Going to the IMF | Frontline

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ECONOMY

Published: January 23, 2015 12:30 IST | Updated: January 23, 2015 15:23 IST

Going to the IMF

VENKATESH ATHREYA

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DR Ashok Mitra, former Finance Minister of West Bengal, has worked and contributed on a variety of key economic issues such as the
share of wages in national income, terms of trade between industry and agriculture, and Centre-State relations. An eminent public
figure, Dr Mitra has written extensively on art, literature and politics. In the wake of the expose of the Government of Indias deal with
the International Monetary Fund (IMF) in 1981 by The Hindus then Washington Correspondent, N. Ram, Dr Mitra brought together
and edited a publication entitled The IMF Loan: Facts and Issues, which considerably raised the level of the debate on the issues at
that time. Dr Venkatesh Athreya interviewed the distinguished economist at his home in Calcutta on June 27 for Frontline.
Dr Mitra, the Finance Minister made a statement the other day that we have no option but to go to the IMF for the
loanand he has indicated the nature of the economic crisis. How do you read the current economic situation?
I cannot at all accept the proposition that there is no alternative to going to the Fund. One must have a look at the facts as they are and
the possibilities as they might be made to unfold themselves.
For example, as I read the balance of payments, we are currently running a deficit of the order of Rs.13,000 crore to Rs.14,000 crore
annually. There is little reason why, if the will is there in the government and among the people, this gap cannot be made to
disappear. Let me do some very crude, simple arithmetic. We, one of the poorest nations around the world, are importing defence
equipment to the extent of Rs.8,000 crore annually. Cant we make a saving of around Rs.4,000 crore here?
There are 1,500-odd wells of the Bombay High which are not being utilised for the past several years and our overall output of crude
has stayed stuck at 30 million tonnes annually. Has there been any serious attempt at all to raise the output here? We are flaring away
roughly Rs.20 crore worth of natural gas every day. So one can go down the list and ask oneself, Is there any scope for rearranging the
priorities in our science and technological research? A little less of expenditure on nuclear and space research might imply a saving of
anything around, say, Rs.700 crore to Rs.1,000 crore annually.
The sum total of all that I want to say is: let us do the arithmetic of our external accounting under the public glare. There has been too
much of hush-hush since 1984. There has been no accountability and the same set of politicians and civil servants who have been
responsible for pauperising the nation continue to hog the centre stage.
You mentioned the possibilities of reorienting S & T research and so on. The argument could be that these would
take some time to show their effect. The other thing is that there is also the fiscal deficit. The recourse to the loan, is
it only on account of the balance of payments? Is it also a kind of soft option in relation to the fiscal deficit?
No, I know the Fund-World Bank point of view, that the balance of payments malady is a reflection of the fiscal imbalance. And they
really embellish it by suggesting that because of a bulge in the expenditure accounts of the government, the government is forced to
give up its control over the internal cost structure which affects exports. On the other hand, the fact is the kind of prescriptions which
the Fund and the Bank are suggesting, namely, further liberalisation of imports combined with continual devaluation of the
rupeewhich is happening every fortnight or thereaboutswould mean that the pressure would always be there from the import side
for prices to go up.
I quite see the need for cutting down expenditure that can be cut. I would refer again to high defence spending. Certainly, certain types
of subsidies ought to go, but not subsidies for the poorer sections of society. Let me insert here a point about which I feel very strongly.
The country is in such a pass because of certain measures which were taken on behalf of the affluent classes. The disarray in the
balance of payments is partly on account of the kind of economic advice which pushed its way to the top. That you can forget the 90
per cent of the community and do everything to sustain the standard of living and incentives of the top 10 per cent! Which is why you
had these lavish imports, which is why you had this holiday for direct taxes, which is why you had these indefinite subsidies,
open-ended subsidies for the rich farmers. And look at the kind of boondoggle there has been under the umbrella of so-called export
entitlements.
There is scope therefore for economising on government expenditure, but here one has to be totally neutral between class interests! If
the government is single-minded in its devotion to serve the interests of only the upper classes, then obviously there is no alternative

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to going to the Fund and the Bank. That would be a class-based decision and essentially the short-run decision, and at the end of the
next five years you will find that we have really receded where we started from. Because... this is the point which I want to hammer
over and over again... that the IMF path offers no salvation because the IMF path really insists on open-ended liberalisation of our
external accounts whereas for the present, in the very short period, what is needed most is rigorous import control.
One question is whether we need a loan at all: you have already indicated that we dont. The second question is
whether the loan would at all help. Would recourse to the IMF at all solve any of the problems we face? Could you
elaborate on that, especially considering the climate that exists in the West vis-a-vis export efforts from the third
world and many other points that relate to that.
Certainly, your point is very well takenbecause the kind of receptivity to what we might try to export is dwindling every day. Look at
the kind of insolent threat which the American administration is holding out. What is the provocation? In 1989-90, we had a trade
surplus of $800 million vis-a-vis the United States. And they are not worried about their deficit of $80 billion vis-a-vis Japan! But they
want to specialise in a kind of nitpicking and this is because, you know, politically and economically, they think India is now ripe for
picking! This at least defines for us what the climate is. And the kind of tough stance which Western governments as a whole have
been adopting in the GATT negotiations would suggest that there is little scope for our being able to expand our exports very
significantly in the immediate future.
There is perhaps just one caveat that I might reluctantly enter. And that is that if we are willing to surrender our sovereignty over the
service sector of the country and allow the free entry of American multinational banks and insurance companies and such like, allow
the American tourist agencies to penetrate into the country, perhaps a little kindness might be shown to us by the Americans. But if, in
fact, you add up the plus and the minus developments, we would remain where we are.
Meanwhile, the multinationals might come in. There might be some marginal addition to foreign investment. By and large, this would
be counterbalanced by the fact that many of the industries that are already in situ within the country would go to the wall. Already
there is stagnation in employment in the private sector; there will now be a steep decline. Prices will continue to rise because the
Fund will insist that prices rise. This is what really makes me feel vastly amused: Rajiv Gandhis promise to bring down the prices of
certain selected commodities within a spell of 100 days even when the government under his thumb was seriously negotiating with the
Fundwhich was ordering, dictating that administered prices should be raised across the board and that the public distribution
system should be unshackled of subsidies and so on.
This seems an important aspect. You link the conditions that are likely to be brought in by the IMF loan to the
political crisis in India. We have a minority government and there is considerable political instability and
uncertainty. Given the developments of the 1980seconomic and politicalIndia is seen as ripe for picking, as you
put it. Do you also expect that the IMF negotiations might involve some hard bargaining over Super 301, over
intellectual property rights, over other things being discussed now in the Uruguay Round of negotiations...
These are issues for the political leadership of the Congress(I) to ponder over. Their existence is already shaky in terms of the votes
they command in the Lok Sabha. There is no question that, if there is a rash of price increases as a consequence of the loan they might
sign with the IMF, we might have other areas of explosionapart from the legacy of Kashmir and Punjab and Assam. That could burst
here and there. And this outburst might manifest itself in different forms as a consequence of decisions imposed by the Fund, but it
would have at its root the economic discontent of the vast masses of the people.
There are certain other points which we have referred to. For example, one insidious suggestion of the Fund is that the government
should not make a draft on household savings. The Fund would insist on treating the floatation of public loans as a variant of deficit
financingthat you keep off. That means the Fund wants these funds to be kept for exclusive tapping by private parties, including the
foreign multinationals which might come in.
In addition to that, certainly the Fund would insist that there should be a freeze on wages in agriculture and industry as well as in
the service sector. That there should be stringent anti-union laws, maybe that there should be a blanket ban on industrial disputes
and that kind of thing. These are things the implications of which the people in the Congress party have not given any thought to. But
what is much worse is that there are not enough people in the Congress party who are capable of engaging in such thoughts. This is a
great danger to the country.
In a sense, this situation takes us back to the 1960s where, again, we had a minority government for a short period.
1966-70 saw the first big move that multinational capital made; Bechtel tried to come in; there was devaluation
under pressure in 1966. Then in 1976, there was the Orville Freeman visit. In 1981, you were the first to articulate in
detail concerns over the high-conditionality IMF loan. In other words, there is this feeling of deja vu, but there is
also something distinctive about the present...
You see, in 1966 Mrs [Indira] Gandhi was hustled into a massive devaluation by Messrs Asoka Mehta, C. Subramaniam and others.
She had a very difficult time because all the things that were promised would happen in the economy, precisely the reverse of those
things happened! Prices skyrocketed, there was no improvement in the balance of payments and, on top of that, there was the
near-famine situation. In addition, there was the internal crisis in the Congress party which shoved Mrs Gandhi towards a slightly
leftward direction.
She was not an ideologue, but she was a first-rate political strategist who could sense that the climate in the country was such that
radical slogans would help her campaigns. And then there was the fortuitous factor, the Bangladesh war. Unfortunately, the victory in
the war went to her head. So she swung completely the other way. That was also the time when she started accepting money without
discrimination from the private sector and using the government agencies such as the State Trading Corporation for collecting political
funds.
Then, of course, the consequences were there which culminated in the Emergency. Once she came back, in 1980, some of us thought
she might have learnt, or at least remembered, the lessons of 1966. Obviously, she didnt. Perhaps because she thought that in the
aftermath of her triumphant return, her old enemies were vanquished for ever. In any case, meanwhile, her set of political advisers
had changed. That is, a new set had come up led by, for example, L.K. Jha who had utter contempt for the bulk of the Indian
community. This is broadly the emergence of elitist economic philosophy which pushed Mrs Gandhi to sign that hefty loan with the
Fund (in 1981). The kind of things which we had forecast would happen to the economy, all those things have happened to the
minutest footnote. Somebody can take off the shelf the booklet we published on behalf of the Government of West Bengal and read
through the paragraphs there. We knew where we were travelling!
Therefore, when my friend [Finance Minister] Manmohan Singh says that while they will go to the Fund, they will ensure that the
countrys sovereignty is not at all compromised, I can only smile. We heard about this in the past and, obviously, the present
government is not willing to learn any lesson from reading the annals of the past.
In the 1984-85 Budget, Pranab Mukherjee (now Deputy Chairman of the Planning Commission) said we were not
even taking this last instalment; where were all these critics who said we wouldnt come out of the debt trap and

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so on? He more or less got away with it. But over the 1980s, the chickens have come home to roost, in a way.
They did not take that tranche because by that time they were worried about the increasing pressures from the Fund. And at that
time, they were advised that rather than going to the Fund, they should borrow short-term from the international capital market
where no questions would be asked, although the rate of interest might be a little higher. And at that time, the credit rating was
comfortable, respectable.
Much worse was what happened in the summer and early autumn of 1989 when Rajiv Gandhi was worried that the elections might go
against him. The prices were rising round the country and he was desperately anxious to import foodgrains, sugar, edible oils... the
State Bank of India and agencies like the ONGC [Oil and Natural Gas Corporation] were ordered to borrow short term. And I am told
that during those six months, they borrowed to the extent of $4 billion at very high rates of interest!
So little of this is known to the public in a way.
The first thing the new Finance Minister ought to dosomething in regard to which the Opposition parties should pleadis that the
processes of the government must be opened up, made public.
Going back to the question you raised about a selective reduction of government expenditure and, in particular,
about a selective reduction of subsidies... could you elaborate on that point?
Now, for example, I would pick and choose... and even in the public distribution system, I would advise the Union Government to
study the Kerala pattern closely, where they make a distinction between income classes. In reality, the so-called food subsidy is a farm
subsidy. And, therefore, I would certainly like the government to examine the possibility of two sets of procurement prices for basic
foodgrains: a slightly more favoured price offer to smaller farmers and a tapering-off formula for the regime of upper-class farmers.
And then certainly, there is no reason why the fertilizer subsidy could not be exclusively confined to farmers with holdings of less than
five acres... that kind of thing.
Then, as I have already suggested, there should be an examination with a fine toothcomb of the rackets that are going on in the name
of export entitlements.
I would, come back to the governments contractual payments, in such areas as state trading, defence spending, including defence
production..., these are areas where there is huge scope for restraining the opera which the contractors are indulging in.
I suppose we cant do much about interest payments because they are committed; we cant do much about inherited
liabilities from the point of interest payments. But the other side could be government revenues; there is scope for
raising government revenues.
Certainly, I would say that this soft, kid-glove treatment of the upper classes... they have made the bulk of their money over the past
ten years from out of the government munificence. You see the bulge in the service sector, for example.... You must have a regime of
steep direct taxes. There is absolutely no reason why the total realisation from the corporate tax could not be doubled or trebled.
Where will they go, the corporations? In any case, this whole business of incentives being affected is bunkum... because for 90 per cent
of their funds, they come to the public financial institutions.
The counter-argument could be if you tax them high under income, since they have monopolistic power, wouldnt
they try to pass it on through pricesas with indirect taxes now?
Put some of them in the cooler for a couple of nights. You see, it all depends on the attitude of the government. It is a class question.
But all economics is a class question now. I was vastly amused to read an editorial in a newspaper today. Something to the effect that
politics should be kept out of economics. Politics is economics! There can be no politics without economics.
Printable version | Mar 18, 2015 7:59:38 PM | http://www.frontline.in/economy/going-to-the-imf/article6805278.ece
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