Whither India's Economic Reforms
S Gurumurthy
S Gurumurthy
Tim Geithner is not friend of India. He is here on a mission. He is a mercenary.
His mission is a part of concerted effort by myriad agencies that includes Time
magazine, Standard and Poor's rating agency, the American administration as
represnted by Secretary Clinton, the Vatican, et-al, aimed at brow-beating India
to fall in line to serve American interests. Manmohan and Ahuluwalia, both
alumni of the London school, patriots though they be,are not even aware that
they are being had. The American machine is too labyrinthine for them to
unravel.
The UPA's high
decibel cry of `reforms' echoed by the euphoric pink media has deprived the
nation of the critically needed debate about what constitutes economic `reform',
particularly after the 2008 global meltdown. Even as the economic theories that
the West trusted till the crisis in 2008 are being re-written by it, the current
Indian `reforms' are based on the obsolete economic ideas of the pre-crisis
West. Tectonic changes have taken place in the economic thinking of West,
including the United States, since the US-led global meltdown in 2008. Here are
a few examples. Big banks, once seen as the cynosure, are now feared as `too big
to fail' and `too big to save'; financial instruments like derivatives, then
viewed as advanced, are now seen as destructive; the consumption-driven economic
model celebrated prior to 2008 is now viewed as unsustainable; in the G20 meet
in April 2010, France and Germany castigated the equity-driven free market
financial model of the US as `Anglo-Saxon' and threatened to walk out the meet
if the US did not agree to rule-changes.
The Economist confessed in June 2010
that much of the macro economic theories developed in the last 30 years `are
useless at best or positively harmful at worst'. Look at what these `useless' to
`harmful' macro economic theories have done to the US and to the world at
large.
This caused huge, unsustainable rise in stock prices
generating `asset appreciation' or `paper wealth'. The artificial asset
appreciation was certified as bankable equity to extend easy credit to
consumers. Americans were encouraged to buy lavishly even as the US ran huge
trade deficits with China. The high stock prices, which classical economists
would have dreaded as an asset bubble, was regarded as real wealth effect by
modern economists. Modern economists rightly saw commodity price rise as
inflation and therefore wrong, but they celebrated asset price rise as wealth
and prosperity! At least twice — once in 1987 and later in 2000 — huge asset
bubbles nearly exploded the US stock markets. On both occasions, interest rates
were cut, more credit was infused into markets to lift market sentiments. The
strategy succeeded. The US Federal Reserve head, Alan Greenspan, who turned the
market on both occasions, was regarded as the `God of Money'! He taught that
producing paper money and making credit available to all by securitising it was
at the core of economic policy. For that, he said, managing investor sentiments
in the market — which produces monies out of thin air, namely, asset prices rise
— was critical. The world mesmerised by him woke up in the 2008 crisis that
showed that the `God of Money' was without clothes after all! Greenspan himself
admitted to the US Congress on October 23, 2008 that "the whole intellectual
edifice" (of market-based economics) "has collapsed". However, he had already
bankrupted US families. Just months before, in his book The Age of Turbulence
(p385) he had brushed aside family savings as the virtue of underdeveloped and
insecure people. The developed US people, he said, are a confident lot;
therefore, they borrow beyond their income and spend. The Americans did it and
did in the US first and later, the world itself. The US could do it for two
reasons. One, their local currency, the US dollar, was also the global currency;
so the United States could limitlessly borrow to fund its current deficit of $10
trillion so far and continue to borrow. Two, the US had become the unipolar
power. Yet, the 2008 crisis has shown that the US (Anglo-Saxon) financial
capitalism is failing in the US itself. Yet the `bank-based' India still looks
at the `market-based' US only for its `reform' agenda.
Germany and
other southern European countries remain heavily dominated by their banking
sector". It also shows that the savings rate in bank-based economies is higher.
According to Business Week (September 30, 2010), in the end of 2009, stocks
constituted just 3.9 per cent of German household financial assets; life
insurance 28 per cent and cash and bank deposits 38 per cent. Japan is
identical. In a paper presented to the Bank of International Settlements in May
2009, Bank of Japan officials point out that `Japanese households prefer bank
deposits over risky financial assets when all the financial instruments are so
well-developed and heavily traded in Japan unlike in other Asian markets'. The
`bank-based' Japan and Germany are as efficient as the `market-based' US, if not
more.
Indian households too prefer bank deposits,
insurance and similar instruments. The bank deposits to gross domestic product
(GDP) ratio in India in 1991 was 34 per cent; it has almost doubled to 67 per
cent in 2011, according to the Economic Survey 2012 (p94). So, like in Japan and
Germany, savers in India overwhelmingly prefer banks. Only some 5 per cent of
Indian savings gets into stocks (Hindu Business Line, November 9, 2011). So
India, with its overwhelmingly `bank-based' economic model, is closer to the
`bank-based' Japan and Germany, and other Continental European
nations.
It is nowhere near the Anglo-Saxon United States. Yet the
economic reforms of `bank-based' India tend to follow the `market-based' US
economic theories, especially when the very theories threaten to become outdated
in the US itself. Look at how things have changed even in India. In his previous
tenure as Union finance minister P Chidambaram dreamt of `reforming' the banking
sector by creating four or five large banks for India by merging all medium
sized banks. Would he now repeat that idea when the West is itself afraid of big
banks? Never. The prime minister told the Indian savers not to go to banks but
to Dalal Street in Mumbai and buy stocks instead. The people of India, however,
did not oblige him. The government can't reform culturally defined financial
habits of the people.
The West is rethinking and seriously
introspecting about its economics that we tend to follow. On May 24-25, a
continuing project titled `Responder' initiated by the Research Institute for
Managing Sustainability (RIMAS), Vienna University of Economics and Business,
had organised a global meet on `The Role of Household Savings and Debt in a
Sustainable Economy'. Its declared intent was to review the savings-drying and
consumption-driven economic model of the West that was, till the 2008 meltdown,
considered as the fast track growth model. Till 2008 all countries tended to
adopt the United States model — not thereafter. That is why the World Bank in its newsletter for May
2008 confessed that there is no economic or financial model that fits all and
each country has to choose the model that suits its specifics. No nation can
copy another nation.
QED: Indian `reform' process has to be endogenous. Not exogenous. Yet, Indian
`reformers' are habituated to search the waste paper baskets of the
`market-based' US for its outdated ideas to `reform' the Indian economy. Are the
`reformers' listening?
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