The recent slowdown in the Indian economy and stalled reform initiatives have raised concerns about India's economic prospects. Kaushik Basu, chief economic adviser at India’s Ministry of Finance, gave his perspectives on India's recent economic achievements and how it is positioned to deal with future risks. Carnegie's Vikram Nehru moderated.
India’s Economic History
- Historically Closed Economy: Although India was an open polity and society beginning in 1947, it remained economically closed to foreign investment, with an intrusive government. Trade tariffs and duties rose through 1991 and investment licensing regulations discouraged private domestic and foreign investment.
- 1991 Crisis: The First Gulf War led India’s foreign exchange reserves to dry up, putting India on the edge of default. As a result, the Indian government instituted reforms, but Basu explained that they remained extremely limited, as they targeted liberalization of only foreign exchange transactions and licensing.
- Foreign Exchange Reserves: In 1990/91, India had about $5 billion in reserves; by 2005 it had grown to $300 billion.
Post-2003 Growth and Improving Ties with the United States
- Changing Perceptions: Indian professionals and the Indian higher education system gave Americans a more positive impression of India, which contributed to the increasingly close economic ties between the two nations.
- American Outsourcing: U.S. television attacks on outsourcing ironically advertised the viability of outsourcing and led to a sharp rise in demand for IT-related exports, which helped the Indian economy and led to closer ties with the US.
- Savings and Investment: Around 2003, India moved from low to high savings and investment, Basu asserted. Today about 35 percent of national income is invested, powering growth.
Slowdown in 2011: Three Explanations
2011 saw India’s GDP growth fall from 8.4 percent to a projected 6.9 percent, and inflation rose from 7 percent to 9-10 percent. Basu offered several explanations for these worrying trends:
- Slowdown in Decision-Making: Basu argued that corruption scandals and finger-pointing led to risk-averse behavior among bureaucrats. This fear slowed reforms, he explained. Furthermore, a coalition government requires more time to make decisions.
- Battle against Inflation: Rapid growth has been accompanied by rising inflation, and there is an ongoing debate over what is causing it.
- Global Slowdown: Globalization affects India more today than it did before, Basu said. Imported or exported goods and services have increased dramatically as a portion of GDP since 1995, making India more vulnerable to global shocks.
Implications of the European Debt Crisis
- Like a Ponzi Scheme: Basu suggested that the European debt crisis is a form of Ponzi scheme. The European Central Bank (ECB) rescued banks by giving $1.3 trillion in three-year bonds (LTROs – long term refinancing operations), essentially allowing the Ponzi scheme to run for one more round till 2014. However, much of the money banks raised from LTROs was then immediately lent to sovereigns at an even higher rate. The sovereigns lack economic strength, due to their own high fiscal deficits and high debt to GDP ratios. These banks needed to be rescued, but that does not change the fact that these (LTRO) bonds provide only a short term solution since underlying problems, such as competitiveness and fiscal stability, remain unresolved, warned Basu.
- Reforms Needed: Unless major reforms are undertaken, this will create problems and potentially increase inflation, Basu warned. One such reform would be a fiscal compact for the EZ countries. The EZ is a large economic entity and has formed a monetary union, but its member nations have a great deal of fiscal autonomy. Ultimately, the monetary union made borrowing easier, but the EZ lacked the fiscal restrictions and rules to ensure sovereign borrowing remained within acceptable risk limits.
- Limits of Fiscal Deficits: But even if fiscal restrictions and rules are instituted, countries are likely to abuse these rules by claiming ‘one-off expenditures,’ Basu said. Furthermore, there are also problems of how to deal with state-owned enterprises within such a system of EZ-wide rules and restrictions.
Implications for India
- EU Implications: India is expected to have a slow revival of growth through 2014, but EU problems could affect this recovery, Basu warned.
- Potential Threats of Arbitrage: If there is a global crisis in 2014, efforts by the RBI to pump money in to the system could lower interest rates, although preventing inflation would likely force India to raise rates again. Even with capital flow controls, this disparity could lead to problems of arbitrage.
- How to Respond: India must fiscally consolidate and have funds for another fiscal stimulus if necessary, Basu asserted.
- Ongoing Domestic Reforms: India has numerous areas where reforms remain outstanding, incomplete or stalled: allowing 51 percent foreign ownership in multi-brand retail, reduction of oil and food subsidies, creation of a social security system, introduction of a GST (goods and services tax), and infrastructure development.
About the Asia Program
The Carnegie Asia Program in Beijing and Washington provides clear and precise analysis to policy makers on the complex economic, security, and political developments in the Asia-Pacific region.
About the South Asia Program
The Carnegie South Asia Program informs policy debates relating to the region’s security, economy, and political development. From the war in Afghanistan to Pakistan’s internal dynamics to U.S. engagement with India, the Program’s renowned team of experts offer in-depth analysis derived from their unique access to the people and places defining South Asia’s most critical challenges.
This columnist cannot pretend to be an economic expert but can certainly point out that the statistics being reeled out on a daily basis now, have added to the economic burden of the people, says Seema Mustafa.
Nineteen ninety one seems to be staring the Indian whiz kids in the face. Two decades down the line, the economic policies of recent governments have burst the dream bubble, with the rupee all set to touch a 80-to-a-dollar high, gold prices increasing even as one writes, and foreign exchange reserves disappearing by the hour.
Except for ‘all will be well’ murmurings from the government, there has been little else to assure the people that the decline will be reversed, and the promises of an India leaping ahead with amazing growth figures, will be kept.
The Left parties had been warning of this crisis ever since the governments of India plunged into reckless economic reforms, but the media joined industry and government to dub the objections as ‘outdated’.
In fact some newspapers took great delight in ointing to the fact that a particular Communist leader was friendly with industry, or another had his son studying abroad, to divert attention from the larger objection and the alternative economic policies offered by well known economists for sustained but perhaps comparatively low paced growth.
This columnist cannot pretend to be an economic expert but can certainly point out that the statistics being reeled out on a daily basis now, have added to the economic burden of the people. Distress suicides have been reported from some of the big cities even before this current collapse, with entire families taking their own lives because of economic hardship.
Suicides by farmers is well known, but even if the figures have declined somewhat, there is little to suggest that the poor and marginal farmers are being able to make their ends meet. Agrarian unrest is visible on the roads with peasants coming together to protest against the acquisition of their land by government or private or both parties, and staying on the roads for months and years as in Orissa to prevent their land from being acquired by the big companies.
The urban poor is adversely affected, with the gap between the rich who flourished under the new economic policies, and the poor becoming more visible and stark. The 1990 images of slums nestling along luxurious skyscrapers have never really gone away, except that in Delhi the slums have been made to disappear from the main city so that the poor remain out of sight.
Unlike their grandparents the poor urban youth are not resigned to their fate, but are openly hostile, angry and alienated with the gap constantly staring them in the face in the big cities. No one wants to admit it, but the increasing cases of gang rape in the metropolis can be directly linked to this increasing anger, with the slumlords joining the feudal overlords, or the conquering armies of the past, to target and attack women.
In Delhi and in Mumbai, the two incidents of gang rape that had women protesting on the streets for days on end, were clearly a manifestation of this alienation and subsequent violence, and of course the larger understanding that they would get away, because of the reprehensible law and order situation in the country. Recent figures show one lakh rape cases are still pending in the courts.
Prices are beyond the poor family’s reach with the additional burden on the poor unimaginable. Onions at Rs 80 make a mockery of the national food bill recently passed by the Congress government to make some grains available to the poor at a low price. Ironically this comes after almost ten years -- not including the National Democratic Alliance government’s term in office -- of dispensing with the excellent public distribution system that made the same and more available for those with ration cards. There were some problems but instead of dealing with these and restoring the PDS chain, the government decided to do away with the scheme altogether despite protests from the Left and some of the regional parties, leaving the poor without the means to sustain themselves despite rising prices. The middle class is reeling under the impact, the poor are silent and desperate, with now even the rich with their investments and their gold and their travels abroad seriously affected.
This was the story of South Asia but India claimed to have stepped out of the cesspool. It now seems that we are all back in the mess together.
Tags: India, PDS, National Democratic Alliance, Seema Mustafa, Delhi