Reload the Indian Economy-1991 reloaded
In the 22 years since the last major crisis, the economy is right back where it started.
Finance
Minister P Chidambaram has said he can see some green shoots in the
Indian economy. Of late it has been as barren as Caesar’s wife
Calpurnia.
GDP growth has come down from around 9 per cent to well below 6 per cent in a scant three years.
Investment
is hugely down, from 38 to 26 per cent of GDP, and no amount of pulling
on the corporate udder is getting it to yield milk.
Inflation remains high, around 13 per cent for consumers who are sullenly waiting to get rid of Sonia’ Sorry Army.
The current account deficit has just gone well above 6 per cent which could lead to foreign money withdrawing from India.
And political uncertainty engulfs the country like the January fog in Delhi.
Is it any wonder that the economy is not taking off?
The imminent crisis
It is the job of finance ministers to hold out hope. After all, they can hardly say that the end is nigh.
But
governors of central banks have to be more circumspect. That is
probably why Governor Subbarao spoke very guardedly about the green
shoots during his I G Patel Memorial Lecture at London School of
Economics.
This is what he said: “…There is nothing inevitable about the India growth story.
We can accelerate growth and improve welfare only if we effectively
implement wide ranging economic and governance reforms. Slipping up
on this will amount to a costly and potentially irreversible
squandering away of opportunities.”
He
then went on to discuss inflation, governance and the current account
of deficit. Having some inkling of how much the current account deficit
is – and has been – worrying policymakers for the last one year, I paid
particular attention to the last bit.
The
labour did not go unrewarded. Dr Subbarao shot down a straw man which
he had himself set up. “…the marginal propensity to import by borrowing
money is small”, he told the audience.
If
I may respectfully ask, Sir: who ever said there was a link between the
two? As far as I know, this is how it works. People borrow more when
interest rates come down. They then spend more.
Some
of that extra spending gets translated into imports. Without those
imports, the extra demand would get translated into higher prices. It is
as simple as that.
But
India being India, we seem to have got both now – higher inflation and
higher imports. Add lower exports and what you have is something very
worrying, a looming balance of payments
crisis which could happen at the drop of a foreign hat.
The
only remaining hope is strong – very strong – government action to
bring down the fiscal deficit which, as Dr Subbarao said, is a
governance problem.
“The
complexity,” he said, “arises from the political economy… political
executives…much more tempted by short-term political pay offs rather
than long-term sustainability.”
He
then concluded his
speech thus: “The India growth story is not inevitable. It will not
materialize in the absence of vigorous and purposeful structural and
governance reforms. It is those reforms that must continue to engage our
attention.”
The question is if we can have those reforms without a crisis. History says we can’t.
The
reform of agriculture happened because of the successive droughts of
1965 and 1966 after which India was reduced to begging America for food.
The slow reforms of the mid-1980s in
the financial sector happened because the so-called ‘Hindu’ rate of
growth forced them on the government. As S S Tarapore, former
deputy governor of the RBI, once put it, there were over 200 rates of
interest in the economy. Simply reducing the rates at the short end was a
major reform.
The
big bang reforms of the 1991 happened because Rajiv Gandhi “was much
more tempted by short-term political pay offs rather than long-term
sustainability” and landed the economy in a mess that was inherited by
his successor, V P Singh.
And make no mistake. The current set of reforms is also happening because a crisis is looming.
Two
decades ago, Manmohan Singh started off by getting the economy out of
very deep trouble. He may well end his career by landing it right back
into it.
Such is life.
tca.tca@gmail.com
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