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.
Source: The Hindu
