The Hindu Business Line : Wanted: A Budget that combats global recession

With the looming threat of global recession, the Finance Minister in the forthcoming Budget should make sure that the common man is not affected. He must be insulated from the vicissitudes of recession even at the risk of sacrificing growth.

The dark clouds of global recession are gathering. The Budget can do much to save us from this impending danger. Both direct and indirect taxes must be adjusted to meet this contingency.

The approach so far has been to reduce Customs duty to Asean levels in order to prod our industries to become globally competitive. The negative impact of such reduction was small and positive impact greater when the global economy was buoyant. There was a huge demand for our goods, especially T-shirts and skirts, in the rich countries.

Reduction in import duties could be borne in such a situation. For example, the reduction in import duty on American apples and almonds put pressure on apple-growers of Himachal and almond farmers of Kashmir. But this was compensated by the huge demand for knitwear and garments made in Bhiwadi and Tirupur.

The loss to the Himachal farmer was made up by the gains to Tamil Nadu textile workers. The total impact on the economy was nominal. Further gains were made from efficiency. Cheap imports forced our industrialists to improve their systems and that has provided long-term gains.

This happy equation fails in times of global recession. Foreign producers are now looking for markets to sell or dump their goods. A reduction in import duty in India will be hugely beneficial for them. They can make distress sales in India. This will create pressure on Indian producers.

But unlike in a situation of global buoyancy, this will not be compensated by increased exports of T-shirts and skirts. Thus Finance Minister should give up his pursuit of Asean levels of import duties. It is better to put down the sails of the boat when there is storm in the sea.

Raise import duties

In fact, the need is to increase import duties. The effort must be to retain India’s purchasing power. We must quite explicitly embrace protectionism, at least, temporarily.

The role of foreign trade in goods is less in our economy. Merchandise trade was only 29 per cent of our GDP in 2005 against 54 per cent for Indonesia, 64 per cent for China and 196 per cent for Malaysia. Even Pakistan at 37 per cent and Bangladesh at 39 per cent have higher dependence on foreign trade. This means that we are in a better position to weather the growth of protectionism globally. In fact we should lead this move!

The Finance Minister should make an ambitious scheme to provide export subsidies on labour-intensive goods. The common man will not be convinced that he has to suffer because of the sub-prime crisis in the US.

Our ability lies in making policies that insulate the common man from global recession even if the larger economy comes under stress. This requires allowing the rest of the economy to sink deeper in order to save the common man.

Employees of IT companies can withstand a reduction in their salaries. All it means is that they will buy a Nano instead of an Alto. But carpet weavers will lose their bread. Thus Finance Minister should provide export subsidies where livelihood of large number of workers is at stake.

Role of foreign capital

The role of foreign capital must be reassessed similarly. It is beneficial to attract global capital when the global economy is buoyant. It does not put negative pressure on our businesses because global economy continues to provide opportunities for them to invest and grow. Not so in times of recession. Lower export demand leads to export-oriented industries looking for sales in domestic area. That leads to fewer opportunities for new investments for domestic markets.

On the other hand, with the rate of profit under pressure in their home economies, multinational corporations may be keen to invest in India, which may be more stable than the rest. Thus the Finance Minister should go slow on FDI and promote domestic investment. This will certainly have some negative impact on the economy. Our industries may lose the drive to attain higher levels of efficiency. But the gains from such improvement have to be set off against the loss from grabbing of investment opportunities by FDI.

The incremental gains to efficiency from FDI may now be small. Our industries have mostly already attained global competitiveness. Just as increasing the number of teams in league matches from 16 to 32 does not have much influence on the finalists, similarly increasing the level of competition from FDI will not have much influence on the competitiveness of Indian businesses. It will only impose unnecessary cost of organising a larger number of league matches.

Effort must be made to export more domestic capital in order to reduce the chances of overproduction and recession in the domestic economy. More export of our capital means less domestic investment and less domestic production and, therefore, less addition to unsold goods.

The Finance Minister must remember that domestic industrialists vote and also influence the vote but not FDI. The following policies may be considered to attain this objective.

One, a capital subsidy scheme for outward FDI can be made. Two, entry tax can be imposed on inward FDI.

Three, high rates of corporate taxes on MNCs may be maintained. Four, clause on free movement of capital may be removed from Free Trade Agreements. These steps will help us face global recession with ease and comfort.

(The author, a freelance writer, can be contacted at bharatj@sancharnet.in)