Getting India Back on Track
From Financial Express, September 13, 2013
Getting India back on track
In my last column (An Indian Spring? FE, August 22,
http://goo.gl/hwW9cw), I raised the possibility of India descending into
an Egypt-like situation. It probably will not get that bad, since
India’s recent history and its societal makeup are sufficiently
different. But there is one large commonality—a surplus of young people
relative to decent jobs. That basic mismatch between demographics and
economic opportunity can drive substantial waves of social unrest. One
only has to think back to the early and mid-1970s to realise that India,
for all its democratic resilience, is not immune to severe social and
political instability. In an earlier column (Can India grow faster
again? FE, August 19, http://goo.gl/8E9iwS) I listed some steps that
India’s leaders need to take in the medium run: effective vocational
training, removing constraints on electric power generation, and more
devolution to the states and to cities. But before that, there is a
short run crisis facing the country. Here are my thoughts on how to turn
things around quickly and effectively.
The immediate problem is a crisis of confidence. This is partly
what has driven the plunge in the rupee, although the strength of the US
and European economies has also contributed to the rupee depreciation.
The erosion of confidence has been gradual, with multiple instances of
government corruption and fiscal and monetary policy mistakes over the
last couple of years. Fixing this will not be easy. The measures
undertaken so far have smacked of panic: sudden promises of relaxing
foreign direct investment caps, a grab bag of import controls, and
derailing financial markets to curb “speculators”. All these measures,
in my view, simply reaffirm the view that the government is adrift and
that troubles will continue. The latter two types of measures also go
against the basics of a coherent economic reform strategy, which should
be built on promoting well-functioning markets in a global setting.
With respect to the rupee, the Reserve Bank of India’s (RBI’s)
initial response of trying to reduce speculation by making short-term
borrowing harder simply sabotaged the working of short-term credit
markets, and had no effect on offshore traders. Markets became thinner
and more volatile. Instead, if RBI wants to prevent further overshooting
downwards of the rupee’s value, it should follow an assertive and
transparent (but feasible) intervention policy (something along the
lines suggested by Kaushik Basu, announcing a schedule of intervention).
Given what has happened, it may be mostly too late. One thing RBI
should do is to raise its policy rate, as other emerging economies have
been doing. Yes, this could further slow down growth, but the short run
benefits of an interest rate hike, in terms of stabilising expectations
about inflation and currency depreciation, seem to make this a
worthwhile option. Reversing such rate hikes is easy and quick, and they
do not have the deleterious impacts of unexpected changes in the rules
governing the functioning of markets.
With respect to the current account deficit, what the government
needs to do is to use the opportunity of the rupee depreciation to push
exports. The obvious areas are in information technology and related
services, tourism, and possibly some kinds of consumer goods (including
apparel, health and beauty items, and processed foods). Essentially,
India’s products are suddenly a bargain, but some rapid and concerted
marketing efforts are required to make sure that rich world consumers
take advantage of these bargains. India’s embassies and missions abroad
should be going into overtime, working with Indian businesses to seize
the opportunity presented by the fallen rupee. Promoting exports, while
more work and slower to take effect than restricting imports, will have a
much larger medium term benefit. One of the easiest, most immediate
opportunities is promoting foreign tourism, since the supply constraints
are less problematic.
On the domestic front, the politics of the looming national
election make progress difficult, but if the government were to push
harder to reach a grand bargain on the goods and services tax (GST),
convincing the array of opposition parties that they will all benefit
from a broader, more robust tax system, this would provide the prospect
of a corrective on the fiscal front. My reading of some of the crisis of
confidence is that it was driven by the government’s attempts to raise
revenue through ad hoc, discretionary and retroactive measures, in turn
driven by the need to reduce the fiscal deficit. But those policies hurt
confidence, growth and government revenues, just the opposite of what
was desired.
The three examples I have suggested are policies that signal that
the government is in charge, and is capable of providing leadership to
the country. In contrast, most of the governmental responses to the
crisis so far have seemed to signal desperation, weakness and lack of
control. Much of the recent Indian policy debate has been reduced to
finger pointing (evil speculators, heartless global capitalists,
incompetent and venal politicians) and crying over spilt milk. It does
not have to be so, and India’s leadership has to act as if it is worthy
to lead in these challenging times.
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