UPA’s report card on the economy: D-
May 21, 2009
The current global crisis is potentially an inflection point that marks the transition from an Anglo-American dominance to an Asian dominance in world economic affairs. Certainly, there is a startling turnaround in the fact that China holds $2 trillion in US Treasury securities and therefore lectures the Americans about running their economy – it feels like only yesterday when the shoe was on the other foot. Another indicator is China’s aggressive fire-sale purchases of commodities, including oil, copper, iron ore etc. from all over the world. “Have money, will buy” is their mantra.
But where is India in this “Asian century”? Alas, India has once again fumbled a golden opportunity to rise to economic superstardom. Given the profligate spending of the UPA and its self-proclaimed galaxy of economic geniuses, India now sports perhaps the highest deficit of any country: about 13%, a far cry from the 5% that the UPA has been promising us all along. Yet again, the Congress has successfully brought India back to the verge of the “Nehruvian Rate of Growth” of 2-3%, which is an economic crime against humanity, imposing abject poverty on 250 million people. After sixty years of Congress misrule, India has most of the world’s poor people, and some of the worst health and nutrition indicators, even worse than much poorer sub-Saharan Africa (see the NYTImes “As Growth Soars, Child Hunger Persists” http://www.nytimes.com/2009/03/13/world/asia/13malnutrition.html?_r=2&ref=world ). This is truly a crime and a national shame.
It is evident that India’s wonderful “hybrid economy” gives the country the very worst of both capitalism and communism. For, when the world was going through a capitalistic feeding frenzy, India, not being sufficiently open to trade and capital flows, did not benefit. In contrast, China, taking full advantage of its WTO accession, amassed a singular fortune, and uplifted large numbers of its poor.
So India didn’t grab that opportunity. One would think, then, that the obverse would be positive – that is, when the excess leverage hit the fan, isolated India would not be affected very much. To some extent this is true: since India is a tiny trading power (accounting for perhaps 1% of world trade in goods), the precipitous decline in demand from the West has not affected India anywhere near as much as it has hit China.
That is India as slow and steady tortoise to China’s flashy hare. In fact, this is why commentators are crowing about the alleged virtues of the dirigiste Indian State and its (usually deadening) hand on the levers of the economy. In comparison to the formerly-lionized-and-now-reviled Alan Greenspan’s laissez-faire Federal Reserve in the US, so the theory goes, the virtuous RBI has been able to protect India from Anglo-American buccaneer investment bankers.
If only that were more than a half-truth! The reality is closer to the way Pay Commission reports are implemented in India – only one half of the recommendations is implemented. Pay Commissions routinely suggest a) reducing headcount, b) increasing working hours, c) tying salary increments to productivity, and d) increasing base salaries substantially. Of course a, b, and c are ignored, and only vote-winning d is implemented at large cost to the taxpayer.
Similarly, it is true that Anglo-Americans were unable to dump toxic mortgages on the Indian banking system. Unfortunately, India’s politicians, including an alleged ‘Dream Team’ of economics mavens, have done the dastardly deed entirely on their own through almost Rs. 200,000 crores of deficit spending, which will result in crushing inflation with a vengeance in the near future. This in the name of programs for the ‘common man’: such as the NREGS, the waiver of farm loans, and the windfall for bureaucrats.
Rs. 70,000 crores for the NREGS, which, if we had truth-in-advertising, should be renamed “National Employment Guarantee Scheme for Party Cadres”, because 95% of the funds ended up in their pockets (I quote Rajiv Gandhi who said 20 years ago that 90% of the funds were pilfered en route, and surely they are more innovative now). Rs. 70,000 crores for the waiver of farm loans, most of which went to rich landlords already flush with untaxed agricultural income that has led to a boom in consumption in villages. Rs. 30,000 crores on the corrupt, do-nothing bureaucracy. All this is money that the Congress printed out of thin air.
Not to speak of the billions-worth of counterfeit currency introduced by the friendly neighborhood printing presses in Karachi. One ocean-going container full of Rs. 500 and Rs. 1000 notes from Pakistan – by all accounts very good copies – was seized in Cochin port, which means hundreds of other containers would have gotten through.
Thus, even though there is a deflationary trend – especially in real estate after the bubble burst, and it too had been propped up the same unaccounted-for money in the politician-civil servant-criminal nexus – the long-term prospects are of raging inflation, as these 200,000+ crores chase limited goods.
Interestingly, the US is heading down the same path by announcing that it will inject $1 trillion in the system via Fed purchases of long-term Treasury securities. In other words, they too printed money. The reaction was swift – the dollar tumbled, naturally.
Lost in all the hoopla about India’s inflation coming down to 0.44% recently is the fact that 12% inflation for months has imposed a high-water-mark pricing on practically every manufactured good. Prices have gone up by 50% in many cases; they have stubbornly remained there, and the chances of them coming down are nil. In India, peculiarly, prices go up, but they never come down. This must be a ‘feature’ of the chimerical ‘hybrid economy’. The only things that have come down are agricultural commodities like grain, and post-bubble real-estate.
Thus, once again, India has managed to snatch defeat from the jaws of victory. China will go on to make it the “Chinese century”, and India will always have unrealized potential. India’s curse, Jagdish Bhagwati once observed, is its clever economists. This has been proven with a vengeance in the last five years.