Crossing our River Styx

Crossing our River Styx

Last fortnight’s passage of the Food Security and Land Acquisition legislation was a tactical triumph for the ruling coalition.  The opposition had to bite its tongue; it was a clever feint, but the body blows are landing fast and hard on growth and investment, and we are against the ropes, bloodied and dazed.  The truth is that those in authority have lost all credibility, and those in business have lost their social contract.  Crony capitalism coupled with cruelly capricious decisions has gutted what was not so long ago a raging bull of an economy.

If you go back to the mid-2000s, India was growing very rapidly and the belief of the middle classes and business was that there was a very talented team running the economy, with an economist prime minister and a half-decent finance minister. There was faith that the central bank would keep inflation low and all would be well.

All of that has come to nought. The RBI let inflation get out of control. Relations between the RBI governor and the finance minister were appallingly bad.

Most of us do not seem to grasp the seriousness of the situation.  Food price inflation was ignored under the pretext that the benefits of growth needed to spread to rural India.  Gorged with high inflows of foreign funds, the government threw money around like a drunkard at a casino.  Indians felt they had an inalienable right to grow rapidly, that India was finally getting the growth it deserved.  The goal of “spreading” the riches to the mythical aam admi  became a moral and not an economic issue.

India did not recognise the fragility of growth. Prices – chiefly of food – rose and rose inexorably. If inflation is very high, people turn away from money.  They stop saving through the financial system and turn to gold.  What had almost never happened in any developing economy happened here – as the economy slowed down, there was a blowing out of the current account.  Instead of imports slowing, Indians shipped in more and more gold.  As the downturn deepened, investments fell and savings fell even more because of inflation, so people ‘saved’ with gold.  India’s current account was being financed by foreign savings, a.k.a. foreign fund inflows.  That was fine so long as growth was rapid.  But in 2012 India really started to slow down.  This had nothing to do with the United States, or Ben Bernanke, or the terror of “tapering”. Simply put, foreigners became very reluctant to lend money to spendthrift India.  The rupee’s exchange rate began to weaken a little over a year ago. When P. Chidambaram took over he initially tried to restore the credibility of the government but here’s what happened:

1.    The government still did not tackle Consumer Price Inflation.

2.    Chidambaram’s attempts to introduce reforms and reduce the budget deficit proved to be a chimera. The bankruptcy of policy was badly exposed when the government passed the Food Security Act.  This meant that it could not care less about the budget deficit.

Gold imports will climb even higher in the months ahead.  The rupee, which has already been factored in at 70 to the dollar, will slip even lower.  So what can we do? We need to restore credibility to policy.   We need big measures, and political courage.  We need to be able to stand up and say that the Food Security Bill is great but we cannot afford it right now.  We need to be able to say “We learned a lesson – when you have excellent growth, you don’t spend all the money.” 

The trouble is that our policy dinosaurs don’t view inflation as a problem or growth as fragile.  The result is that investors, both domestic and foreign, who have to deal with the real economy, have lost confidence.

The two most important and critically urgent goals now are: keep inflation low, and keep the budget deficit under control, or we will end up like Zimbabwe. 

“I would not use ‘crisis’ and ‘India’ in the same sentence,” new central bank governor Raghuram Rajan told reporters on September 4.  Yes, but how quickly have ‘growth’ and ‘India’ become antonyms.

(This column appeared in Business Today, Sept 29 2013)

On a Wing and a Prayer

Last week I called up a friend. She was on the train from Bangalore to Chennai. I was surprised. She is not the kind of person who travels by train. I asked her how long the train journey takes. Four and a half hours, she replied. So why are you taking a train when you are so busy and time is so important, I asked. Simple, she said. “It takes an hour and a half from my office to Bangalore airport. Then there is check-in, security checks, a delayed take-off because the plane arrived late, more time on the tarmac while waiting for clearance from Air Traffic Control, and then a 45-minute flight. I found it quicker to take a train. There is less stress, minimal turbulence, and I can read a book!”

This is really the story of India, and of countless surveys and papers in which Elephant India is compared with Tiger China. I have travelled to nearly every country in Asia and their airports always made me cringe in shame at the memory of Delhi or Mumbai. Changi, Chep Lak Kok, Incheon, Bangkok, Narita, Kansai, Beijing, Shanghai, Jakarta, Lahore – even Hanoi and Ho Chi Minh City and Phnom Penh – all made me wish I could return to Delhi and not have to descend dark stairs, get into a jerky bus, and enter a terminal building with a smelly entranceway to wait for baggage that is brought in on clanking trailers and thrown roughly on a creaky old belt by tired men.

Just before the elections, as my plane circled Delhi, I was struck by how similar our politics and our state-owned airline are. "We know you have a choice of other airlines (parties) but we appreciate your custom (votes)". Ageing aircraft (infrastructure) crewed by ageing staff (politicians). Endlessly stacked-up planes waiting for permission to land ... don't they conjure up a picture of endless project delays? "Don't blame us, blame the weather/air traffic control/technical faults/late arrival of our own plane" sound so much like "Don't blame us, blame our coalition partners/the opposition/the global economy/the ISI/late arrival of the monsoon".

It costs more to fly from Delhi to Kerala than to Singapore, but that's not our fault -- look at how our nasty trade partners are trying to get us to lower our tariffs and taxes so they can fill our skies with their planes. Lost baggage (promises)? Not our fault again -- it's our alliance partners. Please continue to give us your business (votes) -- we promise things will get better once we have that extra runway (a few more parliament seats). Coming off my plane, exhausted and wrung-out, I saw signs that promised a better airport by next year. Where would we be if we had not offered to host the Commonwealth Games?

Prime Minister Manmohan Singh has referred constantly to the need for more infrastructure to lift India out of the seven to eight percent growth rut. If India does not grow at a steady double-digit rate over the next decade, the elephant will stumble, and fall to its knees. Last week President Pratibha Patil referred to infrastructure as one of the key goals of the new government: “(Attention to recession-affected sectors) must be accompanied by measures to achieve a countercyclical expansion in public investment in infrastructure sectors including public-private partnerships in these sectors. Financing the investment will be a critical constraint and my Government is determined to ensure that innovative steps are taken in this area, consistent with a medium-term strategy of prudent fiscal management.”

Back in February, India’s interim budget said 50 new infrastructure projects worth Rs 67,700 crore ($14.5 billion) had been approved, and the India Infrastructure Finance Company, which will finance 60 percent of commercial loans in critical public-private partnerships, plans to raise Rs 30,000 crore ($6.8 billion) during the current fiscal year ending March 2010.

It helps if you are a Congress government with a clutch of Nehru-Gandhi names to christen every new populist spending plan. We have the Jawaharlal Nehru National Urban Renewal Mission, which has spent over Rs 50,000 crore ($10.6 billion) over the past four years on the “urban poor”. Under the Indira Awas Yojana, the government has built more than six million homes for rural poor. And now, President Patil has announced the Rajiv Awas Yojana, which aims to build a “slum free” India for the 62 million people living in shanties in the nation’s cities.

All these schemes come at a steep price. There was a huge surge in what can only be described as election-year fiscal profligacy in 2008/9. The government’s revenue deficit shot up to 4.4 percent of GDP against an estimated 1.0 percent – a four-fold increase. The fiscal deficit has alarmingly rocketed to Rs 326,515 crore ($69.5 billion) or 6 percent of GDP from the original estimate of 2.5 percent. In ordinary language, the Indian government was printing money – literally. And Reserve Bank of India figures bear this out. In the week ended May 29, currency in circulation totalled Rs 709,364 crore ($150.9 billion), a rise of Rs 96,699 crore ($20.6 billion) over a year earlier.

But what about the poor in India, the target of all this largesse? Are the country’s 1.2 billion people truly moving towards economic equity? In its Global Economic Prospects 2009 report last December, the World Bank noted that rising food prices were hitting the poor hardest. In urban areas in South Asia, it warned, poverty levels had gone up by as much as 4.4 percentage points – the highest in the developing world.

Already, 32.3 percent of the urban population and 43.3 percent of the rural population in South Asia is poor, that is, living at or below the “poverty benchmark” of 1.25 U.S. dollars (less than 60 rupees) a day. This is only slightly better than Sub-Saharan Africa. “Capital inflows have diminished, contributing to falloff in investment growth, particularly in India,” the World Bank said in a March 2009 update. “Fiscal support for slowing economies may face constraints in already quite high budget deficits.”

In her speech to Parliament last week, President Patil said new targets will soon be set for rural electrification by the new government. That will be of some consolation to Ramakanta Sethi, a Dalit boy from the fishing village of Kendrapara in Orissa. Ramakanta, who herded cattle during the day, did exceedingly well in his high school examination, studying at night with only a kerosene lantern for light. When Chief Minister Naveen Patnaik, re-elected last month with a landslide majority on a good-performance ticket, congratulated Ramakanta on his success, embarrassed officials promised to make amends for the darkness in Kendrapara. Electrifying news indeed.
(This appeared in the Khaleej Times on June 9, 2009)