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| Inflation, Hot Money, and Sleaze Paralyze Indian Economy | | | Ramtanu Maitra | 7/14/2011 10:22:45 PM |
| rates have soared. One report shows that in Punjab alone as many as 60,000 farmers have committed suicide in the past 20 years. The Singh government, presiding over this sordid state of affairs, remains in a state of denial, trotting out official statistics that show 132 suicides in the past five years. Inflation Everywhere
It is not only the rapidly rising food prices that are causing serious problem to the millions of poor in India. Real estate prices are also soaring. An analyst pointed out that one of the causes of this is the huge sums of black-market money (from drugs, smuggling, etc.) pouring into India. Land purchase scams have become quite common with senior politicians, top bureaucrats, and even senior military officials being involved. Also, the government has allowed foreign money to come into the real estate market.
At the same time, an inflationary spiral has engulfed the education sector. The cost of primary or secondary schooling has gone up two and a half times between 2005 and 2011. A survey carried out by ASSOCHAM, one of India's leading chambers of commerce, shows the rising cost of education has become a major concern for parents. The survey showed that parents living in major Indian cities invest on an average 40% of their income in their children's education. The cost of education is increasing every year, parallel with inflation.
The survey pointed out that over 40 million children are now educated in private schools, where fees rise annually well above the overall rate of inflation. Seventy eight percent of the parents said that, in an average family where only one parent works, it is impossible to pay even for one child's education.
Not long ago, pharmaceutical drugs, like education itself, were priced to help the poor. But, things have since changed, to accommodate the global players. New Delhi's decision to allow large foreign pharmaceuticals to increase their control over domestic drug companies has hiked up the price of medicines well beyond the reach of the poor.
The Singh government has reportedly taken note of this, and yet, the government's control of drug prices is restricted to only 74 essential medicines. The National Pharmaceutical Pricing Authority (NPPA) recently conducted research on cancer drugs of similar configurations. What they found startled them: prices have gone up 10 times during the last few years!
Hot Money
The government's neglect of the agricultural sector, immoral as it is, is not the only reason that the curse of high inflation is now taking its toll in India. High interest rates, globalization, the government's penchant for foreign exchange to build infrastructure, and the inadequately regulated bourses, have made India the haven of dirty money, flowing in from all directions.
One major inlet of hot money is the African country of Mauritius, considered a tax haven. The total amount of foreign direct investment (FDI) that came through Mauritius has surpassed $50 billion, accounting for 42% of the total FDI inflows, according to the latest official data.
India has a Double Taxation Avoidance Treaty (DTAT) with Mauritius, under which the corporations registered there can choose to pay taxes in the island nation. Companies prefer to route their investment through Mauritius because the effective rate of corporate tax on foreign companies incorporated there can be as low as 3%. Moreover, an investor routing his investments through Mauritius into India does not pay capital gains tax in either country.
Hot money in the form of Foreign Institutional Investment (FII) is growing, while the annual FDI flow is slowing down. In 2010-11, inbound FDI fell by as much as 28%, the second consecutive year of decline, and the first such large decline since the opening up of the economy in 1991-92. The present level of $27 billion in FDI inflows is the lowest in four years. By contrast, FII flows into India have been on the rise over the past two years on an annual basis, with only 2008-09 being a year of sharp outflows. In fact, the outflow of $15 billion was more than made up by inflows of $29 billion - the highest ever - in 2009-10. This level was largely maintained in 2010-11 as well, with a small increase.
As the Reserve Bank has jacked up the interest rate once more, with the intent to slow down inflation, India is becoming more and more an attractive destination for hot money from abroad, thanks to the prevailing high interest-rate regime, with foreign institutional investors continuing to pour cash into short-term bonds issued by Indian companies. FIIs are taking advantage of the substantial interest rate differential between India and the big money markets in the West. The probability that more money might come to Indian shores in the form of debt has risen sharply in the past couple of weeks, as a majority of the central banks around the world, excepting China, have shown an inclination to continue with their easy-money policy.
Interest rates in Europe are at 3.15%, while the rates in the US are between zero and 0.25%. In Japan, they are about zero to 0.01%. This leaves enough scope for funds to raise money overseas and invest in Indian debt paper, even after taking into consideration the risk of currency fluctuation.
One report shows that, in 2011 to date, FIIs have invested about $3.09 billion in India, of which only about $85 million is in equities. The remaining portion has been invested in debt issued by government and corporate entities. As of June 3, FIIs have poured $20.66 billion into rupee-denominated debt in India, as per the Security and Exchange Board of India data, much of it in short-term bonds. It is this money that threatens to fly out overnight should arbitrage opportunities improve in the West or other competing markets.
In other words, whatever is coming in by way of foreign funds flows into debt, because of interest rate arbitrage opportunities made possible by borrowing cheaply in overseas markets and investing in top rated Indian debt instruments at attractive coupon rates. Most investors who play with hot money are constantly seeking short-term profits rather than long-term investments. They shift hot money from one place to another quickly, in tune with changing interest rates.
The rapid flow of hot money across borders of nations can cause fluctuations in the foreign exchange markets, reaping quick profits for those who control the funds; but the moment the same funds begin to flow out of the country, its economy takes a beating. India has become increasingly vulnerable to that
What Has Gone Terribly Wrong?
Prior to the appearance of Manmohan Singh on India's economic scene as a financial guru, in his first official incarnation as Finance Minister, and now, for the last seven years as Prime Minister, with his major domo, Montek Singh Ahluwalia, an IMF product, the Indian economy had a slow growth rate, very little foreign exchange reserves, and a lower disparity of income.
The economy was handled badly, causing untold misery to the millions, but at that time India had a political economy - i.e., its economic decisions, though badly handled because of poor understanding of how to generate physical wealth, were in the hands of politicians who were accountable since they were elected by the people.
The ushering in of monetarist "reformers" and globalizers as the policy-makers has changed all that. India's economic decisions are no longer in the hands of the politicians, but firmly in those of such large corporations as the Tatas, Ambanis, Ruias, Jindals, et al. These are global investors, beholden to the foreign financial institutions from which they raise money. In other words, they are nominally Indian, but consider that their business interests come first. They are not accountable to the people of India, nor, for that matter, to the people of any nation.
As the transition occurred, the politicians became "facilitators" for one business house or the other. Some of them are facilitating many business houses. This has given birth to what many Indians call "crony capitalism." Whatever that term means, the fact remains that by facilitating these business houses, which are worth billions of dollars, these politicians and their families enrich themselves immensely. The process does not stop there. It goes way down.
Indian bureaucrats in high positions usually know a lot more than the relevant Cabinet minister, who was elected by the people, about the project he or she is handling. So, after the politicians take their cut, the bureaucrats get their share from the businesses. The process of facilitation, in essence, corrupts one and all.
The Singh government is presently presiding over one of the most corrupt administrations that India had ever seen. Teresita C. Schaffer, a retired US ambassador with long experience in South Asia, and co-founder of the web magazine southasiahand.com, posted an article, "Cleaning up India's Culture of Sleaze," in which she described the rampant corruption of "scam-o-ramas," in which the Singh government's ministers and bureaucrats are steeped.
Describing one of the "scam-o-ramas," in which the minister-bureaucrat-business houses together fleeced an estimated $40 billion, according to the government's Comptroller and Advocate General, Schaffer writes: "Corruption is hardly unique to India - and it is not new there. Past cases that have risen to the level of public scandal have generally involved kickbacks or sweetheart deals. What distinguishes the present situation is the confluence of several major scandals at about the same time, creating an atmosphere of sleaze that appears to permeate all aspects of public life in India."
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