Posts
THE HINDU, March 31, 2013
1991 reloaded
T. C. A. Srinivasa-Raghavan
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.