S Gurumurthy By

The import of capital goods for $587 billions, most of which India could make in its own backyard, drained out a third of India's GDP under nose of the UPA regime. The UPA government also eased customs and excise tariff to facilitate their entry into India with the least fiscal resistance and consciously ran current account deficits of $339 billions. That means what? To that extent India has lost its wealth to the other nations. Who gained from India loss? Not America, nor England, Germany, France, Japan, or Russia – countries friendly to India. It is China. Year after year from 2006-7, it has been the single biggest beneficiary of India's import orders. India's imports from China was 13pc of the country's total imports in 2006-7. It rose to 17pc by 2011-12. Result, India's trade deficit with China topped $175 billions in the last six years to 2012-13. The UPA was the architect of the huge deficit syndrome with China. India ran a trade deficit of $1 billion with China in 2001-2. By the third year of the UPA rule, it rose to $9 billion. Later it galloped to $16 billion [in the 4 year] $23 billion [in the 5] $19 billion [in the 6] $28 billion [in the 7] $ 39 billion [in the 8] and $41 billion [in the 9] aggregating to $175 billion or 54pc of India's total current account deficit of $325 billion in the last seven years. The capital goods imported from China alone amounted to $150 billion plus. India imported from China three times more than it exported to it.

Not in India's strategic interest

China has never been a great friend of India. India's Cold war with China continues. China breaths hot on Arunachal Pradesh. Builds dams on Bramhmputra. Not just that. It is a friend of Pakistan, the depth of whose nationalism is measured by its hatred for India. Not just a friend. China is Pakistan's strategic partner giving economic military and technological support. It has built up, and is still building up, nuclear arsenal and missiles for Pakistan. Economic consideration apart, it is certainly not in India's strategic interest to benefit China so hugely, at India's cost. The trade deficit of $175 billion with China [Rs 10 lakh crores] equals India's defence spending for the last six years! Based on the US Department of Defence estimates of $63 billion as China's annual defence budget, the $175 billion Indian trade account bounty funds the defense budget of China for some three years! More. The trade deficit with China weakens the Indian Rupee and Indian economy and strengthens the Chinese economy – which again does not serve the geo-political interests of India. How and why did the UPA government commit this geo-political and economic blunder? No answer. Apart from failing to resist the Chinese dumping, by cutting India's import and excise taxes, the UPA has positively helped China, already a cheap producer, to penetrate and dominate the Indian market. More. Its huge liquidity enabled China to lure the Indian importers of China's capital goods with billions of dollars of suppliers' credit virtually at throwaway interest rates. Had the UPA government been more alert, could it have prevented or mitigated this disaster? Yes.

India not alert to China's dumping

China entered the Word Trade Organisation [WTO] in 2001. It was preceded by huge tariff cuts effected by India under the WTO regime. India's import-weighted tariff of 50pc in 1990 came down to 20pc by the end of 1990s. From the 1980s, China has been a huge dumper of goods world over. Dumping means selling goods at less than their cost. Anti-dumping provisions are integral to the WTO regime. The previous Indian governments have been extremely alert in dealing with Chinese dumping. India used to be so offensive on dumping into India that, between 1995 and 2001, India launched as many as 248 anti-dumping cases – which was next only to the US [255 cases]. A fifth of India's anti-dumping moves were against China. The accelerated dumping of goods by China under the UPA regime coincided with the declining import tariffs of India. The trade-weighted tariff rates of India declined from 50pc in 1990, to 20pc in 1998, 14pc, in 2006 12pc in 2007 and 8pc in 2008. Yet shockingly, the anti-dumping efforts by India – instead of intensifying – slackened from 2008. In about 2002 [when NDA was in power and the trade-weighted tariff was still high, 20pc] India accounted for a quarter of all global anti-dumping cases. The cases dipped later but grew in 2007 to 27pc, but slacked and halved to 15pc in 2009 when the Indian tariff had hit the bottom, 8pc – precisely when the anti-dumping efforts should have been more rigorous.

China grabs Indian market

Result, China's share of imports into India is now more than a quarter of the capital goods, half of textile yarn and made ups, three-fourths of cotton yarn/fabric, nine-tenths of silk yarn and raw silk, half of manmade filament yarn/fabric, one-third of readymade garments, two-thirds of synthetic fibres, one-third of chemicals, medical and pharma items, two-thirds fertilizer manufactures, one-sixth of machine tools, one-third of computer software, a quarter of steel, two-thirds electronic goods, one-tenth of cement, one-third of metal manufactures, two-thirds non-metallic manufactures. This list, just illustrative, shows the Chinese domination of the Indian market. The dumping of goods by China has been an open affair. The media had extensively highlighted it. The Statesman [18.5.2009] had warned that Chinese dumping was irreparably damaging “the Indian domestic market and producers.” and “if the current situation continued Indian industry would cease to exist.” But it is after such public warning that the trade deficit with China shot up by $127 billions – three fourths of the total trade deficit of $175 billions with China since 2006-7. Yet, India did not even use the market access it provided to China as leverage for geo-political gain to settle the border and other disputes with China and negotiate its support for India's entry into UN Security Council. This demonstrated the lack of strategic element in India's China policy – pointing to utter failure of diplomacy and national leadership.

Ostentation, and mismanagement

Undoubtedly, the UPA has messed up, grossly mismanaged a rising global economic powerhouse by internal and external ostentation. When the UPA leaders saw the GDP growth rates surpassing 9.5pc in 2005-6 and 2006-7, the fiscal deficit coming down and the forex flows heavy because of phoney credit monies wandering all over the world, they became euphoric and lost all sense of proportion and moderation. In the euphoria generated by hot-money flows, the UPA opened the floodgate of imports and foreign investments by Indians. A mature leadership would have used the opportunity for fiscal and external consolidation. That was the right time to withdraw the tax waivers and build more reliable forex reserves. In the days ahead of 2005 budget Manmohan Singh and Chidambaram did threaten to cut tax waivers but kept silent about it in the budget. With the result the extravagant tax giveaways of over Rs 2.5 lakh a year continued. UPA government behaved as if India had already become a global power, not just one in the making. And when the 2008 crisis hit, the government went overboard and doubled the tax giveaways to Rs 5 lakhs crore which hit the revenues, also made it possible for China and others to invade the Indian market with cheap equipments and products. The economic destruction of India took place between 2005-6 to 2010-11 when things could have been reviewed and controlled. Things tended to become uncontrollable by 2011-12.

The way out

Now, what is the way out? Not begging for inflow of hot money or external borrowing like the UPA government is doing. It is like applying ointment on cancer. How about these two big things? First, an announcement that the food security bill, that adds additional Rs 2 lakh crore fiscal deficit a year, will be deferred till after the looming crisis is over. This will instantly shock the market to think that the government is serious, to begin regaining confidence. Next, announce complete tax immunity, bring out the un-ornamented hidden gold, estimated at 3000-6000 tons, into interest-bearing government gold bonds, securitise gold, which has the potential to turn $200 billion investment into the economy and add equal amount of stable forex reserves. This can transform the internal and external economy dramatically. [see the detailed scheme in the web-edition] Pranab Mukherjee was keen to do it in the 2012 budget, but he was scared of being bracketed with black-money holders by the anti-corruption road show heroes fashionable then. Will the government have the political will to do it? If not, later, it will do something like this or more drastic, helplessly. It is time that the government worked with the opposition to build consensus, like they did in 1991, to tackle this serious situation which has the potential to develop into a financial emergency.

Also read:

S Gurumurthy is a well-known commentator on political and economic issues.

Email: comment@gurumurthy.net

(Concluded)