cancer or in treatments such as heart or kidney transplant, while ignoring the need for providing basic preventive health services related to malaria, hepatitis, diphtheria, tuberculosis, death during pregnancy, and so on, or even to provide safe drinking water, in order

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to reduce mortality rates. To give another example, it is like having hundreds of TV channels in place of two or three, where it is not clear whether this enormous increase in choices amounts to increased social welfare. Some would argue that too many choices reduce social welfare, as people, spending their time and energy to hop from one channel to another in search of the best one at a particular moment, become fickle-minded and unable to concentrate on anything. Word is going round that, under competition, the premiums would go down. Just the opposite is more likely to happen. It is more than certain that the car insurance premium would be increased manifold in line with the rates prevailing in the Western countries where the automobile prices are lower but premiums are much higher as compared to those in India. The same would apply to other areas of insurance. Even in the West, there are frequent allegations that insurance companies make use of conditions laid down in small print in the agreement, which no one reads before signing on the dotted line, in order to deny customers legitimate compensation (US Government, 1990). Nor is the contention that foreign companies settle the claims faster, true. The same applies to health services also. Going by the US experience, it is not clear as to what proportion of the Indian population would be able to pay premiums required for this purpose, even in case of the GIC-sponsored Mediclaim scheme based on actuarial estimates. The coverage of diseases and the compensation paid would be linked to the premium paid; the higher the premium paid, the greater would be such coverage and the amount of compensation in case of treatment required for such illness. No ordinary middle class salaried employee would be able to afford the premium prescribed by the private companies for AIDS or kidney or heart transplant or for any terminal diseases that may or may not affect a particular person during his lifetime. It is sometimes claimed that the globalisation of the insurance business would bring better technologies. Apart from the universal global experience that the rich countries and their companies are shy about disseminating their technologies and are likely to keep those under patent protection long enough to ward off competition from the poor countries, it is not at all clear what technology one is talking about. If by technology one implies software management packages incorporating tested actuarial models, one should

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consider the example of Lloyds, one of the global giants in this field, which uses the services of Indian firms for developing some of the software packages required by them. Two specific questions have so far remained unanswered in this debate on foreign participation in insurance. First, would not private business in life insurance expose the Indian clientele to a high risk of default? As we know, the life insurance business was nationalised in the 1950s because of a high level of bankruptcy among the private companies. We also learn from the experiences of US and other countries that bankruptcy continues to be a problem with them, though they have been trying, over the last few years, to bring down the frequency of bankruptcy. This is not simply a matter of the size of the firm—even a large firm with massive financial resources can fail because of imprudent management decisions and practices. The problem, therefore, cannot be tackled by only having companies capable of operating on a big scale, as the report has suggested. In India’s case, the adverse consequences are likely to be many times more serious. A low-paid clerk saves month after month for 35 to 40 years with the expectation that, at the end of his working life, he would have a substantial fund in his kitty to survive for the remaining post-retirement years of his life. Since he does not have any national assistance or old age state pension to fall back upon, unlike his counterparts in most developed countries, he can ensure his survival during the post-retirement years only through such savings. If it is a publicly-owned insurance company, the state itself implicitly guarantees against such bankruptcy; no government can afford to ignore this commitment. But if the company concerned is a private one, can one guarantee that it would still be operational after 35–40 years, and if it does not who would guarantee payment at the end of the client’s working life? For a poor country like India, the private business in life makes the insurance policy-holders vulnerable. It may be asked as to why the Indian policy-holder should be exposed to such a risk. It is clear that the private companies—both foreign and Indian— would be mainly interested in operating in compact high density areas, such as big cities and towns, where the cost of administration per unit of money transacted would be the least, and where they would be better able to monitor their business. That the private companies are unwilling to operate in rural areas that are spread

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out over a large low density area, and the population is diffused in a large number of small settlements, is demonstrated in other fields too, such as the banking and power sectors. Before the nationalisation of banks in 1969, the activities of private banks were negligible in rural areas; had it not been for the nationalisation of banks, it is doubtful whether banks would have been willing to provide farmers short-term crop loans and medium-term loans for tractors and other equipment, to make the Green Revolution possible. Similarly, would the government be able to persuade Enron or the Calcutta Electricity Supply Company to operate in remote, backward districts? In contrast, both LIC and GIC have excellent track records when it comes to mobilising savings and investments in the rural areas. When it comes to non-life insurance, the single biggest item that can bring the ‘greatest good to the greatest number’ would be ‘crop insurance’. The crop insurance scheme in operation until now cannot be described as a great success, but it is by improving upon the scheme, and not by abandoning it, that one can ensure progress in our country. The single biggest curse befalling our country is the fluctuation in agricultural production because of the vagaries of nature. If the farmer is assured of some compensation in the years of bad harvest or low price, if a ‘floor’ is assured, this will do much more for the Indian economy than tax concessions declared in every budget to benefit private business. The fact is that the private business—whether Indian or foreign—is not interested in crop insurance. To them, this is a loss-making area that they are keen to avoid. Nor can any means be found to force them, by way of commandments issued by IRI, to allocate a certain proportion of investment for this area. Such a move would be opposed to the World Bank or WTO’s view against ‘directed investment’ or ‘local content requirements’. Such a measure is also likely to invite retaliation from the government of the United States and other Western governments. If foreign companies are unwilling to enter into an area that is so vital from the point of view of the Indian economy and society like crop insurance, why should they be allowed entry into the ‘juicy’ areas like car or theft insurance in urban areas? Should not the public sector companies be allowed to have a monopoly over these ‘juicy’ areas to compensate for the losses that they would be forced to sustain in activities like crop insurance? Why should foreign and Indian private companies be allowed to amass profits

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in urban areas when they are unwilling to share the social obligation of crop insurance in the rural areas? These questions need to be answered before the formulation of a coherent national policy on insurance (Government of India, 1998).

Valuation The firms selected by a Disinvestent Commission were valued according to various methods, such as discounted cash flow, balance sheet, transaction multiple, and asset valuation which reflected net replacement value, net worth, and so on, to determine the minimum value of a firm. The Discounted Cash Flow (DCF) methodology worked on the premise that the value of a business is measured in terms of future cash flow streams discounted to the present time at an appropriate discount rate. It was the most appropriate methodology wherein the business was being transferred/acquired on a going concern basis and where the business possessed substantial intangibles like brand, goodwill, marketing and distribution network. The Balance Sheet or the Net Asset Value (NAV) methodology took into account the value of the assets of a business or the net worth as represented in the financial statements. This method did not, however, consider the earning potential of the assets and was, therefore, seldom used for valuing a going concern. This method was not considered appropriate where intangibles such as brand, goodwill, marketing infrastructure and product development capabilities formed a major part of the value of the company. The Transaction Multiple method took into account the value paid for similar transactions in the industry and benchmarked it against certain parameters like earnings or sales. Two such parameters were Earnings before Interest, Taxes, Depreciation and Amortisations (EBITDA) and sales. The Transaction Multiple methodology suffered from the drawback that actual money was required to earn maintainable profits/sales of the business as a going concern (for instance, future capital expenditure was not reflected). Further, this methodology did not take into account the time value for money. The Asset Valuation methodology estimated the cost of replicating the tangible assets of business. This methodology was useful

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in case of the liquidation or closure of a business. It failed to factor in some important aspects for a running business such as the value of intangibles, the profit or cash generating ability of a business and opportunity loss during the period before a business was fully operational. It was questionable in cases where it was impossible to replicate a business intended to be transferred on account of a complete change in technology (Government of India, 2001c). International valuers were appointed, at a high fee, to give the exercise as neutral an appearance as possible. Yet, the limited Indian experience could not escape allegations of price rigging and sleaze. Like other countries where public sector units had been sold in dozens, e.g. in Chile or Mexico, there had been allegations of sleaze, price rigging and collusion among potential buyers (Boratav, 1993; Chakraborty, 1979; Webb and Karim, 1992).

Disinvested Companies Below is given an account of the companies that were disinvested during this period.

Modern Food Industries (India) Ltd. (MFIL) Hindustan Lever was selected as the strategic partner of Modern Food Industries after its sale. Hindustan Lever Limited paid Rs 105.45 crore to the government of India and Rs 20 crore to MFIL for acquiring 74 per cent stake in MFIL. This corresponded to Rs 169.53 crore for the sale of 100 per cent equity against the valuation range of Rs 57.02 crore to Rs 157.10 crore (Government of India, 2001e).

Lagan Jute Machinery Co. Limited (LJMC) Seventy-four per cent equity of LJMC was disinvested to a strategic partner (M/s. Murlidhar Ratanlal Exports Ltd. (MREL, Calcutta), which was effected through sale of 6,330 equity shares (face value Rs 1,000 per share) at the rate of Rs 4,000 per share by Bharat Bhari

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Udyog Nigam Ltd.(BBUNL) for Rs 25.3 million and a fresh issue of 5,680 equity shares (face value Rs 1,000 per share) at the rate of Rs 2,640 per share by LJMC for Rs 15 million (Government of India, 2001f).

VSNL Forty-seven per cent of the shares of VSNL were disinvested to institutional investors and individual shareholders by March 1999. Of the remaining shares, the government decided that it would sell 25 per cent to a strategic partner and 1.97 per cent to employees. On 5 February 2002, Panatone Finvest, a company belonging to the Tata Group purchased a 25 per cent stake in VSNL for Rs 14.39 billion against the reserve price of Rs 12.18 billion. It was expected that the realisation from the sale of VSNL would go up to Rs 36.89 billion after factoring in Rs 18.87 billion as dividend and Rs 3.63 billion as dividend tax (The Hindustan Times, 2001b, p. 1; The Hindu Business Line, 2002, pp. 1–2; Deccan Herald, 2002).

IBP Co. Prior to privatisation, the government equity in IBP was 59.59 per cent. The Indian Oil Corporation bought 33.58 per cent of this government stake in IBP for Rs 11.53 billion against the reserve price of Rs 337 crore (The Hindu Business Line, 2002, pp. 1–2).

IPCL The government of India had a 59.75 per cent stake in IPCL. Reliance Industries Ltd. acquired 26 per cent of the government stake in IPCL for Rs 14.5 billion.

Maruti Udyog The government decided to disinvest its stake in Maruti Udyog Ltd. through a two-stage process beginning with the slashing of

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its equity from 49.7 per cent to 45.4 per cent. The government’s partner in Maruti Udyog, Suzuki Motor Corporation, paid a control premium of Rs 10 billion to the government to increase its stake from 50 per cent to 54.2 per cent. This was accompanied by Suzuki picking up a Rs 4 billion rights issue at Rs 3,280 per share. Thereafter the government would offload its remaining equity through public offer in two phases by April 2004 (The Hindustan Times, 2002, p. 1).

The BALCO Episode A recent example was Bharat Aluminium Co. (BALCO) whose half share was sold to Sterlite at Rs 5.5 billion. Here the price fixed by the international valuer was very close to the figure at which the enterprise was sold, suggesting the leakage of the valuation, which determined the minimum price. But, more suspicious was the manner in which the bidding was conducted. Although the tender was global, only three bids came. Of these, one dropped out as it was very low and unrealistic. Another bid withdrew before bids were opened. Therefore, at the time the bids were opened, there was in effect only one bid that was above the minimum price, which was selected. There was also criticism that the valuation took no account of the cash balance and the value of a captive power plant, and the net worth of the firm was not calculated, on the ground that the government still retained half the share of the enterprise. For the seven units mentioned above, the following financial indicators were under consideration: net profit as a percentage of capital employed, net profit-net worth, turnover ratio, return on investment and dividend as a percentage of the paid-up share capital. These showed quite high values for six out of the seven PSUs—Lagan Jute Machinery Co. Ltd. was a loss-making company at the time of its disinvestment (though Maruti Udyog Ltd also made a huge loss of Rs 2.69 billion in 2000–2001, the year prior to its privatisation), implying that the PSUs were in a good financial position at the time of disinvestment.

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Disinvestment of NALCO The proposed disinvestment of NALCO, the only integrated aluminium producer in the Indian public sector and the second largest aluminium producer in India after Hindalco, has created a major controversy until there was a specific promise from the Prime Minister of the time that in no case would NALCO be taken over for privatisation. At present, the government controls 87.15 per cent of the shares of NALCO, after the first dose of about 13 per cent disinvestment several years ago. Of the 87.15 per cent that the government owns, it has proposed a disinvestment of 61.15 per cent. Of the remaining, 10 per cent of the shares will be sold in the domestic market, 20 per cent through the American Depository Receipts (ADR), 2 per cent to employees, and 29.15 per cent shares will be offered to a strategic partner who will, for all practical purposes, be the real owner with control over the management. This decision went against the Seventh Report of the Disinvestment Commission in 1998 which categorised NALCO as a company in the core sector and, after pointing out NALCO’s strong business and financial position, particularly its ability to generate funds for investment projects without relying on the government, it recommended an offer of sale of up to 30 per cent of the government holding of the company to retail and institutional investors while cautioning the government against total privatisation. Moreover, the Commission recommended that the government give full autonomy to the company’s board so that it could operate successfully in the increasingly competitive environment (Government of India, 2002). The government has evaluated the reserve price of NALCO at Rs 29.28 billion whereas NALCO was established with a cost of Rs 24.08 billion. As on 31 March 2001, the authorised and paid-up capital of NALCO were Rs 13 billion and Rs 6.44 billion, respectively (Government of India, Economic Survey, 2000–2001), and the fixed assets of the company were worth Rs 6 billion, investments were worth Rs 358.4 million and net current assets were worth Rs 4,900 million (Government of India, Economic Survey, 2000–2001b). The high quality of bauxite from NALCO’s mines and the low cost (in fact, the lowest cost of production in the world) have

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allured as many as 15 bidders from inside and outside the country. Among the bidders vying for a stake in the company are the domestic majors, Sterlite and Hindalco. Others in the fray include international giants such as Glencore of Switzerland, Alcoa of the USA, Alcan of Canada, BHP of Australia, Pechiney of France and Rusal of Russia. The ABN Amro-Rotschild-Enam group has been appointed as a global co-ordinator-cum-advisor for the three transactions—sale in the domestic market, sale through ADR, and strategic sale (Government of India, 2002; The Hindu, 2002, pp. 1–2; Yahoo Finance, 2002). NALCO employees see Hindalco, an aluminium major of the Aditya Birla Group as the most likely buyer of NALCO, if and when it is sold. In a major restructuring attempt in the Aditya Birla Group, Indo Gulf Corporation has merged its copper business with that of Hindalco. This merger offers Hindalco the size and adequate balance sheet strength to make a serious bid for NALCO without entering into any financial alliance or partnership with any other aluminium company. Moreover, this places Hindalco at a significant advantage vis-à-vis its major competitor, Sterlite Industries. After its acquisition of BALCO, Sterlite controls about 13 per cent of the Indian aluminium industry. If Hindalco can buy NALCO, then the Aditya Birla Group will have complete monopoly over the internal market of aluminium, of which it presently controls 51 per cent. In that case, the two companies will control the entire market for primary aluminium in the country. The Disinvestment Ministry’s narrow definition of ‘strategic sectors’, including only those that are defence-related or railways, thus allows little leeway for the government to retain control of units that have a strategic role in the economy. Resentment over the sale of NALCO has been building up since July 2002 when the Cabinet Committee on Disinvestment announced the decision to divest 29.15 per cent of the government equity along with management control to a strategic bidder. Massive opposition from various quarters has delayed the privatisation bid. Trade unions and Left parties are in the forefront in the movement against NALCO’s privatisation. The due diligence process had to be called off immediately after it began at the end of October 2002 when a team of potential bidders were prevented from inspecting the company’s main plant at Orissa.

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The Ministry of Mines objected to the modalities for sale. It maintained that, as per the Disinvestment Commission’s recommendation, sale of the company’s equity in domestic and foreign markets had to be adhered to. It has also opposed the appointment of a single advisor for the process. Moreover, it had objected to the strategic sale pending completion of the company’s modernisation programme (The Hindu, 2002, pp. 1–2; Yahoo Finance, 2002). Table 11.2 shows NALCO’s financial parameters. Table 11.2 NALCO’s Financial Parameters

Net profit as a percentage of capital Net profit: net worth

1995–96

1996–97

1997–98

1998–99 1999–2000 2000–01

17.41

14.38

14.63

8.24

18.47

27.55

23.73

16.56

16.20

8.76

15.98

18.36

Source: Government of India, Economic Survey, 1997–98, pp. 49–51 (data for 1995– 96, 1996–97, 1997–98); Government of India, 2000–2001, pp. 43–45 (data for other years).

BIFR and Sick Public Sector Units During this period employment in the public sector as also in the organised private sector virtually stagnated. Most of the employment growth was in the informal sector. The implementation of the ‘exit policy’ in the case of sick units—both public and private— was hampered by the inadequacy of the ‘national renewal fund’, while the number of sick units jumped. One major criticism, in the case of the sick public sector units, was that the revival packages took several years to formulate and to be approved by the appropriate cabinet sub-committee, and by the time these were put into action, the condition of the factory or the enterprise concerned, went beyond redemption. Lending from banks and other financial institutions stopped as soon as an enterprise was declared sick, and from then onwards, to keep the firm ticking until the revival packages were decided upon was usually an uphill task. Now the

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semi-judicial agency co-ordinating the affairs of the sick industry, BIFR itself has been declared sick and is going to be closed down, while the bank funding the sick units (the Industrial Reconstruction Bank) has changed its name (Industrial Investment) and is no longer looking after sick units.

12 Labour Market Reform Introduction In the 2001 budget, the Finance Minister conceded to a long standing demand of the global agencies that the labour laws protecting workers from sudden closure and lay-offs by the management, should be scrapped. In the case of enterprises employing more than 1,000 men, after this change, such a decision can only be taken in consultation with the authorities. By proposing to amend the required number of employees from 100 to 1,000, the Finance Minister is, in effect, taking away protection of the employees against layoffs and closure. In future, there may be other bills that would further dilute the provisions of labour welfare legislation on minimum wages and compensation for workplace damage, and providing crèches, toilets, etc., in order to transform labour market conditions in India as per the desire of the large multinational companies. For the wealthy MNCs, with their empire spread across a large part of the globe, the rights to ‘hire and fire’ are inalienable ones, and are indispensable preconditions for their entry into a particular market in a big way (Dasgupta, 2001c). ‘The overriding tendency (of the World Bank)’, as one ILO document suggested in 1994, ‘has been to criticise existing labour laws and regulations, whenever they may raise the cost of labour and otherwise impede the freer operation of market forces.’ The ostensible objective of these criticisms was to remove rigidities and distortions in the labour market, (Plant, 1994), but these were compatible with the World Bank’s view on liberalisation. Labour

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market regulations were cited specifically as constraints to successful reform. The World Bank document on Africa says, Experience suggests that, except on grounds of health or worker safety, governments should resist interfering in labour markets. If left alone, they work well. The political imperative is to interfere, but the economic logic is not to .... Minimum wage legislation, regulations restricting the ability of employers to hire and fire, and related interventions tend to raise costs, reduce competitiveness, and restrain the growth of employment.... During the next generation, the rapidly expanding labour force will tend to drive wages down. In these cases , any attempt to obstruct this process administratively will fail in the long run, at the cost of lower growth in production and employment in the short run (Plant, 1994). Another World Bank document of 1992, talks generally about poverty reduction, safety nets and the need to go in for labourintensive community work, but is critical of minimum wages, labour market and job security legislations (ibid.). All the three major international agencies seek those reforms in the labour market. It is not usually recognised that though they share the same market-oriented economic philosophy, nevertheless, they speak with diverse and contradictory voices when it comes to labour market reform. While the World Bank and the IMF desire non-intervention of the state, and prefer the determination of wages and other labour conditions through the interaction of the forces of demand and supply in the market, in contrast, the World Trade Organisation (WTO) seeks a certain amount of state intervention to achieve what it describes as ‘labour standard’. We begin with a bland statement that these so-called labour market reforms are anti-labour and anti-poor countries. These reforms seek total, unobstructed mobility of capital and commodities across national frontiers, but do not allow corresponding privileges to another equally important factor of production, that is, labour, to move without restriction from labour-surplus areas such as India, to labour-deficit ones, such as Australia. The globalisation programme that they advocate is, for this reason alone, partial, discriminatory and biased (Dasgupta, 2002a).

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NPE and Olson The philosophical basis of structural adjustment lies in the writings of Mancur Olson and other exponents of the so-called new political economy (NPE). Since we have discussed the new political economy elaborately elsewhere, here we do no more than draw the attention of the reader to this particular aspect of Olson’s writings (Dasgupta, 1997, 1998; Olson, 1982). At the base of NPE is the concept of rationality, which is taken as being synonymous with self-interest. A person or a self-interested group seeks a higher share of the national cake through his actions. It is, however, debatable whether self-interest is the main motivating force behind human action. The history of mankind is replete with examples of people who have risen above their own narrow interests to sacrifice a great deal, including their lives, for a cause. NPE does not explain philanthropy, martyrdom, nationalism, ethnicity, the giving and taking of life in ugly communal outbursts, or fights between two groups of (non-gambling) football fans. People can and do go beyond their immediate self-interest quite regularly. Further, the joining of a group (e.g., ‘save the baby seal’ campaign) is not merely prompted by the desire to get a share of the national cake. Emotions, sentiments, concern for others and enjoyment in being a part of a larger group, are matters that go beyond personal book-keeping and cost-benefit analysis. One can even go to the extent of saying that if rationality is defined only in terms of self-interest, the most rational behaviour would be an irrational one. Taking the Olsonian definition of rationality as self-interest for the purpose of our understanding of NPE, a transition from individual self-interest to group interest, a major concern of Olson and NPE, in general, takes place when these two are not in conflict with each other. Generally speaking, a rational self-interested individual in the Olsonian sense has no incentive to contribute to the provision of public good if he can do without it, more so where there is no close and direct connection between his contribution and the social good that results (Hindess, 1988). He would not join a union or pay taxes and would rather enjoy a free ride of higher wages from collective action or contribution by others, unless

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not being a member of the union or tax-payer would confer some disadvantages (e.g., social exclusion or imprisonment) that are, in his reckoning, more costly than the amount he will have to pay as union subscription or taxes (Olson, 1982). The only exceptions to this are, according to Olson, encompassing organisations, where unions represent almost all earners in a society, and where pursuing national well-being would further their own interests too. (ibid.). But in case of encompassing organisations, the success of the organisation would depend largely on its ability to frame rules that benefit the vast majority of its members or avoid conflicts among members, but, in most cases, at the cost of efficiency, e.g., the seniority rule in promotions prevailing in many workplaces (ibid.). We know that, to be effective, a cartel has to fix both the price and the quantity of the product it is offering. But in this situation, the encompassing organisations, which function like a cartel, tend to fix only the price, e.g., the wage in the case of a union, leaving the quantity, that is the number employed, to be determined by the market (ibid.). In the case of the labour market, this would imply the presence of the unemployed, on the one hand, and the prevalence of high wages for the employed on the other. The wages will not be adjusted downward to allow the market to be cleared and to do away with unemployment. Further, according to Olson, such interest groups as labour unions are likely to form distributional coalitions with other interest groups, and seek various types of state intervention in the economy, e.g., controls against imports and other competitors, and licences and permits for themselves, at the cost of a loss of welfare for the nation, as a whole. Lobbying, so far taken as a positive feature of the pluralist-competitive society by the neo-classicists, is considered by Olson and NPE to be harmful. A major question raised by NPE is whether such pursuit of selfinterest by individuals and interest groups operating in an economy, with conflicting aims and with unequal access to decision makers, brings about a desirable optimum allocation of resources for the country as a whole. Until NPE, an assumption underlying neo-classical micro-economics was that the sum of individual welfare and utility maximisation adds up to social welfare. Olson, however, disagreed with this assumption. Indeed, as his analysis attempted to show, this would lead to an irrational economic

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outcome. The special interest groups would only cater to the interests of their members, and, thus, will reduce efficiency and the aggregate income of the society as a whole in which they would operate (Olson, 1982). Distributional coalitions, whose objective was to maximise the share of its members in the national cake, would be quite inefficient in their manner of functioning, according to Olson. Because of the diversity of interests they represent in order to achieve a common aim, coalitions would tend to have a crowded agenda and, thus, would be rigid and slow in decision-making. Once a bargain has been struck, it will be difficult to change the terms within a short period, even if that becomes necessary because of the altered market or technology conditions (ibid.). Further, distributional coalitions, once big enough to succeed, would tend to limit the diversity of interests and values of their membership, and to make themselves more and more exclusive (ibid.). In other words, the politically rational goals of private interests would ‘lead to ends that are economically irrational’ (Grindle and Thomas, 1991). They will induce the government to make rules and pass legislation that would benefit them exclusively. The coalitions will strive to capture the largest possible share of national income, at the cost of the vast majority, who are poor and unorganised (Olson, 1982). Olson raised the question as to why there was more unemployment among the groups with lower skill and productivity, e.g., teenagers, or disadvantaged racial minorities, while it was the least among the highly skilled workers. He then proceeded to answer that question himself. When wages are set above market clearing levels, the argument goes, it is inevitable that the employer will choose and attract the more skilled, and, inevitably, the less skilled and young would go without jobs (ibid.). Although he also blamed the monopsonistic policy followed by enterprises for this, he made the trade unions more of a culprit by saying that they block ‘mutually advantageous transactions between individual employers and workers to keep wages below competitive levels.’ The fact that the unions would not allow the unemployed to work at low wages by displacing those who are already working at higher wages is considered to be wrong. The unions are made responsible for the stickiness of wages, and for not letting market be cleared. Olson’s anti-labour views even take him to support inflation, though, apart from being inequitable, it erodes the real wages (ibid.). (Such views

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are not only typically Olsonian but these also find their place among the writings of Left-bashers some of whom masquerade as leftwing; (Bardhan, 2003; Dhar, 2003). While critical of all types of ‘distributional coalition’, Olson, in his efforts to make the organised trade unions his main target, entangled himself in another serious double-talk. Not all interest groups or coalitions are decried by NPE. On the contrary, its proponents argue for mobilising support structural reform by bringing together the potential and actual beneficiaries of such market-based reform, away from the interventionist state. To quote one influential World Bank publication, ‘Adjustment programs should thus be designed and presented with an awareness of the importance for political sustainability of building a coalition of groups benefiting from and expanding as a result of the reform process’ (Webb and Karim, 1992). One World Bank official was glad to note that the military regime in an African country was receiving the support of the beneficiaries of reform (Foroutan, 1993). In other words, coalitions of a different kind, of the potential beneficiaries of reform, are welcome, while those sponsored by the trade unions are not. The trade unions are blamed for producing irrational economic outcomes, because they seek to maximise their own share of the national cake by forming a coalition of similar interest groups, and yet the NPE urges the possible beneficiaries from structural adjustment to form a coalition in its support in order to make it politically sustainable. The theory does not reveal why such a coalition of possible beneficiaries of reform would be any different from other types of distributional coalitions seeking to maximise their share of the national cake, and in that case, how can they avoid inefficiencies and irrationalities associated with distributional coalition in general, as discussed by Olson himself. Given this ambiguity, one might argue, despite the elaborate arguments of Olson and other proponents of NPE, that there is nothing basically wrong with coalitions as such, the more critical question is: on whose side are you? NPE protagonists entangle themselves in another serious argument on the nature of the state and its relationship with the unions. Like Marxists, NPE proponents take the view that the essence of the state lies in its right to legally use violence in favour of interest groups (read classes BD) in control of the state machinery (Lal

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and Myint, 1996). But unlike the Marxists, they take the view that only an authoritarian regime can more effectively keep those trade unions of organised workers seeking wages that are higher than the average earnings of the multitude of unorganised workers in control (Hoggard, 1995). In other words, liberal neo-classical economics requires, for its success, its political obverse—an illiberal, authoritarian political structure, that is, a ruling party (or leader) which can rise above interest groups such as trade unions, make decisions and impose them on the rest of the society, and sustain unpopular but desirable policies over what is likely to be a number of difficult years. The economic success in several of the South-east and East Asian countries in recent years has been attributed to the success of their authoritarian governments in keeping wages in check (Agarwal et al., (eds), 1996). The main justification for such an attitude towards labour is the view that high wages, prompted by trade union activities, operate as a disincentive to private investment. While, according to this view, there is nothing wrong in the management making huge profits and accumulating wealth, trade unions are not permitted to procure for their members wages that are far in excess of the average wage. This, again, looks at the issue from one side, that is, the requirement to induce the rich to make efforts to become richer by producing more, but ignoring a task that is no less important, which is of providing an incentive for the vast majority of workers who would actually turn the wheel. In fact, the literature on structural adjustment and the new political economy is replete with policy prescriptions that would keep wages within limits, even by way of repression of organised labour, while allowing the industrialists and traders to maximise profit. A simple linear relationship between economic success and the political form of the government is hard to establish (Hoggard, 1995). In fact, taking all the countries of the world into account, generally speaking, the better-off countries tend to be more democratic than the poorer ones. On the contrary, autocratic governments—whether ruled by Mobutu, Trujillo, Batista, Duvalier, Idi Amin, Rhee or Ayub Khan, just to name a few with long records of governance, all generously supported, financially and militarily, by the Western governments, the World Bank and

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the IMF—do not seem to have done much for the economic progress of their people. The fact that many economically successful East or South-east Asian countries are mainly governed by autocratic regimes, is a mere coincidence and this correlation between the two cannot be generalised (Healey et al., 1992). Further, as Taylor argues, if the authoritarian generals, because of their total control over the country, are so efficient in keeping the government out of the market, what prevents them from taking over the market too? ‘The record of the Third World authoritarian states in avoiding corruption and distortions is not encouraging in this regard’, he concludes (Taylor, 1995). Generals ousting corrupt politicians in a coup, and making trains run on time and the clerks attending office punctually, usually end up being worse than those they replace, as the experience of many countries—from Pakistan and Bangladesh in Asia to Central American Republics through Africa south of Sahara—confirms.

Anti-Labour Policies of the East Asian States However, irrespective of whether they are autocratic or not, the governments of East Asia were notorious for their repressive labour policies, for controlling the organised labour movement, for suppressing dissent and unrest, and for ruthlessly restraining wages. The struggles of working people for higher wages and/or an equitable share of the national income were brought down with a heavy hand. To quote the World Bank study on the East Asian Miracle, in almost all the East and South-east Asian countries (except Hong Kong), the ‘governments restructured the labour sector to suppress radical activity in an effort to ensure political stability .... Labour movements in Indonesia and Thailand, while not subject to systematic restructuring, were nonetheless routinely suppressed at the first sign of radicalism’ (World Bank, 1993). Where permitted, the labour unions were mostly controlled by the ruling party or the management, and had no independent voice. Labour legislations were non-existent, or weak, or were diluted in order to encourage private, including foreign, investment. Formation of industry-wide unions was prohibited, enterprise unions

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were encouraged, while the government gave bureaucracy and business a long hand in dispute settlement. The management had the unrestricted right of hiring and firing. In Japan too, the management was far from friendly to the trade unions, particularly the Left-wing variety, but their harshness was partly mitigated by the norm of lifetime employment for a bulk of employees within a paternalistic social-administrative corporate framework (Bagchi, 1987). To what extent such policy eventually contributed to social welfare and high growth, and, even to democratic trade unions, in the long run, is a moot question. One major objective behind this ruthless suppression was to keep wages low. However, after this policy of wage repression had succeeded in promoting a certain amount of increase in production and in achieving a higher level of GNP, the government took a more relaxed attitude towards wages, helped by the switch-over to more capital-intensive and less labour-intensive industrial strategies. It was realised that for further growth, repressive policies would not do, and would in fact be counter-productive (Hoggard, 1994). However, even when allowed to grow, wages lagged behind labour productivity increases and the share of labour in national income was deliberately kept low to make room for profit, accumulation and investment (Agarwal et al., (eds), 1996). There is no doubt that low, repressive wages played a certain role in East Asian development. But so did a vigorous public sector and an interventionist state, ‘directed’ investment and saving, ‘created’ comparative advantage in high-quality industrial goods, and so on, that were at variance with the theology preached by the World Bank. A multi-dimensional phenomenon like the high growth rate in East Asia, sustained over more than three decades, cannot be explained in terms of a single factor alone. The fact is that the strategy of low, repressive wages was abandoned and the anti-trade union policy was modified, as soon as a certain amount of progress was achieved in East Asia (Dasgupta, 1998). The NPE view on trade unions does not take into account the historical process by which the trade unions emerged in the modern industrial world, to fulfil a certain need, as the guilds of artisans and craftsmen emerged in the middle ages, to protect their collective interest. In the beginning, the employers were too powerful in relation to the individual workers who were in their

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employment and exploited them at will, hiring and firing them when it suited their interests. The trade unions grew as a collective body of workers to protect them from exploitation. They are so much a part of the industrial reality now that they cannot be wished away, not even where they are very weak, as in India.

Labour Market Reform: The Global Experience in Practice In most countries, because of strong local opposition, the governments have not been able to make much headway in this area. As one World Bank document puts it, ‘The Bank has acquiesced in the desire of the governments to avoid the politically sensitive issue of labour retrenchment’ (Corbo and Fischer, 1992; Webb and Karim, 1992). Only in a country like Ghana, where ghost workers constitute a significant proportion of the public payroll, a substantial public saving has been achieved by removing many (not all) of those from the list (Toye, 1991).

Frozen Organised Employment In general, structural adjustment leads to a freeze in public employment. The organised private sector employment also seldom grows because of low level of private investment and high capital intensity of what takes place. Most of the unemployed fall back on the low productivity informal sector which acts as a natural safety net. The organised sector also takes full advantage of the surplus labour situation by opting for contract labour and casualisation, and for putting out systems that avoid establishment costs and make it easier for them to offload surplus workers as demand falls. This high social cost of structural adjustment programmes has been a recurrent theme in studies by UNICEF and ILO among others. In sub-Saharan Africa, structural adjustment has destabilised many poor households, which have been hurt by inflation and food scarcity.

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As we have noted at the very beginning, the trinity’s concern for free trade and global mobility of capital, inputs and products does not entail free flow of labour power across national frontiers. If anything, over the past three decades, immigration laws in the rich countries have become more rigid, and their implementation more severe against labour exports from poor countries. Unlike capital and products that are supposed to move from anywhere to anywhere in response to demand, movement of people from labour-surplus to labour-deficit areas is actively discouraged. The question is, why what is desirable in terms of the philosophy of free trade in case of rich country capital, is not desirable in the case of Third World labour.

No ‘National Treatment’ for Labour and No ‘Local Content Requirement’ for Capital During the pre-reform days, particularly in East Asia, foreign firms competing with domestic ones, had to meet a long list of ‘local content requirements’, that greatly blunted their competitive edge. They had to hire a certain percentage of local engineers and other skilled manpower and, local raw material, had to reinvest in the host country market a part of their profit, had to export a certain proportion of the production to foreign markets, and so on. Now, under the new WTO dispensation, capital is to be given ‘national treatment’ and freed from ‘local content requirements’ and any kind of discrimination in favour of local enterprises. Given this, why should not labour, irrespective of its source, enjoy a similar ‘national treatment’ and protection from discrimination The argument that unrestricted flow of labour would adversely affect the local population and their culture in rich countries, is analogous to ‘local content requirement’, that too is banned under WTO. It cannot be that ‘local content requirement’ is bad for capital and good for labour, while ‘national treatment’ is good for capital but bad for labour. Obviously, the global trinity’s love for free trade is confined to the factor the rich countries have in plenty, that is capital, and does not extend to labour, that the poor countries have in plenty. Some of those liberal thinkers wish to take the issue of local market to its logical conclusion. They prescribe the complete

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overhauling of the labour market, with ‘labour power’ rather than the ‘labourer’ as the unit. They argue for the replacement of regular labourers working for a scheduled number of hours in a day and for a scheduled number of days in a week, and for all practical purposes for their entire working life, by ‘flexi-time workers’, many of whom, like married women, would drop in and out of the labour market in accordance with their family needs, whose contribution would be measured by ‘hours’ and who would not be required to stick to a given time format. This, they claim, would improve efficiency as it would no longer be necessary for an enterprise to carry permanent workers on the pay roll even when the demand for its product declines. Those opposed to such radical change in the pattern of labour use point to the Japanese and IBM examples, where a person is recruited for life. Seniority, rather than merit, determines promotion in Japanese enterprises. The Japanese and IBM models, based on a stable and regular workforce, have cemented the bond between the worker and the management, while no such loyalty is expected from flexi-time workers, they argue (Corbo and Fischer, 1992). Things are of course changing in IBM and Japan. They are no longer what they used to be in the past. Still, the moral of the story remains: one has to make allowance for the national and corporate heritage and the diversity of culture.

MNC Salaries: A Distorting Factor One major impact of globalisation on labour use and the labour market, that has serious implications for a country like ours, is rarely, if ever, discussed. This relates to the distorting impact of MNC salaries on the wage structure for the country as a whole. With the entry of the multinationals, the pay structure for the higher level of management has been catapulted to a very high level. Although not at par with salaries for the same jobs in the rich countries, these are now high enough to gravitate the ablest of the skilled workforce towards them in the poor countries. This is forcing the non-MNC companies, in their turn, to raise the salaries of their own management staff to MNC levels, realising that not to do so, in this age of globalisation, would mean losing them to MNCs. Two major consequences are following from these. First,

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the economy is being divided clearly into those enterprises which can offer MNC level salaries to their professionals and managers, and those who cannot. Second, the disparity between the highest and the lowest paid within the same enterprise is widening alarmingly. The company’s balance sheet, while capable of offering astronomical salaries to a few, would not allow a similar hike in the salaries and wages of all other employees. While the ratio between the highest and the lowest paid is around 30:1 in the rich countries, 10:1 in East Asia, it is around 100:1 in many of the Indian enterprises. Such gross inequality is not sustainable, and is bound to lead to widespread industrial unrest. The Indian companies are, thus, facing a serious dilemma as it is not easy to reduce this disparity—either by raising the wages of the lower order given their vast number, or by restraining wage increases at higher level in the face of global competition.

Anti-Poor Most studies show that structural adjustment, with its attendant policy of sacking workers and reducing wages, gives rise to poverty, unemployment, lowering of wages and a lower level of access to health and education, as government social spending and subsidies are reduced and wages are held back in the face of inflation. One World Bank study admits that ‘Little is known about how poor people at large are affected when countrywide subsidies have to be cut back to reduce the government deficit.’ But then adds hastily, ‘But experience with adjustment programmes has already shown clearly that failure to adjust is likely to hurt the poor’ (Development Committee, 1990). Another World Bank study, evaluating the performance of the adjustment programmes in the 1980s, admits that calorie intake had stagnated or declined during the 1980s, and the poor had been hurt by pruning of government activities or privatisation of health and other services; in the latter case the richer are targeted by those providing services (World Bank, 1992). The World Bank document edited by Corbo et al. takes a contrary position, that it would have been worse for the poor without SAP. Adjustment to adverse external shocks or the effects of previous policy mismanagement inevitably carries some short-run social

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costs .... The report did not find evidence that adjustment lending was associated with an increase in the overall misery of the poor. To the contrary, orderly adjustment supported by Bank lending seems to have been less costly for most of the poor and for the general populace than disorderly adjustment without Bank support was (Corbo and Stanley, 1992, p. 14). For a long time, social issues were ignored by the World Bank, but from the early 1990s, thanks to a campaign launched by UNICEF, a ‘social dimension’ is now added to structural adjustment loans (SALs), e.g., with a safety net and renewal programmes that cushion the impact of retrenchment in non-viable industries by offering some funding and training for self-employment and other jobs (Development Committee, 1993). However, the amount available for these activities have usually proved to be inadequate. It has been found that the breakdown of the adjustment programme and a policy reversal is more likely in cases where the social cost is high, in terms of its impact on vulnerable sections. e.g., in Zambia in 1987 and in Madagascar in 1991, leading to suspension of adjustment programmes (Foroutan, 1993). A food riot here and a strike there, or, in case of democracies, a few election debacles, is likely to unnerve the government in power and to lead to a rolling back of the economy from structural adjustment.

Labour Standard While the issues relating to the right to ‘hire and fire’ and diluting existing labour legislations have been raised by the World Bank and IMF as parts of their structural adjustment or stabilisation programmes , those relating to ‘labour standard’ have been, in the main, sponsored by the third of the trinity, WTO, founded in 1995. The former advocate the unrestricted spread of dynamic, competitive MNCs, all over the world, but the latter caters to the survival needs of old, decaying, non-competitive industries of the West, otherwise unable, on their own, to face the competition of the Third World products. In the former case, the two major international agencies wish the government to stay out of the market and advocate the survival of the fittest, while in the second case,

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WTO seeks state intervention in the form of legislation and implementation of laws relating to child labour, old labour, bonded labour, trade unions, and so on. Most US statesmen, including the President of the country, sometimes advocate one position and sometimes the other, without explicitly recognising the contradiction between the two. The idea of a labour standard has been prompted less by the concern for the plight of the exploited poor country workers, than by the fear of competition from cheaper Third World imports. It may be noted that the first official Commission to enquire into the conditions of workers in the Indian jute industry, in 1895, was inspired by their global rivals, the jute textile industry of Britain whose centre was located in Dundee, Scotland. In both, the management was in the hands of the British, more specifically Scottish, but they were sworn enemies. The Indian counterparts were seen by their Scottish rivals as intruders in a field that they looked upon as their exclusive preserve. The interest they took in the labour conditions in the Indian jute industry was prompted less by their concern for the low wage and poor working conditions of the proletariat that was in the making in India at that time, but more by the fear that the Dundee industry was being swamped by products from this cheap source and its own survival was threatened.

Low Wages: A Trade Advantage It can be argued that today a poor country like India, having little capital, technology and management resources, enjoys an advantage over the rich countries only in terms of the prevailing low wages. To force them to adopt Western wage levels would ruin their industries and would take away whatever little chance they still have to make some of their products competitive in the world market. It might also be asked why the rich countries should grudge this very small advantage the poor countries have over them, when they dominate the world trade so comprehensively and ruthlessly. The share of the poor countries in the global trade is pitifully small and is getting smaller over time, the terms of trade are consistently against the poor country exports as they keep on producing and exporting more to earn less, activities ancillary to trade such as

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shipping and insurance are also under their near absolute control, while the multinational companies (MNCs) decide, in the case of most poor countries, what to produce and what to sell. The wage level of a country cannot be out of tune with the overall state of its economy and its per capita GNP. There can be no mechanical parity between wages, say, in Japan and India when Japan’s per capita income is 100 times more than those in rich countries. To demand that wages paid in India be comparable with those in Japan would amount to driveing the Indian exports out of the world market. Our criticism of the attempted imposition of ‘labour standard’ by the rich countries does not take away the fact that the conditions in which the Indian labourers work are appalling. There was nothing wrong in the support , monetary and otherwise, that the trade unions of Dundee gave to their Indian counterparts in the 1890s. In India, the management had always been reluctant to share its profit with those who toil on the floor, while the continued employment of child labour is an unpardonable sin. The International Labour Office, rightly, takes the view that the provision of social insurance and social protection are basic human rights. But our present analysis serves the purpose of providing a proper global perspective. The issue of ‘labour standard’ that the rich countries pushed for acceptance at the WTO ministerial conference was raised in a big way at Seattle1, in December 1999. However, as it turned out, while the rich, northern countries, as always, were ready with their drafts prepared in consultation with several hundreds of experts on various fields, over several years, virtually nothing remotely comparable had been done by the poor countries by way of preparation for a meeting that was to decide, effectively, whether they would ever be able to move out of the poverty trap, and to meet the very modest objective of advancing a few inches towards becoming a middle-level income country such as South Korea or Taiwan, in a few generations’ time. The Indian government, facing an election in October 1999, a month away from Seattle, was fully preoccupied with the question of its own political survival, and had no time to ponder over the broader issues of globalisation and trade. It never called a meeting of the undissolved Upper House or of various parties to form a national consensus that could form the basis of our position on

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various issues, whatever the outcome in the election, or publish any white paper setting out the government’s position on those. For India, time was running out fast for yet another reason. Injustices done in 1994 at Marrakesh could not be rectified by India alone, and would have to be done by way of forming trade alliances with other less developed countries. Given its appallingly low share of the world trade—0.6 per cent, as compared to 2.67 per cent at the time of Independence—India alone was not going to count for much. The rich countries, no matter how rich they are, also take care to form alliances to augment their bargaining strength. Among the poor countries too, one finds many similar regional trade alliances. A major incentive for the formation of such alliances was that these were permitted, under GATT rules, to extend additional concessions to intra-region members of those bodies that were denied to other GATT members. Where is the trade alliance that India belongs to? The most natural of such alliances could have been called the South Asian Common Market, comprising India and her immediate neighbours, countries that were once parts of the British Empire and share a common historical experience and a common cultural root. These countries also share many common economic interests, e.g., the world prices of jute and tea, opposition to the patenting of basmati by a Texan company, and the distribution of trade gains that would follow from the dismantling of the textile quotas with the ending of the infamous multi-fibre agreement in 2005, to name a few. Such a trade alliance, joining hands with other trade alliances in Asia, Africa and Latin America, could have effectively changed the world trade scenario and vastly improved the bargaining position of the poor countries. However, virtually nothing had been done to achieve these. India could also learn from its experiences in the past trade negotiations: that, unless united as a rock, the Third World countries, given their very low trade shares, count very little in those negotiations. The three key players in the 1994 Marrakesh negotiation were the United States, Europe and Japan, who exchanged drafts among themselves and finalised everything and never bothered to seek the opinion of the poor countries. Apart from these three, a fourth player that was sometimes consulted was the Cairns group of 14 members, representing the rich and middle

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income countries specialising in agricultural exports and having close links with the G7, including Australia, New Zealand, Argentina, Brazil, Canada, Chile, Colombia, Fiji, Hungary, Indonesia, Malaysia, the Philippines and Thailand. This collection of countries, accounting for one-tenth of the world’s GDP and manufacturing output, and a 30 per cent share in world agricultural exports, made a much bigger impact than the much larger group of less developed counties. If the main players ever wanted to consult the less developed countries, they talked to the South Koreans or the Taiwanese. The poor countries operated at the periphery, remained as shadows, and seldom consulted each other until the rich ones had completed negotiations amongst themselves. The selfish US interests were represented as being in the interest of the entire mankind. Although 70 out of 108 countries in the GATT negotiations were the less developed ones, they had no voice and expressed their views, on the few occasions they did, ‘within a framework scripted by the major industrialised states’ (Hopkins, 1993). It was hardly possible for India to bring together such an array of skills or to match the US in the number of experts, but the least one expected was that the government would not surrender without a fight and would devote as much time and energy as possible to doing proper homework before attending the Marrakesh negotiations.

Note 1. The Ministerial Conference of the World Trade Organisation, held at Seattle, Washington, from 30 November to 3 December 1999, was convened with a crowded and diverse agenda, labour standard being only one of them. From the point of the rich countries, the objective was, first, to consolidate the gains they made at Marrakesh in 1994, and, second, to spread the idea of standardisation to new areas, such as labour, environment, e-commerce and government procurement, to name a few. From the point of view of the poor countries, the objective was the other way round: that is, first, not to allow standardisation to proceed further, and second, to rectify as far as possible, the damage done to the poor countries at Marrakesh. Seattle presented to the poor countries like India an opportunity as well as a danger. An opportunity because, we hoped, if the poor countries of the world managed to form an effective trade alliance, did their homework well and bargained hard, they might succeed in rectifying, at least to some extent, the injustice that had been done to them during the 1994 Marrakesh agreement on TRIPs (Trade Related Aspects of the Intellectual

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Property Rights). On the other hand, our fear was, should they fail to present a united front, there was a real and ominous possibility that whatever little remained of their economic sovereignty in the TRIPs agreement would also be taken away by the rich countries. In the language of economics it was a zero sum game: the poor countries could not play for a draw, it was a win or lose situation. The Indian delegation reached Seattle without having done any adequate and comprehensive homework and without any significant skilled assistance. The delegation did not even have a lawyer to examine various drafts. The present author was one of the three MPs (the other two being Sri Kamal Nath of the Congress and Sri Yerran Naidu of the TDP), who formed the core of the official delegation along with the Minister of Commerce, Sri Murasoli Maran. However, as the Seattle drama unfolded, and the Labour Standard became the main item that the rich countries wanted to push, the political consensus that eluded us in Delhi for so long, arrived at Seattle. Some US Congressmen and members of the European Parliament asked us, during the bilateral talks, how we could avoid supporting the labour standard, which involved, among other things, banning of child labour and forced labour, recognising trade unions and the right of collective bargaining, and our answers were three-fold. First, there was an agency of the United Nations, called the International Labour Office (ILO), whose job it was to deal with labour issues in consultation with governments, workers and management. Why should the World Trade Organisation arrogate to itself the specialised task of another international agency, going far beyond its mandate to deal with trade issues? Second, there is something called ‘economic sovereignty’ that is enjoyed by every independent nation; why should the WTO attempt to bind the world with a standardised set of rules, irrespective of wide differences among countries in history, levels of development, factor endowment, comparative advantage and culture? Why should not matters like this be left to the countries concerned, their governments and the labour movement, not dictated from above by a super world state? Third, we reminded them of our fear that, while proposing the labour standard, the welfare of the poor country workers was far from their mind. Labour standard was to be used as a ‘nontariff barrier’ to keep the Third World exports away. We reminded them that the rich countries in general, and the US in particular, had a poor record in terms of signing ILO labour conventions; the US has signed only 12 out of 100-odd conventions. We told them that we believed that their expression of sympathy for the Indian workers was hypocritical. What happened at Seattle? Let us begin at the very end. On 3 December 1999, the fourth day of the much-hyped WTO Ministerial Conference at Seattle, around 10 at night, its last plenary session began. But it ended quite soon, in a matter of less than half an hour, without a joint declaration, without any resolution having been approved, without any decision on the next round of talks, and without even thanking the Chair and the participants. Everyone on the dais seemed to be in a hurry to draw the curtain. Cerlene Bershefsky, the 49-year old Chairperson, the host, the US trade representative, admitted in a dull tone, that the conference had to end inconclusively as there was no consensus. She was followed by chairs of five working groups, each of whom

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made some brief remarks taking 2–3 minutes each. The last to speak was Mike Moore, the Director General of the WTO who hails from New Zealand, whose job it would be to pick up the pieces and to hold wide-ranging consultations to decide on the future course of action. Humour, wit and pleasantries, that normally characterise the final session in such international conferences, were conspicuous by their absence. The only touch of humour or poetry in an otherwise grim presentation was Cerlene Bershefsky’s reference to ‘we, the sleepless at Seattle’. As soon as Mike Moore finished his speech, all those on the dais, got up and ran, as if they were catching the last bus. There was not even a round of applause to mark the ending. It took us a while to realise that the conference had actually ended. There is a serious risk that the good work done by the Indian delegation at the WTO ministerial talk at Seattle would, at the end, amount to very little. At the beginning of the parliamentary session immediately after the Seattle meeting seven bills were passed by 31 December 1999, the deadline set by the 1994 Marrakesh Agreement, five of which were passed without discussion— on trademarks, geographical indications, copyrights, design and semiconductors. and only two, on patents and plant varieties—were referred to the select committees formed for the purpose. The opposition’s demand that each of the five bills should be sent to the select committees, so that each and every word of the bills could be scrutinised with care, and with expert advice, was not accepted. At the beginning, the government was saying that not to pass these bills by the end of December would imply a violation of the WTO charter that India could not afford. They drew an alarming picture of the USA and the WTO savaging Indian economy in the case of non-compliance. The opposition’s argument was that the heavens were not going to fall if the bills were not passed within that deadline and to give in now would severely weaken India’s position in these global reviews, while the very act of introduction would signify that the government was intent on passing it, and it could always plead to the WTO that, despite its intention, the obdurate parliament was not releasing the bill in time. There were other ways, too. The very fact that the government sent two of the seven bills to the select committee reveals that it too did not take the deadline seriously. Then came the argument that some of these bills were ‘good’ ones and were in India’s interest. By implication they admitted that others were ‘bad’ bills from India’s point of view, and were being passed only under WTO pressure. But who would decide what is a good bill and what is a bad one? Similarly, one can argue that the bill on ‘design’ would be ‘good’ for India. But who in the Parliament would understand this highly complicated bill, whose every word is highly technical and whose every sentence carries varied legal nuances?

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Index ABN Amro-Rotschild-Enam group, 234 account: settlement of current, imbalances, 38; falsification of, 207 acquisitions, 71 adjustment: breakdown of the, programme, 251; idea of structural, 43; launching of structural, 69; providing structural, support, 44; sectoral, loans, 37; social cost of structural, programmes, 247; structural, 15, 16, 27, 37, 44, 71, 97, 153, 191, 250; structural, and the new political economic, 244; structural, programme, 41, 99 advertising, 61; media, 74 agreement on trade and tariff issues, 48 agri-business companies, 71 agricultural crops, procurement prices for, 24 agricultural growth, industrial and, rates, 16 agricultural products, input prices for, 117 agriculture, 111; MNCs specialising in, 82; role for, in the economic, 111 agriculturists, British, 77 American Depository Receipts (ADR), 234 American Express, 56 anti-labour policies, 245 Application of Sanitary and Phytosanitary Measures, 98

assets, non-performing, 143 autonomy, PSU, in raising capital, 24 awareness: environmental, 96; global environmental, 97 Ayurveda, 90 Bailadila mines, 215 Bakht, Sikandar, 87 Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987, 178 balanced diet, debates on, 119 BALCO, 220 bank: and financial institutions, 151; commercial, 42, 160; defaulting on, loan payments, 44; distinction between, and non-banking institutions, 151; foreign, 73; foreign private, 226; international privately owned, 43; international, 43; ownership in, and insurance, 23; private international, loan, 16, 17, 18, 45; private, 226; stateowned, 214 banking: activities, 151, 157; and brokerage subsidiaries, 158; conservative, norms, 42; crisis facing the international, system, 44; global private, system, 44; international, 42; international, system, 43; monetary and, reform in India, 148 basmati, 83, 86, 101 Beveridge, William, 212 Bhakra-Nangal Project, 103

Index Bharat Aluminium Co, 233 BHEL, 215 Bhopal gas tragedy, 69, 98 bill on fiscal management, 174 biodiversity, bill on, 90 biopiracy, 57, 76, 82, 85, 101; amendment on, 87; danger of, 83; phenomenon of, 82 Board of Industrial and Financial Reconstruction (BIFR), 142; sick industries registered with the, 145 borrowing: domestic, 180; foreign, 16; forms IFCT, 159; internal, 170; public, 163 BPCL, 215 Brahmaputra, surplus water of the, 102 Bretton Woods institutions, 35 Budget Enforcement Act of 1990, 178 buffer stock, international, operations, 48 bureaucracy, civil service, 214 businessmen, small, 172 Cabinet Committee on Disinvestment, 234 CACP (Costs and Prices Commission), 114 Calcutta Electricity Supply Company, 229 capital: advantage with, account convertibility, 193; emergence of a well-integrated global, market, 34; foreign, 224; gains, 152 Caribbean Basin Economic Recovery Act, 53 Cash Reserve Ratio (CRR), 148 capitalist, developed, countries, 210 Central Sales Tax, 173 Centre for Industrial and Economic Research (CIER), 144 CFC, ozone depletion by, 79 Charter of Budget Honesty, 178 Charter of Economic Rights and Duties of States, 55 Chelliah, Professor Raja, 170; report, 170

273

Chidambaram, P., 188; dividend taxes imposed by Mr, 173 child labour, laws relating to, 252 chit funds, 160 coalitions, distributional, 242 COFEPOSA, 205 Cold War, 35 commitment, schedules of, 53 Committee on Capital Account Convertibility, 188 Commodity buffer stock, 48 Common Agricultural Policy (CAP), 125, 127 Companies Act, 1956, 115, 161 companies, disinvested, 231 comparative advantage, theory of, 51 competition: foreign, 135; in the international markets, 132; non-price, 67 compulsions, political, 26 concern for food security, 126 Congress party, 89; defeat of the, 27; ruling, 27 consumers, welfare of the, 61 Convention on Biodiversity, 84, 90 convertibility, history of, 190 corruption: condemnation of, in high places, 27; in high places, 152 cost: benefit analysis, 240; low, inputs, 55; reducing technologies, 130 counter-guarantee, 73 countervailing measures, investigation for imposing, 55 credit: flow of, to the private sector, 148; mandatory, exposure norms, 158; rating, 45; —, low, of the less developed countries, 39; —, of the less developed countries, 43 crops, standardisation of, and varieties, 80 crude oil, domestic, production, 17 currency, convertibility of, 187 CYMMIT (Centre for Research on Wheat and Maize), 80 Damle Committee, 63 Damodar Valley Corporation, 103

274

Globalisation

debt: default, 143; external, 171; foreign, 170, 198 ; forgiveness, 113; grants for, repayment, 113; limit on public, 176; management, 17; rescheduling, 44 debtor countries, 44 defence: expenditure, 181; expenses on, 164 deficit: bridging the, 164; budget, 163, 181; control of fiscal, 175; fiscal, 19, 175; fiscal, and inflation, 181; low external account, 154; minimisation of fiscal, 170; primary, 163; reduction of fiscal, 47; revenue, 163; views on fiscal, 181 deflation, 179 demand: constraint, 184; management, 47 demand and supply: conditions for world food, 123; gap between domestic, 120; interaction of, forces, 20 devaluation, 47 development: costs of, and sales promotion, 80; financial institutions (DFIs), 156; goals of the government, 129; indigenous, of technologies, 55; institutions of, 157 diplomacy, Indian economic, 140 Direct Taxes Inquiry Committee, 169 Discounted Cash Flow (DCF), 230 discriminatory action against a trading partner, 51 Disinvestment Commission, 215, 220, 230 disinvestment, 217; of the public sector, 24; policy of, 31 Dispute Settlement Board, 55 dispute, settlement, 246 distress-sellers, 117 Doha Ministerial meeting, 58 domestic production of agricultural inputs, 120 drugs, life-saving, 55, 81 Du Pont, 56, 79 Dunkel draft, 49

Earnings before Interest, Taxes Depreciation and Amortisation (EBITAD), 230 Earth Summit, 90 East Asian development, 135 eco-dumping, 95, 108 eco-labelling, 96; threshold levels for, 97 Economic and Social Council of the United Nations (ECOSOC), 35; role of the, 35 economic success, 244 economics: development, 210; liberal neo-classical, 244 economy: Brazil’s, 182; implications of FDI in the Indian, 155; of the OECD countries, 43 employment-producing technologies, 130 Enron, 73 environment: concern for, 94; industry, 97 environmental degradation, changes brought about by, 99 environmental protection, 95; cost of, 96 environmental standards, 95 equity: diffusion of, ownership, 62; foreign, ownership, 23 European Commission, 85 European Community (EC), 50 European Free Trade Association (EFTA), 50 European Parliament, 84, 86 exemptions, abolition of, 152 Exim Bank, 158 expenditure: on food, 119; social, 153; tax, 169; wasteful non-Plan, 164 export: agricultural, 196; and imports, 194; earnings, 195; —, loss of, 101; Indian, 196; —, in software, 200; manufactured goods, 68; marine, 203; marine fish, 199; on international finance, 191; orientation, 24, 97; —, of the Indian software industry, 202; poor country, 96; promotion, 31, 70, 135; shrimp,

Index 204; withdrawal of, subsidies, 18, 22 Extended Fund Facilities (EFF), 37 Exxon, 61 farmers: bill on the right of the, 90; cotton, of the Prakasham and Guntur districts, 75; lobby, 126 FDI, 154 Feldstein-Horioka hypothesis, 189 FERA, 205 financial assistance, rendering, 160 financial institutions, 156; need for development, 157; non-banking, 160 financial repression, 134 firms, non-financial, 151 fiscal responsibility, law on, 178 fly-by-night operators, 152 food: concept of, security for a country, 118; domestic self-sufficiency in, production, 120; importers, 121; intra-family distribution of, 119; security, 118, 121; —, by way of trade, 121; self-sufficiency, 112, 118; Food and Agriculture Organisation (FAO), 92 Food Corporation of India, 115 food for all, 29 food production, self-sufficiency in, 119 food products, production and distribution of, 115 Food Security Act of 1985 of the United States, 126 Ford, 61 foreign companies, 130, 214 Foreign Exchange Management Bill, 205 Foreign Exchange Regulation Act, 205 Foreign Exchange Rules, 205 foreign exchange, 209, accumulation of, reserves, 30; India’s, reserve, 198; laws, 207; management, 188; market, 194; offences relating to, 207; reserve, 16, 140, 198

275

Foreign Institutional Investors (FIIs), 73, 153 forestry, social, 106 formulation and implementation of PFP, 37 free trade, principle of, 51 French colonisers, 77 funds, long term and low-cost, 158 General Agreement of Trade and Tariffs (GATT), 48 General Agreement of Trade-related Service (GATS), 223 General Insurance Company (GIC), 222 Generalised System of Preferences, 50 genetic engineering, 99 genetic foods, 77 genetic sickness, 144 globalisation, 21, 26, 89, 97, 162; attack on, 73; debate, 162; impact of, on labour, 249; in the national economy, 155; Indian government’s commitment to, 90; of patents, 71, 78; of the insurance business, 227; onset of, 140; opposition to, 26; policies, 27; process, 154; reform and, 28; trend under, 116; values of, 162 gold standard: collapse of the, 38; maintenance of the, 33 good, public, 213 governance, good, 28 government: BJP-led NDA, 27, 31; Chandrasekhar, 16; collapse of the United Front, 28; expenditure, 179; financial support of the, to publicly-owned enterprises, 214; guarantees provided by the, 33 Green Revolution, 80, 103, 110, 123, 170; technology, 80, 118, 123 ‘grow more food’ campaign, 109 growth rate, industrial, 16 Gulf crisis of 1990, 17 Haiti, 50 haldi, 83

276

Globalisation

Hawala, 198; elimination of the, markets, 193; Jain, case, 206; merchants, 193; money, 207 health services, 227 Herberger, Arnold C., 218 Hindalco, 234 Hindustan Lever Limited, 231 Hirakud Dam Project, 103 hire and fire, issues relating to the right to, 251 hire purchase and leasing companies, 160 HPCL, 215 human rights, 50 IBM, 56 ICICI, 158 IFCI, 158 IMF, 35, 94; agreement, 19; assistance, 47; conditionalities, 19; preconditions by the, 47; stabilisation package under the, umbrella, 37 IMF-World Bank attitude, 40 import: domestic demand for, 47; selfreliance through, substitution, 130; subsidised, 55; substitution, 22, 31, 51, 120, 211, 217 income: proportion of, tax payers, 225; regressive distribution of, and wealth, 183; tax, 152, 168 indexation, wage-price, 182 Indian crops, commercialisation of, 116 Indian Oil Corporation, 232 Indian Patent Law, 81 Indian Petrochemicals Corporation Ltd (IPCL), 221 indigenous producers, Indian, 74 Indo-Burma Petroleum, 221 Indonesian timber, 95 Industrial and Development Bank of India (IDBI), 158 Industrial Financing Corporation of Thailand, 159 industrial growth, 30 Industrial Policy Resolution, 148 Industrial Reconstruction Bank, 137

industrialisation, 94, 132; importsubstituting, 72; in India, 131; policy towards, 133 industrialists, Indian, 155 infant industry argument, 135 inflation, 180; rhythm of, 184 Infosys, 203 infrastructure financing, longgestation, 159 infrastructure, development, 28 inputs, self-sufficiency in food and agricultural, 25 Insurance Regulatory and Development Authority (IRDA), 74 insurance, 253; business in India, 221; business, 74; crop, scheme, 229; debate on foreign participation in, 228; performance of the, sector, 225; state-owned, business, 222; US multinational, companies, 224 integrated global capital market, 34 integration: global, 187; horizontal, 64 intellectual property: concept of, 54; rights, protection of, 54, 202 interest: diversity of, 242; equality, in firm, 151; subsidised rates of, 210 International Bank of Reconstruction and Development (IBRD), 32 International Clearing Union, 48 international institutions affiliated to the United Nations, 35 International Labour Office, 253 International Monetary Fund (IMF), 15, 32 international trade, 61 International Undertaking on Plant Genetic Resources, 92 inventions, and scientific development, 79 investment: corporate saving and, 149; directed, 229; foreign, 73, 155; foreign portfolio, 198; in share market, 24; in the less developed countries, 69; institutions offering, funds, 134; private, 244, 247; public, 149, 150; public sector, 156

Index investors: foreign, 141; institutional, 194; middle class, 152; small, 152 Japan Development Bank, 159 Japanese consumers, 125 Japanese rice market, vulnerability of the, 124 kasmati, 83 KDB Act, 159 Khadi Village Industries Commission (KVIC) , 74 Khan Committee Report, 157 knowledge, dissemination of, 54 Korean Development Bank (KDB), 159 Kuwait: airlifting of Indians residing in, 17; Indian workers in, 17 labour: attitude towards, 244; market reform, 19, 25, 27, 238, 239; movements in Indonesia and Thailand, 245; overhauling of the, market, 249; power, 249; productivity, 182; standard, attempted imposition of, 253 Lagan Jute Machinery Co Ltd, 231, 233 leadership, political, 20 legislation: environmental, 69, 98; European, 86; existing labour, 251; minimum wage, 239; on exclusive marketing rights, 74; on Indian forests, 106; on POTA, 31 lending: international, 42; on a massive scale, 43; project-based, 33 less developed countries, 34 liberalisation, 20, 74, 208; and globalisation, 155; financial sector, 158; of capital account, 190; of imports, 22; of capital account, 191; unregulated 152 LIC Bill of 1956, 222 licences: industrial, 23; seekers, 21 licensing: industrial, system, 142; objective behind, 129; system, 141 Life Insurance Corporation of India (LIC), 222

277

liquidation, 231 liquidity: augmentation of international, 39; opposition to increasing international, 39 loan: approval of the, application, 37; conditionalities of a structural adjustment, 16; project-based, 38; repayment by the less developed countries, 45; soft, window, 34; structural adjustment, 16, 37, 251; syndicates, 42 lobbying, 86 London Club, 44 long-term contract, 64 MAHYCO (Maharastra Hybrid Seeds Company), 75 Malhotra Committee, 222, 225 manpower, skilled, 211 Marrakesh Agreement of 1994, 26, 49, 58, 71, 137; on trade-related investment measures (TRIMS), 141 market: capital, 158; control over the, 61; domestic, 69; for the US agricultural surplus, 121; host country, 248; level demand and supply interactions, 209 exclusive marketing rights (EMR), 22, 81, 92 market-oriented policies, 213 Maruti Udyog Ltd (MUL), 221, 232 Maynard, John Keynes, 212 Mehta, Harshad, 73 Members of the European Parliament (MEPs), 84 mergers and takeovers, 27, 155 Microsoft, 69 military: alliances led by the USA, 122; and diplomatic support, dependence on a single country for, 62; might of the West, 41 Ministry of Disinvestment, 215 Mitsubishi, 61 Mitsui, 61 MODVAT, 169 Money Laundering Bill (MLB), 205 money: black, 171; borrowing, 158; conversion of black, into

278

Globalisation

white, 171; creation, 180; generated by fiscal deficit, 181; laundering, 207; laundering law, 207 Monopolies and Restrictive Trade Practices (MRTP) Act, 23, 60, 130 Monopolies Commission, 130 monopoly: measures against, pricing, 56; private, 64; rights, 91, 218; state, in the insurance business, 222 Monsanto, 56, 75, 77 Multi-Fiber Agreement (MFA), 136; dismantling of the, 43, 51 multinational companies, 27, 45, 60, 64, 72, 73, 210; arguments in favour of, operations, 69; dependence on, 80; engaged in agricultural activities, 76; entry of, 73; global objectives of the, 71; history of the, 61, 62; import by foreign, 209; intra-firm, transactions, 68; lack of technology transfer from, sources, 70; large, 238; minimisation of the role of the, 155; proliferation of, 72; role of the, 63; tendency among the, 98 mutual funds, 160 NABARD, 158 NALCO: disinvestment of, 234; resentment over the sale of, 234 Narasingham Committee 1991, 156, 157, 158, 170 Narasimha Rao government, 88 National Housing Bank, 171 National Mineral Development Corporation, 216 National Water Development Agency (NWDA), 102 National Water Policy, 102 Net Asset Value (NAV) methodology, 230 net worth, erosion of, 145 New Economic Policy (NEP), 18, 19, 111, 155 New International Economic Order, 72

New Political Economy (NEP), 18, 40, 111, 112, 240 Nippon Denro Ispat Limited, 215 NRI (non-resident Indian), outflow of, funds, 17 non-banking entities, 160 non-banking institutions, 157, 160 non-discrimination, 49 non-gold reserves, 38 nonpayment, risk of, 42 non-tariff barriers (NTBs), proliferation of, 49 North Atlantic Free Trade Association (NAFTA), 50 NTPC, 215 oil companies, multinational, 65 oil pool fund, 107 oligopolistic practices, 65 oligopolists, 64; rivalry among the, 65 Olsonian definition of rationality, 240 ONGC, 215 OPEC (Organisation of Petroleum Exporting Countries), 66 other-worldliness, 118 over-invoicing, 207; by, a foreign company, 206 Overseas Development Institute, 44 over-utilisation, 68 ownership: pattern of the DFIs, 158; private, 213; public, 100, 148; restrictions on private, 60 ozone layer, depletion of the, 99 packaging and product differentiation, 71 patent: international, regime, 87; laws, 54; process, 81; product, 81; right, 78, 81, 82, 83 patented seed, 75 patenting, battle on, life forms, 84 patents, 79; applications for, 23; bills on, and exclusive marketing rights, 23; concept of, 84; idea of, 78; issue, 89; national laws on, 81; on life forms, 83, 84; on plant varieties, 76; proposed bill on, 88

Index payment: balance of, 37, 180, 198; balance of, and growth, 35; balance of, crisis, 41; balance of, difficulties, 42, 48; balance of, problems, 36; balance of, protection; arguments, 50; oil balance of, accounts, 17 Petroleum Business Funds, 159 pharmaceutical industry, 55 PL 480, US wheat import under the agreement, 122 Plan Expenditure, 167 plant breeders, interests of the, 91 Pohang Steel, 196 Policy Framework Paper (PFP), 36, 46 policy makers in India, 15 polluting industries, 69 population policy, 119 Post Office Savings Banks, 160 poverty: alleviation programmes, 25; pace of reduction of, 28 permanent account number (PAN) , 168 price: and distribution recession trend, 144; book-keeping, 63; competition, 66; drastic lowering of, 67; fixing a, 65; intervention, 127, 128; landed, 186; of inputs supplied by the MNCs, 74; of lifesaving drugs, 86; of domestic production, 120; output, for agricultural goods, 112; threshold, 128; transfer, 63; wars against oligopolist rivals, 67; wars among the oligopolis, 66; wars initiated by major companies, 66; without subsidies, 118 private enterprises, 209 private good, 213 private sector banks, 151 privatisation, 78; drive towards, 219; of VSNL, 221; of losing public concerns, 217; of rights, 80 producer, distress-selling poor agricultural, 115 product: attractively packaged, 82; differentiation, 61

279

production, labour-intensive, 22 productive capacity, safeguarding of the, of land, 127 productivity: farm size and, 110; higher, of a small farm, 109 profit: maximisation, 68; motive of the MNCs, 76 profit-making public enterprises, 217 proprietorship private enterprises, 151 protection from import, 218 Provident Fund, 152, 160 public distribution system, 24, 27, 116, 117; targeted, 116 public enterprises, 60 public investment, retreat of, 149 public sector: decline of the, 216; economic activities, 21; employment in the, 236; Indian, 223 R&D: capability, 71; subsidies, 113 Raja Chelliah Committee, recommendations of the, 24 Rangarajan, Dr C., 188, 189 Rao, Narasimha, 18, 88 re-financing institutions, 158 reform: agricultural, 24; anti-land, attitude, 118; beneficiaries of, 27; beneficiaries of land, 25; economic, 130; financial sector, 156; fiscal, 19, 24, 163; ideology of, 19; implementation of land, 30; in the financial sector, 161; industrial, 129; introduction of the financial sector, 158; potential gainers from, 19; public sector, 24, 151; second generation of, 25; share market, 23; trade, 186 rehabilitation, follow-up data on, schemes, 144 rent receivers, 142 repayment: future, obligations, 42; guarantees, 42; of bank loans, 44 rescheduling, precondition for, 44 reserve constraint, 38 resource: mobilisation, 158; optimal utilisation of, 68

280

Globalisation

restriction: put on investment, 152; quantitative, 124; quantitative import, 120; tariffication of quantitative, 22; trade, in the name of environment, 97 restrictive trade systems, 36 reverse engineering, 131 Ricetec, 82, 83, 86 right: farmers, 91; individual, over an invention, 78; individualisation of, 79; intellectual property, 54, 56, 137; private property, 99 rightful owner, 78 risk-bearing role of the MNCs, 69 Roundup soybeans, 75 Royal Dutch and Shell, 61, 62 Rupee, external value of the, 191 rural wealth, 184 SAIL, 215 salaries, MNC level, 250 Satyam, 203 saving: correlation between domestic, and investment, 187; gross domestic, 150, 183; mobilisation of, 160; total domestic, 150 scams: role of the multinational companies in, 74; share, 152 seal-reliance, goals of, and importsubstitutions, 23 SEBI (Securities and Exchange Board), 24, 151, 152 self-interest of the rich countries, 40 self-reliance, industrial policy based on, 129 share market, 151, 152; abuses of the, operations, 152 shareholder, minority, 73 shares, without voting rights, 73 shipping, 253 short term funds, 158 shrimp, pond cultivation of, 204 Shukla, Vidyacharan, 89 Sick Public Sector Unit, 236 sickness: industrial. 142; operational, 144 Singh, Dr Manmohan, 18, 25, 26, 148, 170, 174, 188, 214, 215

Sinha, Yashwant, 26, 117, 171, 214 Small Industries Development Bank of India (SIDBI), 157, 158 software: exports, 199; Indian, industry, 200; world trade, exports, 201 South Asian Association of Regional Cooperation (SAARC), 57 South Asian Common Market, 254 South Asian Free Trade Association (SAFTA), 57 South–South co-operation, 70 Special Drawing Rights, 38 Special Industry Supporting Fund, 159 special interest groups, 242 Standing Conference of Public Enterprises (SCOPE), 144 state enterprises, subsidising the, 214 State Financial Corporations (SFCs), 160 State Industrial Development Corporations, 161 State Small Industries Development Corporations (SSIDCs), 161 Statutory Liquidity Ratios, 148 Sterlite, 233 subsidies: agricultural, 52; aiming at facilitating privatisation, 114; dismantling of, 27; elimination of, 52; ending of interest, 23; given to agricultural import and customs, 170; given to FCI (Food Corporation of India), 117; India and the, 114; offered by the rich country governments, 114; on various items, 167; producer, 125; reduction in agricultural, 51; reduction of, 114; to farmers, 127 subsidisation: of technologically advanced domestic industries, 51; of interest, 151, 157 Super 301, 224; hit list of, 224 surplus investible fund, 41 Suzuki Motor Corporation, 233 swadeshi, 89, 90 takeover: and mergers, 152; by stealth, 155

Index tax: bargaining policy with the, evader, 171; capital gains, 169; checking, evasion, 173; direct income, 172; direct, on the expenditure side of income generation, 169; dividend, 232; evasion, 173; expenditure and wealth, 166; gift, 169; gift and service, 166; indirect, 168; personal income, forms, 172; presumptive, on small business, 171; returns, 168; revenue, 165, 168; service, 172; simplified, structure with reduced rates, 24; value-added, 173; wealth, 169 Taxation Enquiry Committee (TEC), 169 taxation: global, 48; rate of, 169 TCDC (Technical Co-operation among Developing Countries), 70, 211 Technical Barriers to Trade, 98 technocrat-bureaucrats, 20 technologies: acquiring foreign, 137; flows, 68; transfer, 70 Tennessee Valley Authority (TVA), 103 term lending institutions, 158 terminator: seeds, 74; technology, 71 Thailand, 47; forests of, 97 Third World exporters, 96 top soil: degraded, 104; of India, 103 Tourism Promotion Fund, 159 Toyota, 61 trade: and production, 139; concessions given to regional, bodies, 50; distribution of, gains, 254; flows, quantum and direction of, 48; policy review mechanism (TPRM), 52; restrictions, 98; union activities, 244; universalisation of, relations, 49; unreasonable and unjustifiable, practices, 224 trade-related issues, 58 transport, actual, cost, 65 TRIPs (Trade-Related Intellectual Property rights), 81

281

under-invoicing, 207 under-utilisation: of local resources, 68; of resources, 143 unemployment, 29 Unit Trust of India, 160 United Front, 89; government, 27 United Nations Economic Commission for Latin America and the Caribbean, 44 United States: commercial interests of the, 224; Congress, 52; foreign policy of the, 122 universal banks, 214, 251 UPOV (International Plant Breeders’ Rights Convention), 91 urban consuming interests, 120 urbanisation, 107 Uruguay Round on Subsidies Agreement, 113 US aid, 91 US balance of trade deficits, 45 US Canada Auto Pact, 53 US Gulf, 65 US: intra-firm operations of the, companies, 68; surplus, funding, 156 valuation, asset, methodology, 230 valuers, international, 231 vertical integration, 62 voluntary disclosure scheme, 171 Voluntary Export Restraint (VER), 126, 136, 140 voluntary trade restriction, 126 VSNL, 215 Washington Consensus, 20 wasteland management, 74 water: ground, sources, 103; lack of adequate, supply, 30 wealth: acquisition of, 24; biological, 100 welfare state, 213; birth of the, 212 well-being of the less developed countries, 39 WIPO (World Intellectual Property Organisation), 76

282

Globalisation

workers in the Indian jute industry, 252 workforce, skilled Indian, 201 working capital, negative, 145 World Bank, 32, 35, 95, 210; document on Africa, 239 World Intellectual Property Convention, 54

World Intellectual Property Rights Organisation (WIPRO), 54, 203 World Trade Organisation (WTO), 18, 32 WTO, 252; and subsidies, 113; dispute settlement mechanism of, 57; Implications of, for India, 56; led patent regime, 81

About the Author Biplab Dasgupta (1938–2005) retired as Professor of Economics, Calcutta University, where he was also the founder-Director of the Centre for Urban Economic Studies. He was a member of the Rajya Sabha and also served one term as an elected member of the Lok Sabha. Prior to joining Calcutta University in 1980, he was a Lecturer at the School of Oriental and African Studies, London, and a Fellow-Reader in Economics at the Institute of Development Studies, Sussex. During his rich and distinguished career, Professor Dasgupta was a Visiting Professor at Jawaharlal Nehru University, New Delhi, and at the Institute of Social Studies, The Hague. He was a member of the governing body of a large number of institutions including Queen Elizabeth House, Oxford, Jawaharlal Nehru University, New Delhi, and the Centre for the Study of Social Sciences, Kolkata. He undertook assignments for various UN agencies including the ILO, UNRISD, the FAO and UNESCO. Besides contributing numerous articles to scholarly journals, Professor Dasgupta published a number of books including The Oil Industry in India: Some Economic Aspects, Patterns and Trends in Indian Politics: An Ecological Analysis of Aggregate Data on Society and Elections (co-author), The New Agrarian Technology and India, and Structural Adjustment, Global Trade and the New Political Economy of Development.