EDITORIALS

Captive of Hot Money
Given the power of hot money to steer the Indian economy, public policy has become its slave.

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he dramatic change in the overall balance of payments (BOP) from the first quarter (April-June) to the third quarter (October-December) of 2011-12, accompanied, as it was, by a deceleration of the growth of the real gross domestic product (GDP), suggests that policy tinkering is not yielding the desired effect. One might recall the rather amateurish meddling with policy mechanisms to revive the gush of net capital inflows – a hiking of the limits on foreign investment in government and corporate debt instruments, a freeing of interest rates on nonresident deposits, a more liberal definition of a “qualified foreign investor”, and now, on the anvil, further development of the bond markets to attract foreign institutional buyers. The sundry financial pundits in the commercial media keep complaining of a “policy paralysis”. And, of course, what a media storm in a teacup over the mere mention of a proposed retroactive change in the Income Tax Act to upturn the Supreme Court verdict on the Vodafone case. The government is now being dubbed immoral and even vindictive. Besides, of course, the media columnists of the institutionally-funded think tanks are crying hoarse about what will happen to India’s net international capital flows. But rather than jumping into the fray like these doyens to criticise the government, it might be better to take a quick look at the recent BOP data and try to discern patterns, if any. The current account deficit of the BOP has been widening from the first quarter ($15.801 billion) to the third quarter ($19.419 billion) of 2011-12 but with the surplus on the capital account falling from $22.253 billion to $7.988 billion, the overall balance (after taking account of errors and omissions) turned negative by $12.812 billion in the third quarter (October-December). The merchandise trade deficit has worsened quite significantly – it was $47.721 billion in October-December of 2011-12 compared to $31.522 billion in the corresponding period of 2010-11. (All comparisons hereafter are between the two corresponding quarters of 2011-12 and 2010-11.) And, exports of software services have not been buoyant enough ($16.123 billion vs $14.743 billion), though private transfers have done much better ($18.009 billion vs $14.081 billion). On the capital account, it is net portfolio investment that has fallen dramatically – in the third quarter of 2011-12 this was a mere $1.898 billion compared to $6.299 billion in the corresponding

period of 2010-11. Indeed, net foreign institutional investment in October-March was only $1.861 billion compared to $7.158 billion earlier, and, net commercial borrowings only $1.441 billion compared to $3.877 billion. Non-resident deposits have, however, done well, thanks to the greater opportunity NRIs have to arbitrage on higher interest rate differentials. Surely, the recent awful performance of the Indian economy on the BOP front is due to economic stagnation in the European Union, in Japan, as also the United States where growth is sluggish at best. The eurozone’s financial crisis deepened in the second half of last year, and with the sovereign debt crisis nowhere being resolved, global capital retreated from the emerging markets to go back to its safe haven – US treasuries. As far as India and other emerging economies are concerned, there is a pattern to such flows of hot money. Between 2003-04 and 2007-08, net capital flows far in excess of the current account deficit on the BOP brought about the “wealth effect”, the expansion of liquidity and, in turn, consumer credit, the Le Grande Bouffe (self-indulgent, elite consumption), and the release of “animal spirits” to boost private investment, leading to high growth until 2007-08. But net capital inflows turned quite abruptly into outflows with the outbreak of the financial crisis in September 2008. Nevertheless, with the first signs of an ebbing of the crisis and with easy monetary policy in the developed capitalist world, the emerging markets, including India, once again became favourites. There followed a repeat of the wealth effect, liquidity, booming consumer credit and so on, for high growth only to fall again with the eurozone’s crisis. The fate of the Indian economy has thus become a function of abrupt changes in the direction of net capital flows, and the Indian government, realising this pattern, does all it can to please the financial markets, for it is these (metaphorical) financial shopping centres that have the power to engineer booms and busts with the volatile inflows and outflows of capital. If the United Progressive Alliance-II government manages to extricate itself from the political jam of its making, it will do all it can to attract (foreign) hot money and retain it. This imperative overrides everything else. But policy tinkering of the kind that the financial pundits keep harping on is not the answer to the real economic problems of the Indian people. For now, however, the Indian economy is a prisoner of (foreign) hot money.

Fast Road to Disease
India’s fast food products must be subject to mandatory labelling.

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he role of fast or “junk” food with its concentration of fats, sugar and salt in the rapid multiplication of noncommunicable lifestyle diseases has been the subject of countless studies over the past few decades, especially in the

west. (A classic book from the United States with a title that says it all is Fast Food Nation.) Now, the Centre for Science and Environment (CSE), continuing with its pioneering examination of our air, water and
april 14, 2012 vol xlviI no 15
EPW Economic & Political Weekly

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