JULY/AUGUST 1995 · VOLUME 16 · NUMBERS 7 & 8
I N D I A : O P E N F O R B U S I N E S S
JULY/AUGUST 1995 · VOLUME 16 · NUMBERS 7 & 8
I N D I A : O P E N F O R B U S I N E S S
New Delhi - At the end of four years of neo-liberal economic "reform" under the tutelage of the International Monetary Fund (IMF) and the World Bank, there is a wide and growing chasm between elite and policymakers' perceptions of the Indian economy on the one hand, and the common people's view on the other.
For the elite, the past four years are the beginning of a new era of globalization and consumerism marked by the triumphant return of Coca-Cola, the entry of Baskin-Robbins ice cream, Kellogg's cereals, Kentucky Fried Chicken, Ray-Ban glasses and brand-name jeans, sustained by an unprecedented boom in executive compensation and a new credit card cult.
For the mass of the population, the four years under Prime Minister Narasimha Rao and Finance Minister Manmohan Singh have meant high inflation, costlier food, rising unemployment, worsening poverty and growing destitution.
Nothing illustrates this chasm as clearly as the controversy over the U.S. multinational Enron. While the elites are claiming that there is growing consensus across the social and political spectrum on India's post-1991 New Economic Policy (NEP), a symbol of that policy, a power purchase agreement with Houston, Texas-based Enron, is coming apart. The government elevated the deal - under which the western state of Maharashtra would buy power at a rate considered extravagantly high by power experts - to the status of a litmus test of the NEP's success and of foreign investor confidence in India.
"We have never seen so many powerful politicians and business interests making such a strong pitch for a single commercial deal," says Prabir Purkayastha, an engineering consultant. Finance Minister Manmohan Singh, India's Power Minister N.K.P. Salve, former Maharashtra Chief Minister Sharad Pawar and ruling Congress Party politicians lobbied energetically for the deal. In late June 1995, the IMF, the World Bank and the Organization of Economic Cooperation and Development let the chief executive of Enron Development Corporation, Rebecca Mark, address the country's principal donors and creditors at a meeting of the India Development Forum in Paris. A statement from the office of U.S. Energy Secretary Hazel O'Leary warned that dire consequences would befall India if the agreement is cancelled.
The Maharashtra government, pressured by popular opposition and criticism from economists, energy planners and environmentalists, appears set to scrap the Enron agreement as illegal, inappropriate and outrageously expensive. With anti-Enron demonstrations erupting all over Maharashtra, a Maharashtra cabinet subcommittee is expected to recommend that the deal be canceled or substantially reorganized.
"Enron is only the first of the big battles we are likely to witness," says Achin Vanaik, a political scientist, and a fellow of the Nehru Memorial Museum and Library in New Delhi. "There is a growing and continuous conflict between NEP supporters and the people who feel the 'reforms' run against their interests, indeed are a disaster. NEP has produced very little growth, but a great deal of inequality."
At the end of four years, the Indian economy is still growing at an annual rate of between 5 and 5.5 percent, trailing the pre-NEP rate of more than 8 percent. The new economy also shows greater vulnerabilities: it is $24 billion deeper in external debt, and more dependent on aid and investment package bailouts.
"Stability" for whom?
Manmohan Singh pushed through severe economic measures to cope with the short-term crisis of mid-1991, when India's foreign exchange reserves dipped to a level where they could barely pay for three weeks' worth of imports.
"There were two aspects to Manmohan Singh's strategy of July 1991: macro-economic stabilization and neo-liberal, pro-market structural adjustment," says Deepak Nayyar, former chief economic adviser to the government. "Of these, stabilization was clearly the more important. This has to do with reining in the government's fiscal deficit, controlling inflation, raising the level of savings and investment and stabilizing the balance of payments. It is only on balance of payments (which went temporarily haywire in 1990-91) that there has been some improvement. On the whole, the stabilization has been of very poor quality indeed."
Annual inflation has hovered above 10 percent. The government's fiscal deficit, which averaged approximately 6 percent of gross domestic product (GDP) prior to 1991, is still running at 6 to 7 percent, down from the 1991 peak of 8.2 percent. The savings rate has dropped from 24 percent to barely 20 percent, while industrial investment has produced very little new growth. Capital goods output is still below the 1991 level. Although the overall manufacturing growth rate has picked up from 2 percent to as high as 8 percent, it is still below the rate of the 1980s.
"Some of the structural causes that lay beneath the crisis of 1991 remain unaddressed," says Nayyar. "We still have not moved away from the narrow, elite-consumption-led, import- and energy-intensive growth path that led to the crisis in the first place."
Despite seven good monsoon seasons in a row, virtually unprecedented in recent history, agricultural production has been sluggish. Daily per capita food grain consumption has fallen from 510 grams to 465 grams. The consumption of pulses - the main source of protein for the poor - has fallen more than 10 percent over the past five years. Manmohan Singh has pushed the price of subsidized basic foods in the public distribution system (PDS) up to market levels, resulting in an 85 percent price increase in the past four years.
"This is a particularly harmful trend," says Prabhat Patnaik, professor of economics at Jawaharlal Nehru University. "Inflation always works to the disadvantage of the poor in India, who have fixed incomes. It is inequality-enhancing. But Singh's conscious policy of jacking up PDS prices and thus destroying one of the few mechanisms that could protect some of the poor, partially, against inflation has been doubly inequality-enhancing."
What this means for India's 380 million officially recognized poor is spending more money to buy less food, reducing caloric intake and approaching starvation in many cases. This food reduction has been accompanied by cruel cuts in already meager spending on shelter, health and clothing. India's official statistics lag behind reality, but the available numbers suggest that the official poverty rate rose from 38 percent in 1989 and 1990 to 41 percent in 1991 and 1992.
The official computation of poverty is based on caloric intake of 2,400 per person per day in the rural areas and 2,100 in the urban areas. It involves assumptions about income, spending, prices and quantities of food, based on aggregate data for all of India. Eminent economists have argued that these data do not accurately depict the Indian countryside. Nilakantha Rath, coauthor of a pioneering study of poverty, estimates that disaggregated numbers would show that the true poverty ratio for rural India would be as high as 60 percent.
Quashing competition
If the government's macro-economic mismanagement has hurt the poor, its structural adjustments policies have had similar effects. The dismantling of licensing and investment controls and the lifting of barriers to foreign capital have not encouraged competition or greater efficiency and productivity. Instead, businesses have taken advantage of the new permissive atmosphere to form cartels and corner markets.
In the soap and cosmetics industry, for instance, two of the biggest producers decided competition was not for them. Hindustan Lever Ltd., a subsidiary of Unilever, and Tata Oil Mills Co., belonging to the House of Tatas, India's second-largest conglomerate, have merged. So have Procter and Gamble India and a division of Godrej Soaps, one of India's top five toiletries industries.
Such mergers embarrass even Michael Porter, the Harvard Business School management guru, who has denounced them as anti-competitive. Porter has been equally critical of the government's approval of a request from Parle, India's biggest soft drinks manufacturer before Pepsico entered the country, to sell its brands to Coca Cola. What critics denounce as cartelization, however, Indian policymakers tout as a healthy index of globalization and mature corporate competition.
The government condemns government
Anti-competitive behavior also has taken its toll on public sector companies such as Air India (AI), the country's government-run international airline. AI has been subject to foreign cartel pressure, and the airline's market share in the country's international traffic is now down to 16 percent, way below Lufthansa and British Airways. Baldev Raj Nayar of McGill University, in Montreal, Canada, has just completed a study of aviation in India that finds that the government has discriminated against Air India in favor of foreign airlines. Similarly, the government could have rationally regulated domestic aviation while reforming Indian Airlines (IA), the domestic public sector carrier known for its poor service, and dismantling its monopoly. Instead, the government allowed fly-by-night operators to come in, form a cartel, grab the most profitable routes from IA and indulge in predatory pricing.
Prejudice against the public sector is widespread among India's policymakers, even though the Indian public sector has a record that is consistent with the private sector's. "The public sector has really become the favorite whipping boy of the elite," says K. Ashok Rao, president of the biggest public sector officers' and engineers' union. "There is certainly a case for public sector reform through making managements of public industrial undertakings more autonomous of bureaucrats," concedes Rao. "But what the government is doing is selling large chunks of public sector equity to foreign and domestic banks and all manner of investors, wholesale � And it is selling them cheap."
The result is an undreamt of business bonanza. A report of the comptroller and auditor general of India found that the government undersold the stock of several public sector firms by as much as $1 billion over a two-year period. In some cases, such as the Steel Authority of India Ltd., a highly profitable and technologically sound company that competitively exports steel to First World markets, the government shares were sold at one-third to one-seventh of their market value.
This revenue has been used not to strengthen public enterprise but to finance the growing federal deficit, now running at an unprecedented level of 3.4 percent of GDP. "This is just one index of the double standards employed by our policymakers who, after the current fashion, talk glibly about efficiency and a lean government," says Nayar. "The truth is that the government is anything but lean and has very little control over its own finances."
In 1991 and 1992, when Manmohan Singh savagely cut real spending on health, education and social service programs by between 20 and 80 percent, he added 45,000 new jobs to the central government's payroll. In 1995, the number of jobs in the central government is expected to increase by 67,000. The government has also withdrawn considerable support for India's public research and development (R&D) laboratories, a network of more than 80 institutions, some of which have earned international reputations. Importing technology to replace homegrown varieties will undermine an indigenous R&D effort that once allowed Indian industries to pursue a relatively autonomous development path.
In a major reversal two years ago, New Delhi capitulated to Northern pressure and altered India's patent protection system that encouraged the development of energy-saving, cost-efficient processes for pharmaceutical and chemical production. As the government moves to implement the intellectual property agreement of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), it is proposing new patent rules which will give greater protection to multinational corporate patent holders, further eroding India's comparative advantage.
Groveling for pennies
As Indian industry is refashioned in the interests of global capital, the government has become desperate to attract foreign investment. It has spent more energy courting multinational capital than on streamlining its finances, or promoting the small industries, farms or artisanal workshops that employ 500 million people. Nonetheless, India has only drawn a total of $2.5 billion in foreign investment since 1991. This amount accounts for about two percent of aggregate investment in the economy. This year, the foreign investment inflow is expected to be on the order of $1 billion - a third of the level flowing into Vietnam and less than 3 percent of what China attracts each year.
Except energy sector investments, the quality of investment - mainly into industries such as food processing, cosmetics and clothing - is poor and supports few dynamic spin-off industries. The energy sector, however, has its own problems. India is offering oil and gas fields that its own Oil and Natural Gas Commission has discovered to multinational energy companies to exploit.
As Indian industry has weakened, approximately 200,000 workers have lost their jobs, some 125,000 workers in the industrial portion of the public sector alone. In response to these heavy structural adjustment costs, the government promised a comprehensive program to build a "safety net." The government set up a World Bank-financed National Renewal Fund (NRF), to retrain workers and to create alternative employment and develop new technologies. But the NRF is no more than an inefficient means of financing voluntary retirement schemes for relatively small numbers of workers. A study by the Maniben Kara Institute of Labor Studies in Bombay has found that only half of the workers laid off under the NRF program find new employment. The others simply join the ranks of the 20 million to 25 million people who are chronically unemployed.
Singh has not keep his promises to help the rural unemployed. He boasts that spending on special employment schemes has doubled in three years. But federal spending on the social sector has remained almost stagnant at about 1.5 percent of GDP.
Unintended consequences
Structural adjustment has also had regionally destabilizing and harmful environmental effects. Since major investment decisions have been left to the market, and the market is a regional cherry picker, India's poorer states have been starved of investment. A handful of states like Maharashstra, Gujarat, Karnataka and Delhi account for the bulk of all new investment, while the other regions stagnate. "This growing dualism will tend to sharpen ethnic, regional and linguistic conflict," predicts Achin Vanaik. "This can only add to heightened social and rich-poor tensions in this deeply hierarchical and increasingly unequal society."
NEP's environmental impacts are at least as threatening. In the name of liberalization, Singh abolished regulatory licensing in all but 18 industry groups. Even where licensing has been retained, the government lacks the data with which to monitor proposals for occupational health and environmental safety. The principal agency gathering such data, the Directorate General of Technical Development, has been abolished. In practice, almost anyone can set up any industry anywhere, without the need for a credible environmental impact audit.
India is quickly turning into a major dumping ground for the North's wastes. According to Greenpeace, India imported 5 million kilograms of metal waste and 2.85 million kilograms of metal scrap from Australia in the first half of 1994. Last year, Australia exported 346,000 kilograms of used lead-acid batteries to India, almost three times what it exported in 1992. India imported 74,000 kilograms of plastic waste in 1993, almost 25 times the amount imported in 1990.
India receives huge quantities of toxic waste from the United States, Canada, Germany and Britain. In 1993 alone, the United States shipped more than 7.8 million kilograms of plastic waste, 26.8 million kilograms of tin waste, 917,000 million kilograms of lead ash and 14,500 kilograms of lead-acid batteries to India.
From January to May 1993, Britain shipped India 250,000 kilograms of ash, 2.5 million kilograms of copper waste and 500,000 kilograms of lead waste, plus 1.1 million kilograms of other metal wastes. Canada contributed 960,000 kilograms of copper waste, a million kilograms of lead waste and 106 million kilograms of copper waste in 1992.
U.S. exports of scrap metal to India weighed 1.7 billion kilograms in 1990. A year earlier, Germany sent India 2 million tons of metal wastes.
The waste imports symbolize what globalization and liberalization really mean to India. India has compromised its sovereignty, accepted World Bank-International Monetary Fund prescriptions and blindly followed free-market policies, with no critical evaluation of their consequences. In return, it has received paltry amounts of foreign investment along with plenty of debt and more poverty, destitution and toxic waste.
Kentucky Fried Chicken and Pizza Hut have plans to start 30 outlets each in big Indian cities this year. The foreign investment promotion board has authorized McDonald's to open 60 outlets, beginning in 1996.
The companies' entrance comes on the heels of Cadbury-Schweppes and Kellogg's opening in India in 1995 and poses uncertain threats to the country's distinct culture.
The latest multinational corporate incursion into the country has generated a storm of protest from members of parliament, including some from the ruling Congress Party. The fast-food companies are seen as symbols of Western culture - signaling that India is "open for business." Echoing former Indian Environment Minister Maneka Gandhi's campaign against meat-based junk foods, the lawmakers have complained that fast-food corporations sell products that only the rich can afford. They also have expressed anxiety about the effect of the companies' on the national balance of payments.
"In a country where ordinary people cannot get one square meal a day, we are going to invite multinationals for preparing fast foods which only the affluent can afford," said one member of parliament who formally raised the issue in a house discussion in May 1995.
A group of 50 lawmakers submitted a three-page letter to the Prime Minister critical of the government's opening to the fast-food peddling multinationals.
"We the undersigned condemn the actions of the union government to have buckled under the pressure of Pepsi foods and McDonald's, the U.S. junk food giants," says the letter. Pepsi is the owner of Pizza Hut and Kentucky Fried Chicken.
"The Pepsi-McDonald's invasion," the letter adds, "comes close on the heels of unchecked entry by multinational corporations into the banking system, stock markets, telecom services, the markets for alcoholic and non-alcoholic beverages, snack foods, etc."
An early market entree was by Cadbury-Schweppes, which found it easy to open shop in India, and Kellogg's, which launched its breakfast cereals in Bombay with a bang earlier this year. These companies have already begun to reshape the Indian consumer goods market, a marketing coup that has drawn an increasing amount of criticism.
Cadbury-Schweppes is the latest multinational consumer entrant to India's estimated $4.2 billion soft drinks market. Local bottlers Pure and Parle once dominated the market, but they have since been swamped by Coca-Cola and Pepsi. Cadbury-Schweppes has now launched Crush, the orange drink, and Canada Dry ginger ale and will soon introduce Schweppes soda and tonic water.
The Kellogg's entry into the breakfast foods market has spurred the two main local rivals into seeking foreign know-how and diversifying their products. According to news reports, Mohan Meakins, the market leader in corn flakes, is seeking collaboration with a British breakfast food company.
Kellogg's is trying to "change the breakfast habit of Indians," as it says in its spots in the print and electronic media. It is making cereals from three types of grains - corn, wheat and basmati rice. The company is pitching its product as fat-free to the growing numbers of weight-watching urban Indians who often skip breakfast.
It is also targeting children, using television, billboard and print advertisements to persuade urban middle-class children to consume its crunchy cereals.
Television, especially the Hong Kong-based Star TV, has been a powerful tool with which the consumer goods industry has hooked children. One-fourth of Indians are under 14 years old and account for one-fifth of India's $1.8 billion dollar annual consumer products market, which is growing at a 26 percent clip.
Mira Shiva, of the Voluntary Health Association of India (VHAI), worries about the social and cultural implications of Indians switching over to Western breakfast foods. "The added values in these new foods is not nutritive, but economically-added value which will only bring benefit to the multinational corporations. The people consuming these will only be further denutrified," says Shiva.
The modern breakfast foods compete with traditional Indian breakfasts The khakra of Gujarat, the sattoo of north India and the idlis of southern India are all much cheaper and more nutritious. The first two have the added advantage of not spoiling for days and are carried on long trips by the villagers.
Although the government touts all new foreign investment as a boost for the economy, some economists question the wisdom of promoting investments by multinational consumer goods corporations in India. "They are not going to be making consumer products for the common man. Moreover, if they produce goods which are already being produced by local companies, this raises the question of net employment generated," says professor Arun Kumar of the Center for Economic Studies and Planning of the New Delhi-based Jawaharlal Nehru University. Most of the new companies will be capital intensive and may drive local competitors, which have more workers, out of business.
In assessing the technological contribution of multinational investments, one must see what kind of technology they are bringing in, says Kumar. "Are they coming in critical areas where technology is desperately needed? This is not really the case."
In most cases, the country could have done without the kind of modern technologies provided by the multinational consumer goods companies, he says. Pepsi and Coca-Cola displacing local manufacturers like Parle and Pure drinks is hardly a significant technological leap for India.
Finally, the repatriation of profits from the multinational ventures may harm the economy. "The drain from the economy could increase unless they start exporting in a big way," Kumar says.
To address the repatriation issues, Kellogg's was allowed into India on the condition that it export part of its locally-produced cereals to neighboring Pakistan, Nepal, Bangladesh and Sri Lanka, countries presently supplied by Kellogg's Australia.
Kumar is skeptical that those export conditions will be met. "In today's environment, when obligations to export are not being imposed," he says, "it is very unlikely that the multinationals are going to use India as a base for exports."
The Pepsi case suggests that Kumar's skepticism may be justified.
When Pepsi first came to India in 1987 - four years before India embraced liberal economic policies - the company promised to create 75,000 new jobs, both directly and indirectly. It also pledged to export part of its production, introduce new tomato varieties and set up a farm research center in India. A recent study by the New Delhi-based Public Interest Research Group (PIRG) found that these promises have gone unfulfilled. Only 963 jobs were created in the Pepsi plant and the company met its export obligations by exporting products made by other companies and counting these exports as part of its export quotas, says PIRG's Kavaljit Singh.
Pepsico India spokesperson Deepak Jolly dismisses the charges as baseless. "We have created 30,000 new jobs and have set an export target of [$64 million] this year," he says. In addition to the 2,000 people directly employed by Pepsico, Pepsico counts people hired by its bottlers, distributors and carrying and forwarding agents as its own employees, Jolly explains. The soft drink giant has 16 bottling plants and 11 franchises in India.
Pepsi is making India a sourcing base for a number of items, says Jolly. Pepsi India is already supplying soft drink glass bottles to Vietnam and the Middle East and concentrate to Russia. About $19 million worth of glass bottles have been sent to Vietnam.
Pepsico India also exports tomato paste, basmati rice and works with other Indian exporters to sell their produce overseas. Under a recent joint venture with an Indian company in Madras, Pepsico is making PET (polyethylene terephthalate) resin for export and plans to sell $32 million worth of the material annually.
The company says it has invested $161 million in India and has plans to invest another $97 million.
- Mahesh Uniyal