Subramaniam Swamy


The way out of the economic tailspin

When is an economy in a tailspin? It is when its rudder and Global Positioning System (GPS) malfunction. For an aircraft, it means hurtling down while spiralling to a crash. Such a crash happens very fast and without much notice. For example, East Asian nations such as Japan, South Korea and Philippines were growing very fast during the 1975-95 period, the growth rates of their Gross Domestic Product (GDP) exceeding 10 per cent per year. Japan was slated to overtake the U.S. by 2005.

The World Bank and the International Monetary Fund (IMF) termed it an “East Asian Miracle” in their publications and called it a model for other nations like India. However, in 1997, a sudden financial blowout knocked out these countries and all the talk of miracle evaporated. Japan is yet to recover from that blowout.

As it stands at present, the Indian economy is headed for a crisis and a crash. The likely date is by early 2016 in my estimation. Can a course correction today rectify and rescue the economy from a crash? Yes, of course, but only if there are short-term and long-term prescriptions to be followed. Does the Narendra Modi government have such contingency prescriptions ready? Not as of now.

Prescriptions for the crisis

What then are my prescriptions? First, the government must constitute a Crisis Management Team (CMT) of politicians and economists who understand the dynamics of Indian society and, more importantly, the general equilibrium calculus of an economy. At present, there is no such team in place. The economists in the government today are mostly ‘hand-me-downs’ from the United Progressive Alliance (UPA) government, and are all of the IMF/World Bank vintage.

These are institutions which had miserably failed to either foresee or rectify the financial crises in Latin America in the 1970s; in East Asia in late 1990s; and even in the U.S. —where these two institutions are headquartered — in 2008. IMF/World Bank studies are of value only as tabular, statistical compilations and no more. Hence, the CMT has to consist of those who are rooted in the ethos of India and not compliant to international financial institutions.

Second, to know what crisis-managing reforms to initiate, we must first know which problem to focus on and prioritise for action. In my considered opinion, the following questions deserve immediate answers and consequent policy rectification:

a) Despite crude oil prices having crashed and the dollar value of the rupee having dropped in a steep devaluation, why have both exports and imports, especially the former in 23 of the 30 commodity groups, declined steadily over the last 14 months?

b) Why have household savings, which were the bulk of national domestic investments, dropped from a high of 34 per cent of GDP in 2005 to 28 per cent of GDP in 2015?

c) Why have the Non-Performing Assets (NPAs) of the public sector banks risen so sharply, in fact at a rate much higher than the rate of the new advances made by these banks?

d) When the economy needs about a $1 trillion investment in infrastructure to render ‘Make in India’ a reality, why is the actual investment in just 75 projects in Financial Year 2015-16 valued at Rs.42,749 crore, less than the amount invested in 2005-06, which was Rs.44,511 crore?

e) Why has the manufacturing sector, which provides the bulk of employment to the skilled and semi-skilled labour force, grown at an abysmally low rates of between 2 per cent and 5 per cent?

f) Why, when India’s agricultural products are among the cheapest in the world despite a low yield per hectare, are we not able to double the production and export the products abroad?

To address these priority problems, it is essential to implement a menu of measures to uplift the household sentiments by abolishing the personal income tax; by lowering the cost of capital, by reducing the prime lending interest rates of banks to below 10 per cent; by shifting to a fixed exchange rate of Rs.50 per dollar for the financial year 2016; and lowering the exchange rate further for subsequent years; by abolishing Participatory Notes while invoking the U.N. Resolution of 2005 to bring back black money of about $1 trillion; and by printing rupee notes to fully finance basic infrastructure projects.

Incidentally, the Reserve Bank of India (RBI) Governor, Raghuram Rajan, has single-handedly brought a huge slowdown to the Indian manufacturing sector and exports. As a doctor, he has believed that the best way to bring down the temperature of a patient (i.e., inflation) is to kill him (investment starvation).

By raising and keeping interest rates high and hence making the cost of capital prohibitive, he has killed the essential manufacturing investments in Small and Medium Enterprises (SMEs) and in export ventures. The Prime Minister is best advised to replace him with someone like Dr. R Vaidyanathan who is presently Professor of Finance in the Indian Institute of Management-Bangalore (IIM-B).

The CMT should also initiate steps for transforming agriculture into a globalised sector by providing adequate infrastructure to export food and milk to Europe and the U.S.

In the long run, we need to tap the advantages we have in our demographic dividend. Through innovation, we must tap our vast Thorium deposits for clean electricity generation and thus end power shortage; set up desalination plants along our long coastline to provide adequate water for coastal States; overcome technological issues and build a water grid by linking major rivers, from Ganga to Cauvery, through canals; and develop new alternative technologies such as hydrogen fuel cells to provide an environmentally friendly substitute to petroleum products.

Alternative ideological thrust

As I have written before, including in The Hindu, the government also needs to give an alternative ideological thrust to economic policy rather than trying to improve up the past failed UPA economic policies. In particular:

a) The individual has to be persuaded by the state through incentives and not through coercion.

b) India can make rapid economic progress to become a developed country only through a globally competitive economy which requires assured access to the markets and technological innovations of the United States and some of its allies such as Israel and Japan. This has concomitant political obligations which must be accepted as essential.

c) Such rapid progress would require a national security strategy for a peaceful environment.

d) The Indian state has to be minimalist in regulatory interventions in social and economic matters; maximalist in providing the quality of life needs; and optimal in the maintenance of law and order.

e) The key goal of the state has to be to empower the individual through a modern education system that gives importance to both material and spiritual progress.

f) An ethos developed on the concepts of trusteeship of wealth, philanthropy and voluntary group action encouraged by religious sanction for the better distribution of income and for minimising economic contradictions and deprivation.

g) At present, generally, the Indian has loyalty to the family but is apathetic to the community where he lives. There are character flaws that have come from two centuries of deprivation and are incompatible with a people forming a great nation. These flaws can be rectified by developing a strong and coherent concept of national identity whose defining characteristics can be culled from a correct perception of Indian history.

India has always come out of crises renewed and on a higher growth path. The food crisis of 1965-67 led to Green Revolution self sufficiency in food, and the foreign exchange crisis of 1990-91 led to economic reforms, enabling the country to move away from Soviet-style statism to market system and high growth rates.

Thus, the present imminent economic crash should galvanise the way we do business and make us rise to new heights through innovation and achieve high growth rates with financial stability.



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