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)
