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Economics Essay 34: Foreign Direct Investment and Development

Discuss whether an increase in inward foreign direct investment is a good way to improve economic development for countries that are primary product dependent.

In assessing the impact of an increase in inward foreign direct investment (FDI) on economic development for primary product-dependent countries, it is important to consider the potential benefits and challenges involved. Let's define and explain key terms before discussing the topic.

1. Inward foreign direct investment (FDI): Inward FDI refers to the investment made by foreign companies or entities into the domestic economy of a country. It involves the establishment of businesses, subsidiaries, or joint ventures by foreign investors, with a long-term objective of gaining ownership or control over the invested assets.

2. Primary product dependency: Primary product dependency refers to a situation where a country relies heavily on the export of primary products, such as agricultural commodities, minerals, or natural resources, as a significant source of its export earnings and foreign exchange.

Now, let's examine the potential benefits and challenges of increased inward FDI for primary product-dependent countries:

Benefits:

1. Technology transfer and knowledge spillovers: Inward FDI often brings advanced technologies, managerial expertise, and knowledge to host countries. This can contribute to the development and upgrading of local industries, enhancing productivity, and fostering innovation. For primary product-dependent countries, which may have limited technological capabilities, inward FDI can facilitate technology transfer and knowledge spillovers that support economic diversification and development beyond the primary sector.

2. Market access and export opportunities: Foreign investors may provide access to international markets, distribution networks, and marketing expertise. This can help primary product-dependent countries expand their export base, diversify their products, and reduce their dependence on a narrow range of primary commodities. By tapping into global value chains facilitated by foreign investors, these countries can enhance their export competitiveness and generate higher export revenues.

3. Infrastructure development: Inward FDI often involves investments in infrastructure projects such as transportation, energy, and telecommunications. These investments can improve the country's physical infrastructure, enhance connectivity, and stimulate economic activities beyond the primary sector. Improved infrastructure can attract further investments, support business growth, and contribute to overall economic development.

Challenges:

1. Vulnerability to external shocks: Increased reliance on inward FDI can make primary product-dependent countries more vulnerable to global economic fluctuations. Changes in global market conditions, investor sentiment, or policy shifts in home countries can have significant impacts on FDI flows. If primary product prices decline or demand weakens, countries heavily dependent on FDI may experience economic shocks and instability.

2. Risks of enclave economies: Inward FDI can sometimes lead to the development of enclave economies, where foreign companies operate in isolation from the domestic economy. This can limit the spillover effects to local industries, hinder backward and forward linkages, and result in limited local value addition. Enclave economies may not contribute significantly to broader economic development or job creation outside of the specific sectors dominated by foreign investors.

3. Potential resource exploitation: In some cases, increased inward FDI can lead to the exploitation of natural resources without sufficient consideration for sustainable development or local community welfare. This can exacerbate environmental degradation, social inequalities, and resource depletion, which may hinder long-term economic development.

4. Loss of policy autonomy: Dependence on inward FDI can potentially limit the policy autonomy of primary product-dependent countries. To attract foreign investors, countries may offer tax incentives, subsidies, or preferential treatment, which can limit the government's ability to regulate and direct resources toward developmental priorities. It is important for countries to strike a balance between attracting foreign investment and maintaining policy flexibility for sustainable development.

Examples:

1. Chile: Chile, a primary product-dependent country with a significant copper industry, has actively attracted inward FDI to diversify its economy. Foreign investment in sectors like renewable energy, technology, and manufacturing has contributed to economic development beyond copper mining and helped in building a more diversified and resilient economy.

2. Malaysia: Malaysia, historically reliant on palm oil exports, has pursued inward FDI to diversify its agricultural sector. The government has encouraged foreign investment in high-value agriculture, such as biotechnology and agro-processing, to enhance productivity, value addition, and export competitiveness.

In evaluating the impact of increased inward FDI on economic development for primary product-dependent countries, it is crucial to strike a balance between leveraging the benefits and managing the associated challenges. Effective policies, such as promoting technology transfer, encouraging linkages with domestic industries, ensuring environmental sustainability, and maintaining policy autonomy, can help maximize the positive impacts of inward FDI while mitigating potential drawbacks.

The hidden wealth of nations

G Sampath in The Hindu

The Hindu

Tax havens such as Mauritius thrive parasitically, feeding on substantive economies like India.

 

India’s biggest source of FDI is India itself, money departing on a short holiday to a tax haven and then routed back as FDI. Will the government muster up the political will to clamp down on the tax-allergic business elite?

This could be a bumper year for the ever-lucrative tax avoidance industry. The 2015 final reports of the Organisation for Economic Co-operation and Development (OECD)-led project on Base Erosion and Profit Shifting (BEPS) — which refer to the erosion of a nation’s tax base due to the accounting tricks of Multinational Enterprises (MNEs) and the legal but abusive shifting out of profits to low-tax jurisdictions respectively — lays out 15 action points to curb abusive tax avoidance by MNEs. As a participant of this project, India is expected to implement at least some of these measures. But can it? More pertinently, does it have the political will?

The BEPS project is no doubt a positive development for tax justice. If India’s recent economic history tells us anything, it is that economic growth without public investment in social infrastructure such as health care and education can do very little to better the life conditions of the majority. Which is why curbing tax evasion to boost public finance is part of the United Nations’ Sustainable Development Goals (SDGs).

However, notwithstanding the BEPS project, MNEs and their dedicated army of highly paid accountants are not about to roll over and comply. Again, if past history is any indication, the cat-and-mouse game between accountants and taxmen will continue, with new loopholes being unearthed in new tax rules.

Empowering tax dodgers

The primary cause of concern here is the quality of India’s political leadership, which has consistently betrayed its own taxmen. All it takes — regardless of the party in power — is for the stock market to sneeze, and the Indian state swoons. We’ve seen it happen time and again: the postponement of the enforcement of General Anti-Avoidance Rules (GAAR) to 2017, and more spectacularly, on the issue of participatory notes, or P-notes.

Last year, the Special Investigation Team (SIT) on black money had recommended mandatory disclosure to the regulator, as per Know Your Customer (KYC) norms, of the identity of the final owner of P-notes. It was a sane suggestion because the bulk of P-note investments in the Indian stock market were from tax havens such as Cayman Islands. But the markets threw a fit, with the Sensex crashing by 500 points in a day. The National Democratic Alliance (NDA) government, which had come to power promising to fight black money, promptly issued a statement assuring investors that it was in no hurry to implement the SIT recommendations. Given such a patchy record, what are the realistic chances of India actually clamping down on tax dodging?

Let’s take, for instance, Action No. 6 of the OECD’s BEPS report: it urges nations to curb treaty abuse by amending their Double Taxation Avoidance Agreements (DTAA) suitably. The obvious litmus test of India’s seriousness on BEPS is its DTAA with Mauritius. By way of background, Mauritius accounted for 34 per cent of India’s FDI equity inflows from 2000 to 2015. It’s been India’s single-largest source of FDI for nearly 15 years. Now, is it possible that there are so many rich businessmen in this tiny island nation with a population of just 1.2 million, all with a touching faith in India as an investment destination? If not, how do we explain an island economy with a GDP less than one-hundredth of India’s GDP supplying more than one-third of India’s FDI?

We all know the answer: Mauritius is a tax haven. While not in the same league as Cayman Islands or Bermuda, Mauritius is a rising star, thanks in no small measure to India’s patriotic but tragically tax-allergic business elite. In Treasure Islands: Tax Havens and the Men Who Stole the World, financial journalist Nicholas Shaxson notes how Mauritius is a popular hub for what is known as “round-tripping”. He writes, “A wealthy Indian, say, will send his money to Mauritius, where it is dressed up in a secrecy structure, then disguised as foreign investment, before being returned to India. The sender of the money can avoid Indian tax on local earnings.”

In other words, it appears that India’s biggest source of FDI is India itself. Indian money departs on a short holiday to Mauritius, before returning home as FDI. Perhaps not all the FDI streaming in from Mauritius is round-tripped capital — maybe a part of it is ‘genuine’ FDI originating in Europe or the U.S. But it still denotes a massive loss of tax revenue, part of the $1.2 trillion stolen from developing countries every year.

What makes this theft of tax revenue not just possible but also legal is India’s DTAA with Mauritius. It’s a textbook example of ‘treaty shopping’ — a government-sponsored loophole for MNEs to avoid tax by channelling investments and profits through an offshore jurisdiction.

For instance, as per this DTAA, capital gains are taxable only in Mauritius, not in India. But here’s the thing: Mauritius does not tax capital gains. India, like any sensible country, does. What would any sensible businessman do? Set up a company in Mauritius, and route all Indian investments through it.

India signed this DTAA with Mauritius in 1983, but apparently ‘woke up’ only in 2000. India has spent much of 2015 ‘trying’ to renegotiate this treaty. But with our Indian-made foreign investors lobbying furiously, the talks have so far yielded nothing. Meanwhile, China, which too had the same problem with Mauritius, has already renegotiated its DTAA, and it can force investors to pay 10 per cent capital gains tax in China.

Changing profile of tax havens

Tax havens such as Mauritius thrive parasitically, feeding on substantive economies like India. Back in 2000, the OECD had identified 41 jurisdictions as tax havens. Today, as it humbly seeks their cooperation to combat tax avoidance, it calls them by a different name, so as not to offend them.

The same list is now called — and this is not a joke — ‘Jurisdictions Committed to Improving Transparency and Establishing Effective Exchange of Information in Tax Matters’. Distinguished members of this club include Cayman Islands, Bermuda, Bahamas, Cyprus, and of course, Mauritius.

Today the function of tax havens in the global economy has evolved way beyond that of offering a low-tax jurisdiction. Mr. Shaxson describes three major elements that make tax havens tick. First, tax havens are not necessarily about geography; they are simply someplace else — a place where a country’s normal tax rules don’t apply. So, for instance, country A can serve as a tax haven for residents of country B, and vice versa. The U.S. is a classic example. It has stringent tax laws, and is energetic in prosecuting tax evasion by its citizens around the world. But it is equally keen to attract tax-evading capital from other countries, and does so through generous sops and helpful pieces of legislation which have effectively turned the U.S. into a tax haven for non-residents.

Second, more than the nominally low taxes, the bigger attraction of tax havens is secrecy. Secrecy is important for two reasons: to be able to avoid tax, you need to hide your real income; and to hide your real income, you need to hide your identity, so that the booty stashed away in a tax haven cannot be traced back to you by the taxmen at home. So, even a country whose taxes are not too low can function as a tax haven by offering a combination of exemptions and iron-clad secrecy — which is the formula adopted by the likes of Luxembourg and the Netherlands.

Third, the extreme combination of low taxes and high secrecy brought about a new mutation of tax havens in the 1960s: they turned themselves into offshore financial centres (OFCs). The economist Ronen Palan defines OFCs as “markets in which financial operators are permitted to raise funds from non-residents and invest or lend the money to other non-residents free from most regulations and taxes”. It is estimated that OFCs are recipients of 30 per cent of the world’s FDI, and are, in turn, the source of a similar quantum of FDI.

Such being the case, all India needs to do to attract FDI is to become an OFC, or create an OFC on its territory — bring offshore onshore, so to speak. That’s precisely what the U.S. did — it set up International Banking Facilities (IBFs), “to offer deposit and loan services to foreign residents and institutions free of… reserve requirements”. Japan set up the Japanese Offshore Market (JOM). Singapore has the Asian Currency Market (ACU), Thailand has the Bangkok International Banking Facility (BIBF), Malaysia has an OFC in Labuan island, and other countries have similar facilities. OFCs, as Ronen Palan puts it, are less tax havens than regulatory havens, which means that financial capital can do here what it cannot do ‘onshore’. So every major hedge fund operates out of an OFC. Given the volume of unregulated financial transactions that OFCs host, it is no surprise that they were at the heart of the 2008 financial crisis.

Apart from accumulating illicit capital (in the tax haven role), channelling this capital back onshore dressed up as FDI (in investment hub role), and deploying it to engage in destructive financial speculation (in OFC role), these strongholds of finance capital also serve a political function: they undermine democracy by enabling financial capture of the political levers of democratic states.

It is well known that political parties in most democracies are amply funded by slush funds that would not have accumulated in the first place had taxes been paid. But today, not least in the Anglophone world, global finance’s capture of the state appears more like the norm.

A lone exception seems to be Iceland, which began the new year on a rousing note — by sentencing 26 corrupt bankers to a combined 74 years in jail. Meanwhile in India, we continue to parrot long discredited clichés about the need for more financial deregulation and a weird logic that mandates a smaller and more limited role for public finance.

The malaise that drove down the rupee

V. SRIDHAR in the hindu

  

 

Desperate attempts to woo foreign capital by boosting investor sentiment is unlikely to result in a lasting solution to India’s currency travails

The recovery of the rupee and the euphoric rebound of the markets in the last few days would appear to suggest that the economy is back on track again. Nothing could be more wrong. The flurry of policy announcements in recent weeks is based on the diagnosis that the relentless slide of the rupee, attributed to the widening Current Account Deficit (CAD), can be arrested if and when capital inflows — as investments or borrowings — fill the gap.

Reserve Bank of India governor Raghuram Rajan’s recent announcement allowing banks to borrow from global capital markets at a time when interest rates are rising because of the expected reversal of the United States Federal Reserve’s easy money policy is tailored to this logic. Indian banks can now borrow up to 100 per cent of their combined net worth and long term borrowings from the international market (compared to 50 per cent earlier) and then “swap” them with the central bank. This is expected to augment the supply of foreign exchange by an estimated $30 billion, which is about one-tenth of Indian foreign exchange reserves. The markets reacted euphorically, but the risks of the country borrowing its way out of trouble have been much less appreciated.

The two-track policy — of making India more attractive to foreign investors by deepening “reforms” and of borrowing more — is fraught with serious consequences. The policy response suggests that the ongoing crisis is only a temporary blip in the Great Indian Growth Story. But it appears that the seeds of the crisis were sown in that very story.

THE GREAT CREDIT BINGE

A striking feature of the story is that Indian corporates borrowed like there was no tomorrow — from not only Indian banks but also from overseas capital markets. Consider this: between 2003-04 and 2010-11 the Indian corporate sector’s share of net bank credit increased from 31 per cent of Gross Domestic Product (GDP) to over 37 per cent. In fact, since 2006-07, their share has been consistently higher than net bank credit to the government.

Infrastructure companies’ (power, roads and telecom) share in total bank credit increased from about 9 per cent in 2003 to more than 33 per cent in 2011. The spectacular increase is responsible for the mounting burden of non-performing assets in the Indian banking sector today. According to an oft-cited report in the media, prepared by the Credit Suisse Group in 2012, the debt of 10 Indian corporate groups whose interests range from oil and gas and steel to infrastructure increased from about Rs. one lakh crores in 2006-07 to Rs. 5.4 lakh crores in 2011-12 — a compounded annual rate of 40 per cent.

ASSET BUBBLE

The fact that private fixed investment did not increase at the same pace is perhaps because a large portion of the credit was diverted by Indian companies to what would appear to be an asset bubble — in land, shares in companies and other speculative assets. The clamour by corporate lobbies that interest rates be lowered has no respect for economic logic, given the state of the country’s external balances. They fail to appreciate that the era of cheap-credit fuelled growth is well and truly over.

But this increase in domestic credit was dwarfed by the remarkable increase in the inflows of foreign capital following the global economic meltdown in 2008.

The share of capital inflows — external borrowings, foreign direct investment (FDI) and foreign institutional investors (FII) — increased from about 5-6 per cent of GDP to about 9 per cent in 2011. The share of costlier short-term borrowings (almost entirely by private companies) in overall borrowings increased from 4.5 per cent in 2002-03 to 25 per cent in 2012-13. Companies, lulled into borrowing at illusorily low interest rates, have been surprised by sharp increase in the rupee-denominated value of their loans.

FDI ILLUSION

Inflows of FDI registered a spectacular rise — from $9 billion in 2005-06 to $33 billion in 2010-11. Popular understanding is that while FII investments are volatile, FDI is much more stable, long term in nature and contributes to improving the competitiveness of recipient nations. However, the story of India’s dalliance with FDI is shockingly different and raises serious doubts about whether the ongoing attempts to woo investors is sustainable or even desirable.

A study co-authored by Biswajit Dhar, Director General, Research and Information Systems for Developing Countries, based on a painstaking dissection of every FDI project entailing an investment of $5 million and more between 2004 and 2009, provides shocking insights that prove that a large proportion of FDI is just as volatile and transitory as portfolio capital. The study that considered 2,748 projects, which accounted for almost 90 per cent of all FDI in the 2004-2009 period, found that the lowering of norms prescribing the minimum level of equity stake in an “FDI invested” project — from 40 per cent to 10 per cent — offered perverse incentives to capital flowing in the garb of FDI.

Less than half of the investment was actually FDI; private equity, venture capital and hedge funds, which are volatile and normally associated with short investment horizons, accounted for 27 per cent; and about 10 per cent was actually portfolio investment. Over 10 per cent of the “investment” was round tripping by Indian entities, which funnelled money back through tax havens in order to take advantage of tax concessions and other inducements available to FDI projects.

A large proportion of the investment was by entities masquerading as investors committed to the long haul or investments that enhanced the productive capacity. Indeed, manufacturing, which advocates of FDI said would be a key beneficiary, received only one-fifth of the investment; but even in this case portfolio and other short-horizon investors accounted for almost 40 per cent of the total investment. Interestingly, while much attention has been focussed on the rising import of oil and gold, little attention has been paid to the fact that the trade deficit in manufactured goods has widened from $1.5 billion in 2004-05 to $45.5 billion in 2011-12 (about 2.5 per cent of GDP).

If there is any truth in the old cliché that a crisis is also an opportunity, surely this is a time to rebalance the Indian economy on a more sustainable path that allows policymakers to use levers that are more easily within their control. Of course, this would require import curbs and other measures suited to these hard times. But rebalancing would also require the use of measures such as the fiscal deficit, which have been for far too long a strict no-no in the policymakers’ handbook.

THE FISCAL DEFICIT OBSESSION

The stubborn opposition to the good old-fashioned Keynesian logic of using a fiscal deficit to get the economy back on its feet is grounded in the apparently intuitive logic that equates a government deficit with a household deficit. A classic example of such misguided thinking is evident in the loud opposition to the Food Security Bill. Quite apart from the fact that such a measure would provide a measure of security to the poor, the implementation of the legislation promises economy-wide benefits.

First, the guarantee of subsidised food grains, which constitutes a significant proportion of the consumption basket for most people, will have the immediate effect of increasing their disposable income. This is not trivial, given that the growth of consumption expenditure has halved between 2009 and 2012.

Second, the provision can play the role of an economic stabiliser because food prices determine the floor wage level, which is why they are termed a wage good. The guarantee would thus not only help in controlling food prices but also stabilise wages. Indeed, it is perplexing that industry lobbies are attacking the provision of an enhanced social wage, from which they stand to benefit significantly.

Third, if the fiscal deficit is run in an imaginative way, even more can be achieved. For instance, coupling the food guarantee to the MGNREGA can help in the construction of a countrywide network of godowns for the Food Corporation of India.

Of course, a cash transfer scheme would negate much of the potential economy-wide benefits that would accrue from the implementation of the food security legislation.

India's FDI Reforms - A risky strategy, born of panic

SIDDHARTH VARADARAJAN

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TOPICS

macro economicsinflation and deflation
investments
politicsnational politics

Building ‘capitalism with Indian characteristics’ means decisions cannot ignore concerns of voters and communities

As the economy slows down and the rupee wilts, Manmohan Singh has bitten the ‘reforms’ bullet with both eyes on the credit rating agencies whose negative reports have done much to dampen the ‘animal spirits’ of investors, foreign and native.

Last November, when the Congress party made a push to introduce foreign direct investment in multi-brand retail, protests in Parliament forced the government to back off. Pranab Mukherjee, who was Union Finance Minister at the time, said the FDI plan was being put on hold until a political consensus emerges.

I asked a senior member of the Prime Minister’s Cabinet what had changed between November 2011 and September 2012. There is still no consensus on FDI in retail, yet a decision has been taken to go full steam ahead. “What has changed is the value of the rupee,” the Minister replied. Every rupee that the dollar gains adds Rs 8,000 crore to India’s annualised oil import bill. “Of course, Manmohan admitted to us that not even one dollar may flow into retail or airlines right now”, he said. But this decision to open the sector and raise diesel prices has to be taken in order to stop the rupee from going into free fall.

SELF-SERVING AND DECEPTIVE

Signalling is not an unknown tactic, both in economics and in war. Signals can radiate strength and resolve, but they can also connote weakness. How will those whose ‘animal spirits’ are being propitiated look at the petard the UPA has just pinned upon the door of small retail across India? Dr. Singh must not be fooled by the applause he has garnered from editorialists, TV anchors and corporate leaders for being “tough” and “decisive”. These perfumed words may wash the stain of the Washington Post’s ink on his hands — a recent article in the American paper about his indecisiveness seems to have particularly stung the PMO — but they are self-serving and deceptive. From their vantage point in the White House or on Wall Street, the champions of American finance and enterprise see an Indian Prime Minister who is not tough but vulnerable: a man who believes the only way he can revive the economy and save the rupee is by doing what it takes to pull in foreign institutional investors and even hot money.

There is no doubt that foreign capital inflows, including FII monies, have played a big role in India’s success story over the past decade. But the problem with the Manmohan Singh strategy today is three-fold. First, it leaves untouched the very structural imbalances in the Indian economy that are responsible for the onset of the slowdown and, worse, stagflation. Second, by pinning all hopes on the revival of foreign inflows, those imbalances will most likely get exacerbated. Today, instead of being used for productive investment, capital is getting locked up in property, gold and other ‘safe’ outlets. A revival of the Sensex on the back of renewed FII interest may breathe some life into the stock market. But the risk is that this may trigger speculative demand and have no impact on the real economy. The third problem with the Prime Minister’s current approach is that the appetite of finance capital will not be sated so easily. One concession must necessarily beget another in order for the foreign investor to keep the faith in the India story.

A few weeks ago, we were told that the dilution and postponement of the General Anti-Avoidance Rules (GAAR) on tax — an important initiative taken by Mr. Mukherjee in the last budget — is necessary so as not to scare off investment. The same reason was cited to argue against the ‘Mauritius route’ of inbound investment being shut down. Today it is said that the bait of FDI in retail must be thrown to the rating agencies, or else the rupee will sink. Sure, the rupee has recovered against the dollar by around Rs 1.50 in the past few days but what happens if and when these gains get eroded again by structural factors? Foreign investors will demand more liberalised norms for entry into banking, insurance and pension funds. They will demand a friendlier patent regime for drugs so that generics can be blocked in the name of “incremental innovation.” They will rail against the ‘wasteful’ subsidies on food and employment going to India’s poor.

MISMANAGEMENT

The slowdown of the Indian economy today is essentially due to manufacturing. This, in turn, is largely the product of poor governance and mismanagement by the Central and State governments and their systematic neglect of basic infrastructure like roads and power over a long period of time. It is also the product of corruption and rent-seeking. The sub-optimal utilisation of the railways and coastal shipping — under the influence of one private lobby or another — raises the cost of long-haul cargo and increases the inflationary impact of any diesel price hike. Thanks to poor monitoring of contractor works, road projects remain unfinished for years on end, even after the land acquisition process is over. Industry is plagued by chronic electricity shortages even as would-be power producers find it more profitable to squat on their allocated coal or gas blocks.

Why is it that the Prime Minister didn’t think about being tough and decisive when it came to allocating coal blocks through a transparent auction? Why weren’t such auctions seen as a way of plugging the fiscal deficit? And we haven’t even begun talking about the allocation of bauxite, iron ore, granite, sand and water. How much revenue is the state continuing to forego by not charging proper prices from the businessmen lucky enough to land concessions for these resources?

The other structural problem the Indian economy faces is the mismatch between a national political culture that is democratic and a model of resource allocation that resents dissent. All those who are busy denouncing Trinamool Congress leader Mamata Banerjee for her decision to withdraw support to the UPA should remember that India is perhaps the only country in the world to have established universal adult franchise and a mature parliamentary system well before it turned to building capitalism in earnest. In virtually every other country, capitalist industrialisation came first and democracy followed, or the two developed side by side. If we are to build ‘capitalism with Indian characteristics,’ this requires a reimagining of the economic decision-making process. This means decisions cannot be taken in a peremptory, top-down manner, ignoring the views and concerns of voters and communities whose land, resources and labour industry needs to utilise.

At the event to relaunch Frontline magazine on Thursday, the noted economist, Prabhat Patnaik, spoke of the social contract of fraternity which lay at the base of the freedom struggle and of the Indian state which emerged. Springing from this are five universal rights which he said were non-negotiable: the right to food, employment at a living wage, education in good quality neighbourhood schools, healthcare and pension security for the elderly and disabled. None of these rights can be realised by granting concessions and subsidies to the corporate sector.

It is the failure of the system to deliver these basic rights that lies at the root of the current crisis in Indian political economy. And the current political crisis is also a reflection of the same deficit.

LAUDABLE

On Friday, Ms Banerjee delivered on her threat to withdraw support to the UPA. She deserves applause, if only for being one of the few politicians to stick to her stand even at the cost of surrendering her share of power in Delhi. Her other faults need not detain us today — most notably her intolerance. Nor should too much time be spent wondering whether the UPA government will survive her departure. It will survive, and do so handsomely, thanks to the outside support it receives and will continue to receive from the Samajwadi Party and the Bahujan Samaj Party. The Opposition Bharatiya Janata Party is in no position to face a snap poll, whatever L.K. Advani may say or want, nor is the Left. In the weeks and months ahead, there will be skirmishes in the Lok Sabha and some moments of tension too. But Dr. Singh and Congress president Sonia Gandhi — who have proved to be superb tacticians — will survive the bumpy journey to 2014.

What happens after that, of course, is anyone’s guess. It is one thing to master the tactics of survival on the battlefield, and quite another to have a strategy that can win a war. No Congress minister sees the party winning more than 150 seats if general elections were to be held today. Dr. Singh hopes to compensate for this dwindling public support by courting investors. This constituency, of course, is happy to be courted. Whether they deliver what the Prime Minister wants is the 272 seat question.

India Inc. and Its Moral Discontents

By Ravinder Kaur in EPW

While the Arab revolts were challenging
the western hegemony
to pave way for grass-roots
democracy last year, India was witnessing
a different kind of mass mobilisation
dramatically named by a few in the
media as the “second struggle” for Independence.
Delhi – like Cairo, Tunis,
Damascus and Manama – had become
the centre of protracted though nonviolent
popular protests with demands
for accountability from the corrupt ruling
elite. The media even took to describing
the protests affectionately as “our Arab
spring” and likened the site of protests in
Delhi as “our Tahrir Square” – imbuing
the event with revolutionary fervour
and turning it into a kind of catharsis
necessary to purify a corrupted postcolonial
nation. That these protests were
largely composed of a restless youth
population – though reliably steered by a
non-partisan “Gandhian” patriarch –
only served to make the comparisons to
the Arab revolts seem natural. Yet the
differences could not be starker. Unlike
the uprisings in west Asia that sought
to address the societal crises – rising
inequality, infl ation, massive unemployment,
lack of political freedoms and
disenchantment with the ruling elite –
as political subjects seeking political
change, the popular mobilisation in
India has primarily been the work of
“apolitical” activism more in tune with
the Tea Party movement of the United
States given its neo-liberal fantasies of
“small government”.


This essay sets out to unpack the economy
of the moral outrage we have witnessed
the past several months and which
continues to occupy a central position on
the nation’s agenda. The prime question
that needs to be asked then is, how and
when did corruption become the most
pressing crisis facing the Indian nation?
And in whose interest has this project
of moral cleansing of the nation been
affected? This line of enquiry opens up
some provisional answers that help explain
a movement that has built upon a
successful coalition of as diverse interests
as the techno-elite, professional middle
class, the urban poor, the religious and the
secular-minded individuals, big corporations,
global non-governmental organisations
(NGOs) and localised neighbourhood
associations. Three crucial interrelated
developments within the Indian
socio-political landscape can already
be noted in this regard. First, the neoliberal
conception of the nation-form as
commodity-form that India has steadily
transformed into since the 1990s economic
liberalisation. The success of the
nation is now no longer measured by its
ability to secure territory and the welfare
of its people alone, it is primarily
measured by its ability to attract capital
investments and maximise revenues.
The Indian nation has acquire d a new
nomenclature – India Inc. – that is vastly
popular within the corporate and policymaking
circles. The addition of the suffi
x “Inc.” highlights the corporate character
of the nation that has become its
prime identity in the past two decades.
It is following this neo-liberal logic of
nation as corporation that Prime Minister
Manmohan Singh is often addressed as
the chief executive offi cer (CEO) of India.
This popularly bestowed title gains particular
currency in his case as he is seen as
the main architect of the Inter national
Monetary Fund (IMF)-World Bank-led
economic reforms in early 1990s.
Second, corporations as well as global
bodies like the World Bank have increasingly
become invested in initiating
reform s at the social level in India. The
widely shared belief is that India is unable
to reach its full potential as a global economic
powerhouse precisely because of
socio-cultural constraints. The culture
of corruption – bribes, nepotism, and lack
of transparency within the governmen t
– is seen as one of the biggest impediments
to complete market reforms. The
anti-corruption mobilisation, thus, has
substantial support from the corporate
sector including several corporationcontrolled
newspapers and television
channels. Third, not only is a corrupt
government found detrimental to India’s
rise as a great power, the government
itself is seen as an impediment in the
path to that goal. A particular feature of
the anti-corruption protests is the outrage
against the government as the primary
source and cesspool of corruption. This
popular view is in line with the neoliberal
belief in “less government” and
more market as the path to economic
growth and prosperity. In other words,
to speak of politics – and anti-politics –
of anti-corruption mobilisation in India
today only in terms of “the people”,
“government” and “civil society” is to
miss out on new realities that constitute
the reformed Indian nation. Not only do
corporations play a dominant though
unpublicised role in the currents of Indian
politics, the Indian nation itself has been
reinvented as a corporate body whose
legitimacy is derived from its ability to
maximise revenues and profi ts. This nexus
between corporations, global fi nan cial
institutions and the anti-political populist
rage is key to understanding the new
agenda of nation’s moral cleansing.
What follows is an attempt to outline
the corporate logic of the moral panic
in India.


2 Nation as Commodity

In the past two decades, the free-market
logic of the nation state has increasingly
become visible not only in the attempts
to patent national commodities, but the
nation itself. The nations, especially those
most newly reformed such as India, are
branded, graded and placed within the
global hierarchy of nations according to
their success in attracting foreign direct
investments (FDIs) as well as revenues
from tourism. This commodifi cation of the
nation – as a profi t-making enterprise –
lies at the heart of this great neo-liberal
transformation. The unique assets of
the nation – its culture, history, natural
resources, human labour, locality, and
the inalienable essence that makes it
authentic – are commodifi ed in order to
maximise its capital and expand its power
in the global scheme of things. Nationality
Inc. blurs the lines between the state
and market to an extent that the state no
longer merely exists as the “monitor” of
the market, instead the market becomes
the underlying principle of the state.2 As
Jacques Ranciere (1999), recalling Marx’s
once-controversial assertion that governments
are simple business agents for
international capital, suggests, it is now
an “obvious fact…the absolute identifi -
cation of politics with the management
of capital is no longer the shameful secret
hidden behind the ‘forms’ of democracy; it
is the openly declared truth by which
our governments acquire legitimacy.


The role of the state as an active economic
agent – a corporation in search of
ever greater profi ts and revenues – has
always existed, the neo-liberal thinking
has only brought out in plain sight the
well hidden secret: the collusion between
the domain of politics and the
domain of the economy. In short, the
neo-liberal turn has surfaced the disarticulations
of the hyphenated dialectic
condition that binds the nation with the
state, and instead fully revealed the
corporate logic of the nation. India Inc.,
the new nomenclature for the nation is,
thus, suggestive of the new species of relations
between the market and the nation
where the Indian state appears as a
facilitator for the circulation and maximisation
of capital.


A significant part of the economic
reforms which opened India to flows of
FDI, private participation in the domain
of government, and withdrawal of the
state from the social sector has been the
attempt to brand the nation in the global
market. As early as 1996, the Indian
state had created a subsidiary agency of
the Ministry of Commerce – India Brand
Equity Foundation (IBEF) – with the primary
task of marketing “Made in India”
products around the world. This lagging
project was revived in late 2002 by the
National Democratic Alliance reform
minded government though with a redefi
ned task – to not only showcase Indian
brands abroad but transform India itself
into a corporate brand. The offi cial brief
was now to “celebrate India” as the “destination
of ideas and opportunities” in
order to bring in FDI as well as invigorate
tourism.

 And by 2004, Brand India was
set in motion to “build positive economic
perceptions of India globally”.6 The new
initiative not only formalised the corporate
approach to governing the nation, it
also confi rmed the alias by which the
nation is known in the corporate world
– India Inc. – an entity consequently
gover ned by a CEO rather than a political
representative.

One of the key tasks for India Inc.
unsurprisingly, then, has been that of
image making primarily for a global
audience – corporate investors, leaders of
global fi nancial institutions and wealthy
tourists. Two Delhi-based advertising
agencies specialising in place branding
were recruited to create a distinctive
logo, a slogan and a “business kit” to be
presented through glossy campaigns in
print and electronic media.8 While one
of these agencies is responsible for creating
a more popular and vastly visible
global campaign called “Incredible India”
mainly to attract foreign tourists, the
second agency works hand in hand
though with little visibility within India
to enhance “Brand India” in the global
fi nancial markets. Brand India unveils
its annual advertising blitzkrieg spectacularly
at the World Economic Forum,


Davos amidst an assembly of corporate
heads, leaders of industrialised nations
and functionaries of global fi nancial
institutions. The idea is not only to
familiarise the world fi nancial leaders
about the current state of Indian economy
but also to report back on the progress
made by the Indian state vis-à-vis
economic reforms.


The corporate sector in India together
with the global financial institutions
perceives the 1991 economic reforms as
incomplete and partial, and each successive
government is therefore routinely
asked to undertake further “unshackling”
of the economy and take the reform to
its logical conclusion: a fully liberalised
market economy without regulatory
oversight and constraints affected by the
social and environmental costs. Davos is
one such prominent location where reformed
nations are reviewed in a global
setting – the “good governments” are
celebrated, whereas those lagging behind
are warned and encouraged to follow
suit. India Inc. has been both a subject of
celebration and warnings about its inability
to reach its potential. The little understood
complexities of Indian sociopolitical
order – caste stratifi cations, religious
divisions, communal violence,
and more importantly now, the “culture”
of corruption – are often posed as impediments
in India’s path towards economic
growth. The question confronting the
corporate state – an effective imagemachine
– is: how to create a desirable
image of the nation while erasing or
minimising the effect of all that “holds it
back”? Or more concretely, how to
project India as the most “attractive” investment
destination in order to lure
away potential investors from other
competing nations in the world.9 The
answer, in branding parlance, is to minimise
the “negatives” – associations with
poverty, archaic social practices, political
turbulence, and corrupt practices –
to halt the adverse news flow about the
nation in global media. This constant
quest for an attractive brand image and
the fear of the contaminating effect of
powerful negatives such as corruption,
then, is a partial explanation for the
moral discontent that is currently raging
in India.


 Economy of Moral Panic

Anna Hazare’s protest agitation began in
the heart of Delhi – Jantar Mantar, a
part tourist attraction, and part zone of
protest – chiefl y to demand the passage
of the Jan Lokpal Bill (People’s Ombudsman
Bill) as a strong anti-corruption
instrument. The crowds that thronged
the protest site – adorned with symbols
borrowed from the repertoire of Hindu
nationalists and to the chants of Vande
Mataram – in support of the Bill had
pitted themselves not only against the
government’s version (the Lokpal Bill),
but the entire political class as such. And
if there was an enemy in this struggle,
then it was the fi gure of the politician –
usually depicted as a slick character
with easily compromised morals and infi
nite greed for ill-gotten wealth stashed
away in Swiss vaults – that had permeated
the popular imagination egged on by
the rhetoric of protest. The less visible
spokes of the government machinery –
the bureaucrats – were found equally
guilty of entrenching a system that did
not move without adequate grease in the
form of bribery and nepotism. In other
words, it was the domain of government
that had been identifi ed as the root
cause of the rot and therefore in need of
instant repair. This form of identifi cation
also disclosed the collective body of
“the people” in a state of isolation from
the government. Not only was the government
viewed as corrupt, the very
idea of state and government was now
shaped through the discourse of corruption.
Accordingly, the provisions of the
people’s bill focused mainly on the
conduct and practices of public functionaries
which through a series of legislations
– disciplinary measures and
punishment – could be rectifi ed and
controlled. The wider socio- economic
landscape – social injustice and inequities
– around which the notion and practice
 named as corruption thrives was hardly
the focus of the protests.
The most telling aspect of both the
competing legislative bills, however, was
the stark absence of any provisions to
scrutinise corporate corruption. This absence
is particularly signifi cant as most
of the scams in India are related to
murky corporate practices ranging from
provision of supposedly mandatory kickbacks,
bribes to impart fl exibility to
existing rules, purchasing infl uence
within the government to ensure friendly
policies, evading taxes, and committing
fi nan cial fraud. Yet, the corporations
appear in the debate, if at all, as victims
of corruption in the domain of government
that hinders the nation’s economic
growth. This is not entirely unsurprising
in a neo-liberal state where the greatest
fear is the fear of failure to attrac t investments
and a slowdown in the pace
of economic growth. But what is surprising
is the intensity with which this
logic has fi ltered to the core of elite politics
in India to an extent that corporate
excesses are more or less effaced from
the public debate.


Corruption has long been seen as an
impediment towards free market and
economic growth. And in the anticorruption
movement, the corporations
have been able to fi nd articulations of
their own interests that seemingly are in
tune with the public outrage harnessed
successfully by the civil society. Even
before the popular protests had taken
off, the Federation of Indian Chambers
of Commerce and Industry (FICCI) had
issued a statement calling for probity in
governance in order “to preserve India’s
robust image and keep the growth story
intact”.10 This was followed by an open
letter by 14 prominent individuals – corporate
leaders, reform-minded economists
and bureaucrats assembled together
under the sign of the “citizen” –
who identifi ed corruption as the “biggest
issue corroding the fabric of our nation”.


The recommendation of the group was
to address the “governance defi cit” that
had permeated every level of state institutions,
and to restore the self-confi dence
of Indians in themselves and in the Indian
state.11 When the protest began gathering
steam, the biggest support to fi ght
corruption came from the corporate
sector. The corporate leaders expressed
their support publicly proclaiming that
“we completely support Hazare in his
fi ght against corruption which has been
denting India”.12 The corporate voices
had not only begun addressing Anna
Hazare as a moral crusader, but in one
instance also as “prime minister” – the
only one morally clean and worthy of
leading the nation – to show their disaffection
with the elected representatives.
13 In other words, the malaise
ailing the nation had been primarily
isola ted within the domain of government,
and only by exposing and emptying
it out in the public could the nation
be put on the path of purifi cation.
The power and infl uence of the corporations
in the anti-corruption movement
can be gauged from the fact that hardly
any critical voices have been heard
demanding corporate accountability.
Yet, bribe-giving or purchase of infl uence
in the government is often seen by
both Indian and foreign businesses as
an acceptable practice. In a survey of
European fi rms conducted earlier this
year, about two-thirds of corporate
employees named bribe-giving as a widespread
strategy to win contracts and
retain businesses.14 Similarly, a Bribe
Payers Index (BPI) found corporate corruption
to be rampant in the “emerging
markets” and particularly entrenched in
sectors like infrastructure development,
construction, mining, oil and gas explorations
and property development.15 The
State’s fear of losing corporate investments
and the attendant possibility of
job creation and revenue generation
means that there is little challenge to
corporate corruption. Instead, the neoliberal
states go out of their way to facilitate
businesses and overlook any exce sses.
This anxiety of alienating corporations
was visible in the controversy over the
2G court case. The union minister of law,
Salman Khurshid, chided the Supreme
Court for not granting bail to businessmen
accused in the 2G spectrum scam.
He was reported as saying, “If you lock
up top businessmen, will investment
come?” to voice his concerns over threat
to the pace of economic growth and
investment in the nation.16 In this case,
17 individuals were arrested and prosecuted
including the former Telecom
minister A Raja and several senior executives
from some of the largest telecom
companies in India. But somehow the
corporate executives escaped the harsh
probing of their conduct in the public
domain whereas the politician involved
was transformed into a symbol of all the
systemic failures and corruption plaguing
the nation. In short, it is the fi gure of
the politician that is frequently evoked
to rouse public passions in the anticorruption
movement while the businesses
are either seen as hapless victims
of the “system” or kept out of public
spotlight when the irregularities are too
momentous to be ignored.
4 Global Panacea of Reforms


The excessive focus on government
together with the near effacement of
corporations from the anti-corruption
discourse is neither an accident nor an
oversight. Rather it is a refl ection of the
global processes that began intensifying
in the past two decades surfacing civil
society as a key player in the domain of
governance. Central to this shift was not
only the lack of belief in the State’s capability
to check corruption, but the fact
that the institution of state per se was
viewed as intrinsically corrupt. The very
defi nition of corruption, at the height of
modernisation theory, came to be particularly
tied to the misuse of public offi ce
for private gains.17 Any checks against
corruption would, then, logically mean
checks against the government itself
which was now largely viewed through
the lens of corruption. This spectre of
corruption became a familiar theme that
was often played out in the context of
the Third World thought to be in particular
need of western style rational
modernisation and development to overcome
the culture of corruption. The anticorruption
campaigns, thus, were initiated
in harmony with the push for structural
reforms in developing countries – more
free market equalled less corruption.
In the early 1980s, coinciding with the
thrust towards structural reforms, the
global institutions such as the World
Bank and IMF began turning their focus
on the “cancer of corruption”18 on the
 one hand, and greater collaboration
with civil society organisations (CSOs)
on the other.19 This was the moment
when one could witness the successful
co-option of the robust tradition of protest,
dissent and speaking truth to power
– by ordinary people against hegemons
– by powerful global institutions to
serve its own agendas. While corruption
was necessarily seen as endemic in the
nation states of the South,20 the CSOs
were encouraged and “empowered” as a
way to minimise the infl uence of the
corrupt and ineffi cient states.21 This focus
on indivi dual cooperation at societal
level outside the domain of government
was argued forcefully as “social capital”
– a cost-effective mode that successfully
limits the government and promotes
modern democracy – by neo-liberal
advocates such as Francis Fukuyama.22
The long-standing tradition of public
activism for public good was, thus, successfully
harnessed to the realisation of
neo-liberal ideals of small government.
Accor ding to World Bank’s estimates,
the CSO sector worldwide is currently
worth $1.3 trillion annually employing
about 40 million people, and channels
fi nancial assistance of about $20 billion
to the developing nations per year.23 The
CSOs are involved in up to 81% of the
Bank-funded projects with a presence in
over 100 nations around the world.
In a recent report published at the
height of the anti-corruption movement,
these seemingly disparate themes – of
corruption, civil society, popular protests
and liberalised markets – were joined
together to weave the narrative of moral
breakdown in the society and its cost to
the Indian economy. The report begins
by evoking the World Economic Forum’s
Global Competitiveness Index24 that
lists a number of freedoms necessary for
a nation’s economic competitiveness
(business freedom, trade freedom, fiscal
freedom) of which India particularly
suffers from the lack of the “freedom from
corruption” that could derail its projected
economic growth and may result in a
volatile and economic environment.25
Nearly one-third of the respondents
believed corruption to be particularly
detrimental to India’s growth poten tial,
while 93% agreed that “corruption
negatively impacts the capital market”.


The lowered levels of ethical values in
the society were no longer merely a
matter of individual immorality and
concern, they had a severe economic
cost for the nation especially its brand
image in the world. The issue of personal
and corporate corruption – evasion of
taxes, for instance – was explained away
in terms of tight regulation and high tax
rates that help produce corruption in
the society.

The successful harnessing of populist
indignation to a cause much favoured by
corporations and global financial institutions
– of free markets – is best illustrated
in the solutions offered to regulate
corruption. Here the provisions of the
people’s bill promoted by the civil societ y
are mirrored in those favoured by the
corporations.26 These include stringent
punishment, high penalties and zero
tolerance to corruption through the establishment
of fast track courts, and special
enforcement powers to the Lokayukta,
or Ombudsman’s offi ce. Remarkably, in
step with the neo-liberal thinking, the
state makes reappearance here in its
new recommended role as that of a strict
regulator of anti-corruption laws and
facilitator of suitable conditions for businesses
to operate in. In this vein, Chinese
state’s solutions to control corruption are
often quoted admirably by the business
community and these include high fi nes
and even imposition of death penalty.27


The Indian model, on the other hand,
with its democratic messiness is seen as
less than ideal for businesses to fl ourish
in. It is ironic that the neo-liberal language
of freedoms that is usually adopted
to advocate for free markets is rendered
speechless when it comes to corruption.
Not only does it look towards an
authoritarian state such as China for
inspiration, it also resurrects the much
despised state to provide legal framework
to control corruption.


Consensual Politics

While the anti-corruption protests have
been widely analysed, and at times even
celebrated, in terms of agonist politics in
a non-violent, democratic space, a closer
look at the movement, its motives, organisation
and opposition shows far
more consensual politics at play between
the government and the protestors than
is commonly believed.28 To begin with,
there is hardly any disagreement with
the central objective of the movement
which is to control and cleanse the public
life of corruption in India. The harmful
effects of corruption on the nation’s
brand image as well as its competitiveness
among businesses and investors
are well understood by the state as well
as the protestors. Though the plight of
the “common man” is the rallying cry
that mobilises diverse groups and interests
– the perception of oneself as victim
of corruption is universally shared
– under the sign of “the people”, it is the
goal of greater reforms and economic
freedoms that guides this politics of
consensus. The differences between the
government and the protestors are of a
more technical as well as tactical nature
concerning the specifi c details of the
regulatory bill and the time duration
within which the bill is expected to
be passed.

That the state is as eager to seize the
populist issue of corruption – and to be
seen as progressive on the economic
growth front – is clear from the ways in
which it responded to the anti-corruption
protests. The protestors were mostly
indulged, and if at all mildly rebuked, in
a manner that appears in stark contrast
to the usual conduct of the police authorities.

The police neither seriously
attempted to disperse the crowds nor
did it pose effective curtailments to contain
the protests. And when Anna Hazare
began his fast-unto-death the second
time around, no one tried to intervene in
order to put an end to his chosen form of
protest. This could not be more different
than the way in which the civil
rights activist from Manipur, Irom
Sharmila, has been dealt with by the
state. She has been on indefi nite hunger
strike for the past decade to protest
against the Armed Forces (Special Powers)
Act, 1958 (AFSPA) which gives exceptional
powers to the army to discipline
what are called the “disturbed areas”
of northeast India. The most striking
reminder of the sovereign state’s power
to intervene and disrupt are the leaked
images of Irom Sharmila being force-fed
through tubes in order to keep her alive.

Unlike Anna Hazare’s widely celebrated
movement, her cause is not universally
shared in the urban middle class electorate
as well as the ruling elite. If anything,
it is seen as a threat to India’s
territorial sovereignty which must be contained through all means.

 The anti-corruption movement has
brought in plain sight the unity between
what earlier appeared to be different
interests within the “new” reformed
India. The long-held ambition of India
becoming a global power – or what is
often believed to be the natural destiny
of a civilisational nation such as India –
is widely shared within the ruling elite
as well as the infl uential and prosperous
middle class. This ambition is contingent
to the economic growth rates
and the attendant global infl uence they
can purchase. It is upon this matrix that
the interests of the state, the middle
class and the corporations assemble in
complete harmony. And this is what
probably explains the contrasting outcomes
for the two non-violent, peaceful
and democratic protests led by a highly
successful Anna Hazare and by the
largely forgotten Irom Sharmila.