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Business Commentary/ Ashok Mitra

At the receiving end

One or two Central ministers have, cautiously, voiced their disquiet over the matter. Andhra Pradesh Chief Minister Nara Chandrababu Naidu has ceased to be deferential toward New Delhi and opened his own channel of communications with the World Bank. The response from the bank is equally enthusiastic; a couple of projects sponsored by the state government have been processed by the bank for long-term financing. As negotiations over these loans have gone on, the Union government has been relegated to the position of a mere bystander.

A technicality is involved here. According to the relevant Articles of the Constitution, foreign trade and foreign investment fall within the exclusive domain of the Centre. In case a state government intends to enter into negotiations with a foreign government or an international financial institution for contracting a loan -- or for any other purpose -- the legal interpretation till now has been that it can do so only with the prior concurrence of the Union government.

New Delhi is however hoist on its own petard ever since June 1991. With globalisation, each and everyone in the country, state governments not excluding, are free birds and have the prerogative of untrammelled access to external institutions and entities. A state government might well claim that, in the changed circumstances, it has the right to negotiate directly with the World Bank. It would base itself on the grammar of economic liberalism; the Constitution of India could rest in peace.

There has been yet another development. In the olden days, the World Bank used to insist upon a counter-guarantee from New Delhi whenever a project sponsored by a state government would come up for consideration. The states were then treated by the Centre as not much more than subordinate district outposts and, as a matter of rule, one-to-one tete a tetes between the bank and the representatives of a state administration were discouraged.

The bank took note of New Delhi's sensitivity. A procedural pattern evolved. The Centre would take the initiative to ask the state to submit to it projects for World Bank financing.

It had its eye on the main chance. Those were hard days on the Balance of Payments front, and New Delhi was desperately anxious to add to its foreign exchange kitty by whatever means.

States were asked to prepare projects for submission to the World Bank. If the bank approved a project, a loan would eventuate, the proceeds of which would formally come to the Union government in the form of foreign exchange.

No questions were raised over such an arrangement, for under the Constitution only the Centre had sole jurisdiction over the holding of foreign assets. In due course, the equivalent of a percentage of the loan would be passed on, in the form of plan assistance and in rupees to the state where the project was located.

Globalisation has made an ass of the Constitution. The gradual enfeeblement of the central regime vis-a-vis the states is a further reality to be taken into reckoning. Theoretically, the Centre can threaten a state administration with Article 356, but -- as the Bihar imbroglio has proved -- it is no longer an easy proposition to translate that threat into practice.

The case history of an Indira Gandhi imperiously running the show as prime minister and a docile Zail Singh anxious to sign on the dotted line in accordance with her command is a faded, jaded memory. Nor do state chief ministers present the picture of obedient minions of the prime minister shivering in their shoes.

The ruling hierarchy, so called, in New Delhi has been living from day-to-day in recent years. Shaky coalitions that are an apology of a government have to accept as datum the possibility of their being pulled down any moment by this or that recalcitrant partner.

In this milieu, were a state government to go ahead and negotiate a loan with the World Bank, New Delhi could only watch from the sidelines.

True, the proceeds of the hypothetical bank loan would accrue in the first place to the coffers of the Reserve Bank of India. The RBI still reports directly to the ministry of finance of the government of India. But such a formal arrangement does not mean a thing anymore.

The state government concerned, if it has sufficient wherewithal in terms of rupees, has the option to walk to the window of the RBI and purchase the foreign exchange that it needed to cover, for instance, the cost of importing capital equipment and foreign expertise for the project -- or for servicing the loan. The Centre, despite its suzerainty over the RBI, is hardly in a position to intervene: globalisation is as globalisation does.

The route the Andhra Pradesh government has embarked upon will perhaps soon be followed by a number of other state governments, such as those of Punjab and Tamil Nadu, as well.

In any event, of the long list of projects for which loan agreements were signed by the Union government with the World Bank in the course of the past 20 or 30 years, a very large number remains at different stages of being incomplete.

Once the foreign exchange on account of the loans safely accrued, New Delhi's interest waned, while state governments did not have adequate rupee resources to complete the projects on their own. In the new kind of dispensation that is being talked of, the Centre would offer no counter-guarantee, and the state governments would be directly responsible to the bank for satisfying the conditions of the loan.

The burden of servicing past borrowings from the World Bank, including payment of interest and redemption of principal -- most recent published data reveal -- currently exceeds the inflow of foreign exchange resulting from signing of new project loans by New Delhi with the bank.

That is to say, instead of the bank adding to New Delhi's foreign exchange coffers, it is now New Delhi which replenishes the bank's resources each year. This is, some might say, an altogether absurd situation for a poor country like India to be confronted with.

With foreign aid zealots stalking the corridors of power and decision-making, a denouement of this nature was however inevitable. And now the state governments are being led up by the same garden path.

International financial institutions of the ilk of the International Monetary Fund and the World Bank advance credit to a poor country not because they are all bleeding hearts, but because they want to extract a surplus through such transactions. One or two state governments, not too greatly concerned over long-term consequences, could emulate New Delhi and go on a loan receiving binge from the international financial bodies.

The government of India failed to listen to admonitions addressed to it as early as 20 to 25 years ago on the perils of indiscriminate contracting of external debt. The state governments, if they are not careful, could encounter the same pitfall.

The dazzle of the free market is nonetheless overarching. What has happened to the erstwhile Asian tigers and to Russia will perhaps be sought to be brushed aside by the determined lobby who are in love with external accommodation. As a nation, we are -- the queasy crowd will be informed -- of much superior intelligence: the disaster that has befallen our neighbours will never catch up with us.

This is what the global mindset is about; the free market may ruin us, so what, the free market is forever. Witness the desperate steadfastness with which New Delhi's mandarins are pursuing their goal of persuading the United States president to visit our land. Our ruling set is prepared to pay any price to bring such a denouement about; globalisation has taught them not to stand on dignity.

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Ashok Mitra