Prime Minister has articulated government position on the slowdown and has characterised it as a temporary phenomenon and a one year affair and he substantiated with data. Prime Minister is an eminent economist; having been an RBI Governor, Deputy Chairman of the Planning Commission, Finance Minister and the Leader of the Opposition in Rajyasabha, so Prime Minister does not need any certificate. But in my view, the Prime Minister missed a fundamental truth about how economies operate as they are living organisms and exhibits all the similar characteristics. Till 2007, country was doing well on investment and proportionate consumption and savings & current account balance and accordingly inflation was well contained and interest rates were also stable. The slow- down in 2008-09 was largely on account of contraction in external demand as the crisis was not originated in India and Indian banks did not suffer much from potential counterparty risks though there was spill-over effect of moderate decline in private investment and there was stress in the inter-bank markets. In order to offset this temporary phenomenon, we introduced an artificial stimulus, which were aimed at private consumption but was not addressed at public investment in infrastructure as these are time consuming and will not get reflected in GDP numbers and the benefits accrue after many years. The stimulus predictably gave a temporary boost to the GDP number but distorted that delicate consumption & investment dynamics and this coupled with supply constraints added to inflationary pressures. Other factors are well discussed, In order to control inflation RBI raised interest rates and since our inflation is structural in nature it did not have much impact but negatively affected private investment and this coupled with high fiscal deficits and current account deficits created a negative feedback loop effect etc. Prime Minster also pointed out the need to minimize petroleum product imports. Ironically, in 2008 Crude Oil prices jumped to as high as $147 per barrel but still the currency traded in the range of 42 to 47. It is noteworthy from 2007-2008 there was net capital outflows than the net capital inflows witnessed since the beginning of 2012, when the currency started depreciating. So the currency depreciation has more than to do with current account alone and has to do with the general deterioration in the macro-economic dynamics, which is a cumulative interplay of fiscal deficits, inflation, interest rates, supply constraints, private & pubic investment, current account deficits etc. and the country’s macro-economic situation deteriorated on each of these parameters in the last 4 years. The pattern is the same in most of the leading emerging market countries as they all adopted the same kind of policies, which was designed to solve the contraction in private consumption & investment in the advanced economies of the developed world as the stimulus was aimed at temporarily giving a boost to consumption in terms of tax breaks and support mechanism for the collapsing housing sector but was ill-suited for emerging markets. As pointed by Eric Beinhocker in his brilliant work ‘The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics’, there is a natural balance in the economy and economies are non-linear dynamic systems and are characterised by time delays. Delays causes us to overshoot with our actions till we get the desired outcome and the longer the time delay, the harder it is to control our policy efforts and the more oscillations we get in outcomes. Had we pursued with our long-term goals without bothering about temporary fluctuations though we could not completely insulate ourselves from the external turbulence but kept our cool, we would have been much better-off. Going forward, we should stick with our long term plans and should focus on things like making our transportation system world-class etc. Just to give an example, trucks in India travel an average of less than 200 miles per day, compared to an average of 1,000 miles per day in the developed world and only 2 to 3% of domestic cargo is containerized. The solutions are well-known; improve our roads, automate & computerize checkpoints by minimizing bribery. We also need to radically transform our power distribution & transmission and many State Electricity Boards are loss making. Our mining sector needs to be re-vitalized. At least for the next 2 to 3 decades India will continue to import petroleum products and the only way we can offset this is through long-term strategy on increasing our manufacturing exports. Productivity growth usually requires economies of scale that in turn require mass production and only through scale and better ports and airports will our manufactures be able to compete globally. We should project our energy imports for the next 3 decades and accordingly tailor our manufacturing & services exports. Shale gas revolution in North-America and the potential for huge shale gas opportunities in China will alter the global energy dynamics by 2020, when the US is expected to radically reduce its oil imports, which will act as a check on crude oil prices. Energy efficiency initiatives are an on-going process.
Posted on: Sun, 21 Jul 2013 11:58:40 +0000
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