S Gurumurthy
Twenty years ago this July, a monsoon of outdated, discarded ideas for the economic and industrial rejuvenation of India hit the nation. Its effect still stresses the politico-socio-economic fabric of the country, but the panacea continues to be worse than the disease
Socialism was always incompatible with the culture and traditions of India. But the Congress party had thrust it on the people of India through catchy slogans like Garibi Hatao. But, in the year 1990, Russia itself lost belief in the socialist order, forcing the Congress government here to begin undoing the damage caused by its juvenile pursuit.
This undoing of deforms caused by socialist pranks was popularised as “reforms” in 1990s; the guilty deformers became heroes as ‘reformers’! But the catch came later. Besides undoing the damage, the ‘reformers’ endeavoured for ‘next generation’ reforms, to marketise the Indian economy, particularly the financial sector, on the American — read Anglo-Saxon — model. But this process, sold as deepening the reform, pushed vigorously from within and outside, did not take off sufficiently.
The reason is that the elite reformers, trained to think, speak and live like Americans, could not understand that without creating a ‘market society’ on the US model, they could not create a ‘market economy’ of the US type. But, this significant mismatch was never debated in the Indian economic discourse. Understandably the Indian reforms on the US model had hit roadblock in early 2000.
But meanwhile crisis after crisis hit the world — the Asian Crisis in 1997, the Dot.Com crisis in 2000, the 9/11 terror in 2001 and finally the global meltdown in 2008. Yet even as the US/West has slowed into a low, Asia, particularly India and China, has risen and continues to rise, threatening to shift the balance of global power from US/West to Asia. The 2008 crisis is also changing the very discipline of economics and rewriting the textbooks and theories of economics. So much has happened in the world and in India in the last two decades that it calls for a review. Here is an illustrative analysis of a vast subject.
The ideas and principles of Indian economic reforms were imported principally from the US in SKD (Semi-Knocked-Down) condition and assembled here by the Singh Parivar — Narasingha Rao, Manmohan Singh and Montek Singh Alhuwalia — and marketed as economic reform in India. The instalments of SKD imports were branded as next generation reforms.
Take some of the marketing techniques of the reform like (a) that without foreign investment India would not develop and, on a capital output ratio of 4:1, India would need foreign investment up to 8 per cent of GDP to add 2 per cent to our GDP to increase it from 6 per cent to 8 per cent on a capital output ratio of 4:1; (b) that India’s infrastructure needs exceeded $400-700 bn which India could not finance with domestic savings; (c) that India cannot develop only by domestic markets and it needs to access foreign markets.
The un-admitted assumption was that Indians could not build India. Many Indian manufacturers were indirectly told that manufacturing was not their cup of tea and Indians were essentially traders; so, let the MNCs do the manufacture and let us do trading. (But today, the proposal is to hand over trade itself to the MNCs through retail FDI!) Now back to the sequence.
The experience of India in the last decade has totally disproved the marketing assumptions. First, the net FDI into India for the last 20 years adds to less than 2 per cent of the total national investment against the projected 8 per cent to post a GDP rise from 6 per cent to 8 per cent and yet India has achieved more than 8 per cent growth in GDP. So FDI did not drive India’s growth.
Second, India’s exports have always been less than its imports. It is only its domestic demand which is sustaining the economic growth. India’s domestic consumption is almost 60 per cent against which, for example, export dependent China’s is less than 40 per cent. So, exports did not drive India’s rise. Third, Indian domestic savings rose from 23 per cent of GDP in the early 1990s to over 35 per cent of GDP now, despite huge interest cuts to promote consumption.
According to the Goldman Sachs Global Economic Paper No. 187 (2010), India’s infrastructure investment in the next decade would exceed $1.4 trillion. But, for financing such huge infra cost, the domestic savings generated by Indian families would suffice and India would not need any FDI. The Goldman Sachs paper says that India would be generating over $800 billion of cash savings, which would be more than all the bank advances of today put together!Viewed cumulatively, domestic consumption and domestic savings and investment, constitute the core drives of India’s economic rise.
And yet the economic debate in India still centres round the very SKD ideas imported from the US, which haven’t worked. And, despite the tectonic changes taking place in the very discipline of modern economics, India still copies from the economic theories of US/West developed in the last three decades. Read on for a brief on the drastic debates in US/West for changes in macroeconomics that is hardly noticed in India.But, the near collapse of the world financial order during the crisis of 2008 has raised fundamental questions about the US-led theories and model of economics.
It has caused civil war within the guild of economists over the macroeconomic theories deployed in and by US/West on which the Indian financial reform is largely founded. Paul Krugman, a Nobel Laureate in economics, virtually howled, “Much of the past 30 years of macroeconomics was “spectacularly useless at best and positively harmful at worst”; Barry Eichengreen, the prominent American economic historian stated in disgust, “The crisis has cast into doubt much of what we thought we knew about economics” Larry Summers, Former US Treasury Secretary lamented, “Economics has forgotten a fair amount that is relevant and it has been distracted by an enormous amount”; Bradford Delong, Professor of Economics University of California at Berkley, confessed, “Economics (is) in Crisis”.
If US economic schools faced civil war within, Europe (mainly France and Germany) began a war on the “Anglo-Saxon financial model”. France threatened to walk out of the G-20 meeting in April 2009 unless the theories of financial freedom — called ‘Casino Capitalism’ — were revised and/or rejected. With the US-devised financial model losing sheen, Japan, which was consistently derided by the West as promoting and operating the inefficient bank-centric financial market, has proudly claimed, in March 2009, that while the Western — read Anglo-Saxon —world’s finances were in shambles, its own financials were stable.
The British Prime Minister admitted in the G-20 meeting in April 2009 that the old Washington Consensus, which became the foundation of free market globalism, free convertibility of currencies and particularly financial capitalism, was over. The IMF, which had championed free convertibility of currencies based on the Washington Consensus, ultimately had to give up the idea explicitly and accept, in 2010, capital controls to be part of the policy-mix. The global trends question the very character of the reforms set by the Indian economic establishment in 1990s. So, the 2008 crisis seems to call for a review and reform of the reform process itself.
QED: The pillars of what was considered as economic reforms in the 1990s and till 2008 collapsed in 2008. With the result that while till 2008, the global agenda was “economic reforms”, the agenda now is “reform economics”. It needs no seer to say that India should “reform economics” before moving ahead with further “economic reforms”.
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