Stewing in our own juice
REVIEWING the current economic situation at a recent meeting of the Prime Minister’s Economic Advisory Council, the advisor to the finance minister, Rakesh Mohan, showed a series of charts tracing the roots of this year’s economic slowdown in India all the way to 1998. I admired his courage in patiently explaining to the prime minister, his key economic ministers and officials, and the other economists present at the meeting, the bare fact that it was the acts of omission and commission of the last five years in the management of the economy which were primarily responsible for the current slowdown as also the grim fiscal situation confronting many state governments and the central government.
Could it not have occurred to the prime minister and his senior colleagues that Rakesh Mohan was in fact holding their government’s inaction on the economic front during their entire tenure in office responsible for the current mess? This knocked the bottom out of Finance Minister Yashwant Sinha’s argument that it was the global economic slowdown, particularly the U.S. recession, which was responsible for the weak performance of the Indian economy in the current fiscal.
Taking off from the presentation, I urged the prime minister and the finance minister not to exaggerate the negative impact of the global slow-down on the Indian economy. Foreign trade accounts for barely 10% of our national income. Foreign direct investment hardly counts for anything in total investment in the country. The only significant impact that external events have had on the economy has been through the stock market, where foreign institutional investors have become bearish and are not bringing in money, and on the IT sector, where software business may have been slightly affected.
There is a basic lesson of Keynesianism which has remained relevant despite the intellectual marginalisation of Keynes in western economic thinking. Simply stated it is that in a market economy characterised by uncertainty and atomisation of decision making by a multitude of actors and where so much is predicated upon sentiment, expectations have a way of being fulfilled. Negative expectations can have a real negative impact on sentiment while positive expectations can alter the mood in favour of a resumption of economic activity.
So, I urged the political leadership around the table, ‘Please do not talk the economy down.’ Talking up may not work unless the talkers carry conviction, but talking down certainly has an infectious quality about it irrespective of who starts the process.
All this happened on 10 September 2001. On 11 September the world entered a new phase of history. Recovering from the initial shock, the prime minister went on prime time television and addressed the nation. The terrorist attacks in the United States have had a serious impact on peace and security worldwide, he said, warning that hard times were ahead of us. The government will have to take tough economic decisions. It may even have to hike energy prices. People must be prepared for sacrifice and difficult times. The prime minister was grim-faced. Even the most cheerful TV viewer would not have slept easily that night.
Afew days later U.S. President George Bush urged Americans to stop watching the TV and go out and have a good time. There was a sudden decline in demand as people stopped having fun, stopped travelling, stopped shopping and stopped spending. Spend, was Bush’s message. Sacrifice, was Vajpayee’s. President Bush was talking up the economy; Prime Minister Vajpayee was talking it down further.
Even though the prime minister listened intently to what I said at the EAC meeting, and even chuckled when I pulled Omkar Goswami’s leg apropos of something Omkar had said, he had not intenralised my message. A full month later, Finance Minister Yashwant Sinha came to the annual conference of economic editors and repeated the ‘scenario is grim’ theme. He was talking down sentiment further.
For a country which is hardly anywhere near the action, not even hosting US planes on its airfields, for an economy which is hardly globalised and barely exposed to the negative impact of the U.S. slowdown, we are getting a bit too worked up about the negative consequences for us of global political and economic events. Big deal! Look at China.
China, like India and indeed the United States, is a continental economy which is largely inward-oriented, notwithstanding its much higher share of world trade than India’s. The Chinese economy continues to be driven by domestic economic growth and while it no longer posts 10% growth, it has not done badly over the past two years, staying globally at the top with 7.0% to 8.0% growth.
Even as the western world worried about a recession and worried even more about the negative economic consequences of the 11 September attacks, the Chinese political and economic leadership continuously talked their economy up. China put in place counter-cyclical policies and aggressively pursued politico-diplomatic initiatives that ensure beneficial economic possibilities. Consider, for instance, China’s success in securing the right to host the 2008 Olympics in Beijing. This news was followed up by a decision to bolster China’s airlines with the purchase of new aircraft that sounded like music to Boeing’s ears in the U.S.
China has acted thoughtfully in projecting itself as a secure and safe place for foreigners and foreign investors at a time when the western world is terribly nervous about terrorism. It will not be surprising if many Americans feel safer in China today than at home! What do we do? As if the current tension in our neighbourhood is not enough, the Vishwa Hindu Parishad goes and forcibly enters the cordoned-off area in Ayodhya. There is palpable increase in communal tension across the country. The government correctly bans the Students Islamic Movement of India (SIMI) but does not ban similar communal outfits advocating violence owing allegiance to other religions, particularly the Bajrang Dal. We pursue internal politics that is likely to heighten global concerns about domestic peace and security.
It is important to appreciate that neither the United States nor India is in fact battling ‘terrorism’. Terrorism is only the means adopted, the manifestation of a cause and that cause is religious fundamentalism, monotheism, exclusivism, mono-culturalism. Both the U.S. and India are plural, multicultural and democratic societies. The terrorists who challenge us are challenging our ‘way of life, our way of thinking’. The fight against terrorism is, therefore, a fight against chauvinism of all kinds and a struggle for pluralism. Strengthening India’s secular and plural traditions is in the interest of our national integrity and security. Anyone who challenges secularism and pluralism is in fact challenging the Indian Constitution and is therefore anti-national, irrespective of religious affiliation.
So what’s the message? Be it the slowdown in the Indian economy or perceptions relating to a heightened security threat to India, the roots of our problems are internal. Don’t blame the outside world too much. If we cannot get our act together, we will have to stew in our own juice.
The talk about India’s globalisation over the past decade has resulted in an exaggerated view of our external dependence and exposure. I believe this is largely on account of the excessive visibility of the superficial symbols of our westernisation. Be it the neighbourhood McDonalds or the many satellite TV channels accessible in our living rooms, or indeed the Americanisation of the print media, the fact remains that outside of the software sector, the Indian economy remains largely inward-oriented even by Asian standards, not to speak of European ones.
This had proved to be a weakness when the world economy was growing faster than ours and a blessing when it grew slower than ours, or was caught in the maelstorm of financial liberalisation. If India did not enjoy the benefits of the post-War boom in the United States, as East and Southeast Asia did, it did not suffer the pain of a financial crisis engineered by fast-paced financial sector liberalisation.
Admittedly, few countries that had globalised ‘intelligently’, that is with a focus on building domestic capabilities, have fared worse than India in the post-War period. Those that globalised without any attention to domestic capabilities, like many African and Latin American ones, have indeed become worse off. The lesson for India is that globalisation is not an alternative to building domestic capabilities; it is a complimentary process, as China has shown.
The main economic challenge for India is internal. However, for us the lesson of the last half century is that the home economy cannot remain isolated from the global economy and, indeed, that it should not. Building globally competitive capabilities and structures is essential for growth and survival in the new world. That is India’s challenge. There will be political, social, economic and technological obstacles and challenges along the way and these have to be addressed, if possible anticipated.
Terrorism, communalism, big power bossism, neo-colonial non-market interventionism and so on will challenge us and we must intelligently and rationally plan to address them, rather than approach each challenge as a crisis. India has the capabilities to deal with such challenges. The task of the government and of corporate leadership is to be able to identify and harness this talent in the national interest so that India may be a better place to live in and we may matter more in the world.