IS THE US IN A STATE OF FEAR?

?What is good for General Motors is good for the United States? is an adage that long survived the firm?s legendary former Chairman Alfred Sloan. Of late it is showing signs of decay. And maybe with the collapse of some of its venerable names in business, the United States has fallen into a state of fear. Will some old-world ideals like freedom and liberty vanish too? People feel the US has its ways of hitting back even at friends. Remember how President Johnson prohibited the export of wheat to India because the government here did not come out unequivocally in support of the US when it escalated its offensive in Vietnam? Delving into history is difficult to resist here. The day US President Barack Obama announced that American companies that ship jobs abroad would lose their tax benefits, comparisons with the past became a natural thing. Those who know the history of the deindustrialisation of Bengal will be able to relate to this. The muslin of Dhaka faced import duties in England, pressed for by legislators there who saw it as a threat to their domestic textile industry. But when Dhaka muslin itself went into decline because it could no longer withstand the competition from machine-made goods from England, made possible because of the Industrial Revolution there, it was again the parliamentarians of that country who began to propound the virtues of free trade. India became flooded with products from Manchester.

How is the Indian side to react to the US moves? Some IT professionals, anguished as they already are with the US President?s steps, see this as another of the initiatives that America has taken against outsourcing. Bigger firms like Wipro, TCS, and Infosys may feel that this will not impact their business but US companies will definitely feel that their expansion plans have been cramped. One newspaper very well listed out the points as to what the consequences of this will be. Many top US firms, including Citigroup, JP Morgan and GE, derive most of their revenue from overseas. They will find such income would be taxable. Firms outsource jobs to India to gain from low cost because back-office work can be done at half the rates here. One point, however, remains. That is how the money for investment is routed. Another paper has said if US firms can claim set-off on expenses that they incur while investing overseas and if the investment is done through tax havens, they get away with paying no tax at all and then there is a case to be addressed here. The paper commented editorially: ?The truth is no Indian tech or BPO companies are going to be affected by this?The situation is different for American companies like IBM and Accenture.?

Tax havens here do pose a problem. According to a recent report in a magazine, the US authorities have forced UBS, the largest bank in Switzerland, to disclose the names of 250 people who have evaded taxes of 300 million dollars by opening offshore accounts. The numbers here are not very big. But the issue is not of numbers but of the modus operandi by which money is funnelled out of a country. It is this problem perhaps that President Obama is attemting to solve. And since we are told that a huge amount is taken out of the country and put in the Swiss bank accounts, part of the US problem is here too. Over four years, 2002-06, annually USD 22-27 dollar was taken out of the country, the magazine has reported. No longer this has become an election issue and some link between what the US is trying to do and what Mr LK Advani is saying will be drawn.

Stimulus packages are proving to be not stimulating enough. From the trade figures released last week by the Commerce and Industry Ministry, it is evident that there is no respite from the decline in exports that started in October last year. Exports went down over 33 per cent in March this year over the same month in the previous fiscal in dollar terms, though the fall in rupee terms was around 15 per cent, underscoring the devaluation of the rupee. The Government agencies are not being able to hold out much hope, either, principally because of the recession in India?s main markets of the US and European Union. Quick estimates have shown that exports in April also have fallen in the same region. Imports are no cause for comfort either, as they too were down in the region of 35 per cent, according to news reports. This might have been good news in the days when official policy stressed import substitution, but no longer. The Indian economy is sufficiently integrated with the world economy, and weak imports do point to small demand at home. Plus, often imported products are raw material for exports and there is a one-on-one correspondence between the two.

The main worry that awaits the new government when it takes office is unemployment because most of India?s exports a la gems and jewellery and textiles are labour-intensive in nature. And this is what L K Advani had stressed in his meeting with industrialists. The Budget is something that all concerned are looking forward to. Green shoots seem to be missing in another sphere also. India?s industrial production dipped by 2.3 per cent in March and the shadow of weak exports loomed large. Domestic demand is also said to have been low. Data for the whole year showed just 2.4 per cent growth, whereas it was 8.5 per cent in the previous fiscal. Obviously here the imbalance between the first half of the year and the second was large. The saving grace for the month of March was power, which grew 6.3 per cent, while manufacturing continued its poor run by contracting 3.3 per cent. Bad going indeed! Despite virtually every commentator worth the name harping on infrastructure, the highway development programme seems to be going nowhere. However, the decision by the government to raise the level of viability gap funding, which are grants to promoters, may see some more activity on the highway, which is in a moribund state now. It is hoped that government subsidy will introduce competition because many road projects in recent times have seen just one bidder and some no bidder at all. Not much of the 70,000 km of the highways has been completed, and the present UPA dispensation has to take a fair measure of the blame for this.

The recent rally in the markets is said to be because of the general feeling that the Bharatiya Janata Party (BJP) may come back to power. Though one knows that brokers have a ready explanation for everything on the horizon, the BJP cannot feel flattered at this because it might look a hint at the ?India Shining? campaign, which party insiders privately admitted was responsible for its hughly unexpected removal from power in 2004. Particularly so, when this was reported at a time when the last phase of the elections still remained.

Our stock markets react more strongly to what happens in the United States than to the index of industrial production numbers. With India and some other South East Asian countries so strongly hinged to the US and the European Union, one wonders what our elections are going to achieve. Globalisation was a good thing, we were told. State intervention was frowned upon. But with current postures that the United States is now striking, one commentator asked a tongue in cheek question: Is it now going back to the days of the Monroe Doctrine of the 1820s, which means withdrawal from world affairs?

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