How to face China?

The Government is asking the people of the country to boycott Chinese goods; and simultaneously sitting like a lame duck on allowing imports from China. This will not work.

We have committed that we will not impose an average import duty of more than 48.5 per cent in the World Trade Organization. The actual average import duty imposed by us today is only 13.8 percent.

We can triple the import duties within the rules of WTO. But we are not doing this because we want to make available cheap goods to our middle-class voters who decide the thinking of the country.

Of course, an action taken specifically against China will in any case be self-defeating because the same goods will be re-routed through other countries.

The way to prevent imports from China is to increase import duties on all imports.

The matter is connected with foreign investment because trade and investment are two legs of globalisation. We have reportedly received US Dollars 49 billion as Foreign Direct Investment (FDI) last year. A large part of this money is our own capital that has been sent abroad by Indians and brought back in the form of FDI.

Let us say, you have earned Rs 5 crore in India. You are required to pay income tax of Rs 1.25 crore on this. You send this money to Mauritius or other tax haven by hawala and convert it into "white" there because those countries have a zero rate of income tax.

Then you bring this money back to India as "foreign" money. In this way you can save the tax of Rs 1.25 crore less nominal expenditures incurred in the round-tripping.

The second path of our capital going abroad is through transfer pricing by multi-national corporations (MNCs). Say, the London-based branch of an MNC sold some goods to its own Mumbai-based branch. The Mumbai Branch paid at the rate of Rs 12 to the London Branch against the market price of Rs 10.

In this way Rs 2 was transferred "legally" from India to the UK. The international watchdog Global Financial Integrity has estimated that USD 9.8 billion has been "illegally" remitted from India every year through this route.

The third pathway is our own outward FDI. The Government has allowed—even encouraged—Indian businesspersons to invest abroad. An amount of USD 11.3 billion was taken out of India for such outward FDI in the last year.

The true inflow of FDI in India is certainly much less than the claimed USD 49 billion if we take these hidden outflows into account. The true inward FDI, in my assessment, is actually hugely negative—and that explains our low and falling rates of growth.

Even more serious are the indications that the outflow of FDI depresses domestic investment. A study done by Al-Sadiq for the International Monetary Fund estimated the relationship between outward FDI and domestic investment for 121 developing countries between 1991 and 2010.

It found that a one percent increase in outward FDI was accompanied with a whopping 29 percent decline in domestic investment. The outward remittances through hawala, transfer pricing and outward FDI have a huge negative impact on our economy.

Question is this: When our economy is weak, when our growth rate is declining, when our capital is fleeing abroad; when our industries are closing down; when our youth are unemployed; then why we do not increase the import duties and prevent our capital from fleeing abroad as we were doing before 1991? I believe there are two reasons. First reason is that our big businesspersons like free movement of capital.

The Tatas have acquired Jaguar and Mittals have acquired Arcelor because of such freedom. These businesspersons drive the Government. These same persons spread the falsehood in the media that we are getting huge amounts of FDI in order to cover up the fact that huge outward flow of our capital is taking place.

The second reason is that our bureaucrats get jobs and fat consultancies from MNCs and the World Bank after their retirement. Their children get the same jobs right now. A former Power Secretary of the Government of India very proudly informed me around 2010 that he was working as a consultant for the World Bank at a rate of Rs 40,000 per hour.

The bureaucrats need to develop favourable relationships with these organisations to keep the pathways for their future benefits open. They implement policies in favour of free trade and free flow of capital for this purpose even though they are destructive for India.

So there is doublespeak. On the one hand, the Government is saying that we will open our economy for cheap imports; and we will allow our capital to flee abroad. On the other hand, the same Government is pleading with the common man not to buy goods imported from China.

This is like the head of the family placing cigarettes on every table in the house along with a huge billboard saying "Smoking is harmful for your health." The Government is making the country weak and asking the people to make it strong!

If the Government actually wants to save India from Chinese imports, then it will itself have to implement such economic policies which protect India from China.

There is no possibility of our separating from China unless we disconnect from the world economy. And we will not disconnect from the world economy because of the self-interests of our own homegrown big businesses and bureaucrats. Thus we should not be surprised that we are strangulated by China in the times to come.

In the end I would like to say that the present anger against China for allegedly having manufactured and spread the Corona Virus will not hold. Recall there took place a huge disaster in Kedarnath in 2013. Thousands lost their lives.

A Committee established on the orders of the Supreme Court held that the hydropower projects contributed much to the damage.

Today, however, the dominant narrative created by the hydropower companies and the Secretaries to the Government is that hydropower actually saved the people from the floods.

We shall similarly find that soon the narrative will be changed. It will be said, perhaps, that the Corona pandemic was a blessing because it led to spread of internet literacy, etc.

(The writer is formerly Professor of Economics at IIM, Bengaluru)