There was (or is?) one Dr. Manmohan Singh, an economist Prime Minister in India. In his cabinet, and also among his policy-advisors, he had many other noted economists, many educated from Harvard, Oxford, Cambridge et al.
Unfortunately, what his cabinet did not have is one Dorothy.
And that happened to be the root of all economic turmoil of India today! These policy-makers, time-and-again said, inflation would come down, with monsoons that had come and gone, with tightening of monetary cycles, with stability returning in global economy sooner or later. And they always projected optimistic growth rates.
Ben Bernanke, the most powerful central banker also acknowledged that economicÂ forecasting was a bit like reading entrails. However, that didnâ€™t dampen Indian policy-makersâ€™ spirit of making regular nice economic forecasting, on a periodic basis, sounding as if they are speaking like prophets. Â
But because they are whoever they are but not Dorothy (and not even Ben Bernanke!), because unlike Dorothy, they could not do anything that she could. And thereby, their interpretation that Indian economy happens to be a strong footing with hunky-dory story increasingly fails to convince any.
Our policy-makers have no control over Europe, nor it has any control over global liquidity; therefore the fantasies of inflation coming down and growth picking up remained fantasies. Â Neither our policy-makers ever looked inside, and asked themselves what they had done, other than wishing things get better, or leaving things to others by opening the economy up – a bit here and a bit there, but not knowing exactly where and why.
But, was it all they could have done? Did they have no tool within themselves? Is there nothing India can do, to ensure we donâ€™t become the victim of whatever worse happens anywhere in global economy? Be it for good or bad, US Government â€˜nationalizedâ€™ failing private banks to auto-makers when the need came up post Lehman-crisis, albeit temporarily, as has been done elsewhere in developed economies. The government exists not merely to form policies and expect others to act on it, and create necessary supplies that market demands; government also ensures when market itself cannot do it due to structural issues, government itself does it.
This Prime Minister supposedly launched reform in India in 1991, although distracters call it compulsion. Beggars cannot be choosers.Â Reform in India was a choice, or a no-choice option remains a debatable topic now, due to media myopia and murkiness, and obvious sycophancy, hoping history would record it rightly. This media, which, in a clueless manner now searches for answers to problems of Indian economy, did bestow all credits to Dr. Manmohan Singh and his reforms barely years ago.
For some reasons, best known to confused journalists, policy-makers and academicians/economists alike, Indian economy did exhibit higher economic growth rates, breaking away from decades of Hindu Rate of Growth, particularly during late 1990s and early part of the 1st decade in the twenty-first century. All the credit went to that â€˜accidental birth of reformâ€™. And since then, reform had always been accidental in India, never by choice.
The important question to ask is, this few Â years of high growth as observed in the 1st decade of the 21st century, was it a normal thing based on choices we made; or was it an abnormal positive things bestowed on India, due to lack of choices internally, combined with external factors? Was it a global pull as global economy too had grown during that period in one of the fastest and stable manner with extreme easy liquidity, due to innovations in ICTs that improved productivity, due to globalization and global movements of easy-money unmatched until then, combined with better geopolitical environment, with the falling of the Berlin Wall & demise of the Cold War era? True, there had been couple of hiccups – barring obvious dot-com crash of 2001 and Lehman-led housing crisis of 2008. Â But, overall global economy had one of its best courses in the 1990s and early 2000s.
Europe still continues to be in problem, more due to politics than due to economics. Japan struggles, but continues as it did, over the last few decades, as expected from a matured economy with aging population combined with dwindling population numbers too. Many other developing nations, including China, made rapid progresses, irrespective of the external uncertainties.Â
However, my humble projection is whatever happens in Europe on euro; Europe would recover from that sooner than India would from its own internal problems. Even Greece would, but I am not that hopeful on India.
Indian economy fundamentally suffers from many myths; primary of those is on account of reforms. â€˜The great enemy ofÂ truthÂ is very often not theÂ lieÂ â€“ deliberate, contrived and dishonest â€“ but theÂ mythÂ â€“ persistent, persuasive, and unrealisticâ€™ wisdom of JF Kennedy haunts Indian economy today, however, still we donâ€™t recognize the myth.
Because the more likely truth is, the unexpected short-lasting high growth rate we saw earlier was more of an accident, an abnormal thing of an unparalleled coincidence of too many external factors, combined Â with that â€˜accidental reformâ€™. It never was normal, it was not expected. India did not expect to grow at near double-digit rates, but when it happened â€“ it, surprisingly, became the norm, in terms of expectations. No one asked what have we done to grow at near double-digit rates.
The obvious answer, probably on the lips of the shoe-shining boy too, was â€˜reformâ€™.
This article argues that the present slowing growth with high inflation and high interest rate is the expected normal growth rate India should have. It is likely to get worse, assuming normalcy elsewhere. Normalcy elsewhere does not mean pre-2008 easy liquidity or easy-money-period; it neither means recession in major economies for prolonged period, although 2nd option cannot be ruled out.
Therefore, all this media cry and empty tears and concerns need to be placed in the right context. Mistaking the abnormal for normal, we have now difficulties in accepting normal itself, and hope some magic potion (â€˜another reformâ€™) exists to get out of this economic turmoil soon. Point is, it is not an economic turmoil that we have been passing through, but it is economic normalcy for us. If external situations remain more or less what it has been over the long-term historical average; and if we continue to do what we have been doing over the last two decades, things are likely to get a lot worse. And that would again be expected, not something unforeseen by sophisticated forecasting economic models.
Economic problems in India are primarily not because of uncertainties in Europe now, or due to crisis in US of 2008. Economic problems in India are because of India itself. This understanding is needed first. Next what is needed is, economic problems in India is again not due to lack of reforms alone; but because of tremendous shortage of capacity everywhere. One does not need multiple complex answers to state the key problem facing Indian economy â€“ it is only capacity, or the lack of it.
So-called experts, managing the economy directly, would surely oppose above view and reinstate more vigorously that the short-lasting high-growth era in India was more due to local push (â€˜we did itâ€™) than due to global pull (â€˜it happenedâ€™). To be on right side, majority of readers would always go for the choice that it was a combination of both.
To disapprove them, one needs to look only at the financial markets, although it mostly is not the right barometer. In the beginning of 1992, Sensex was at 1950 levels whereas Dow Jones was at 3100 levels. In 2012, DJ Index is at 12500+ level, Sensex is at 17000 levels. So, Indian markets gave a return of roughly 9 times, whereas US gave a return of four times. Now factor in rupee depreciations. In January, 1992 â€“ Indian Rupee was in the range of 25-26. Now it is 54.
So, over the last twenty years, how has Indian markets outperformed a developed matured market like US? What had been the reward for taking risk by investing in emerging markets? We have taken a twenty-year long period, which should nullify any short-term movements in markets.
Now take another example. In 1992, Chinese Renminbi to US-dollar was at 5.5 levels. Today it is around 6.32. In January 1992, Shanghai Composite Index was around 290 levels; today it is around 2300 levels.
The figures speak for themselves. Foreign investors have got seven times more return from China in last twenty years than from India. Seven times. And India didnâ€™t do any better than even US. Foreign investors, even today, remain more bullish on China. And those same policy-makers had been hoping since long that there would be a day soon when India would grow at a faster rate than China. It surely has to happen one day, following laws of economic growths, but not likely in near future.
No denying this obvious middle-path that India’s past growth rate was a combination of global pull and local push, the all important question to ask is, how much had been the contributions of local push and global pull, respectively, for this sudden spike in growth rates that India witnessed during late 1990s and early 2000s. Agreeing that it remains a complex subjective exercise, and no single right answer exists, it may be important to examine what had been this local push exactly, over the last couple of decades.
There as such is no evidence of local push. Savings rate had remained more or less same, and a bulk of that savings of individuals have beet fettered away by profligacy of government expenditures, in not creating capacity, but in unsustainable expenses or subsidies. Investments had never been anywhere comparable to China, even in % terms of GDP.
Economy is not something that can be managed by boardroom paper work alone. Reducing/rationalizing tax rates, privatization, allowing foreign investments â€“ all these can be done through simple paperwork, anytime. But what cannot be done by simple paper work is creating thousands of kilometers of world class roads, world class ports, power plants, mining capacity, manufacturing capacity, agricultural productivity, world class educational institutes or healthcare facilities, and all such things.
It is secondary who builds it. Governmentâ€™s job is not only to make policies, but to fill up the gap when the policies fail to achieve their objectives. We need to build those. Making policies is one, but if the policies fail to create a fraction of the capacity needed for a nation like India, only through private investments, locally or globally, someone else has to create that capacity. And that someone else is the Government.
Prof. Ranjit Goswami works as theÂ Director of School of Management of RK University. Opinion expressed in this article is personal. HeÂ invites you to visit his blog,Â Wondering ManÂ (or take a look at his book, Wondering Man, Money & Go(l)d). You are also invited to join him onÂ Twitter.Â