Navel Gazing Discontent

Lovely Poonam Kaur

Navel-Gazing Discontent

The current official navel-gazing assessment of our economic situation is stymied by its own in-built limitations. It is now evident that an economy of our modest proportions does not possess the resources to right itself, dependent as it is on investment from the driver economies of the West to do so. This, particularly in the management of our current account deficits, despite our foreign exchange reserves of some $ 300 billion.

We should have realised this before embarking arrogantly on a strict monetarist path, smug in the belief that our growth story was going to survive the abuse to its roots. Instead FDI has dried up, would-be investors domestic and foreign are dismayed, and FII money is leaving in floods, driving the rupee and the stock market down in its wake.

With appalling swiftness, we have gone from an admired BRIC nation that survived the 2008 downturn with finesse, to one in which we have managed to embarrass ourselves to the point of becoming a global disappointment in 2011.

And since some 56% of our economy now consists of the services sector, inclusive of the growth engines of IT; and America happens to consume, or did, some 90% of our IT exports, we are naturally hard hit in that department.  Of course, a lot of this service sector also attends to the domestic market, but the home market has been garrotted in the cause of containing inflation too.

Europe and America  are grappling with an avalanche of debt without growth, even negative growth in some places, that has led it to technical, if undeclared, bankruptcy. They are only staving it off from naked admission by constantly printing more and more notes marked figuratively with an IOU from the future. And of course, the West does have a substantial technological and military dominance and the heft of sheer size that will help it pull through in the end. In past centuries this would have been a good time for them to go to war in order to seize the resources they needed, and some say the military activity in some of the oil and mineral rich regions is precisely that.

Back in our shanty, besides IT, our other brilliant spot consists of small diamonds duly imported, cut and polished, mainly in Surat, before being sent out again. And diamonds, the small and tiny ones which are processed in India, have also been hit hard by the recession in the West.

Other areas, such as commodities, garments and engineering goods, not our strong suit in any case, are caught in the pincers of very low margins and sluggish demand. But the good thing is that the exports area accounts for only about 12% of the total Indian economy. So the implication is - fix the domestic economy and we’ll be alright. However, this seems easier said than done, as attempts to reform it have demonstrated.

This mainly because, despite the grave economic situation, occasionally given frank voice to by our Finance Minister Mr. Pranab Mukherjee, the powers that be are more interested in controlling inflation which affects the voting poor the hardest, rather than managing growth, which is an amorphous reality not easily understood by the illiterate.

So growth be damned has been the mantra of our Government, let’s control food inflation instead. The good news is that food inflation is at last falling noticeably, partly because it is a seasonal demand-supply thing for farm produce, and partly because of the sharp constriction in money supply engendered by over a dozen interest rate hikes imposed by the RBI.

 In addition, even as Business and Industry have been battered by way of collateral damage by the actions of an unsympathetic and unsupportive Government, observers, at least those that don’t subscribe to endless handouts, are dismayed by the Government’s exploration of more populist measures. These encompass further reckless welfarism aimed at the aam aadmi, such as the pending Food Bill, likely to have very deleterious effects on the finances of the Government.

With indifference writ large on the part of the Government, Indian companies will have to wait to make their own way once the investment climate and confidence improves in the West. We will then stop being buffeted by waves of imported pessimism aggravated by unhelpful domestic policies and circumstances. These include tight money, the Government’s ever growing fiscal deficits, weakening currency values, slowing growth rates, governance paralysis on reforms, chronic political cacophony and weakness and a most disconcerting lack of purpose.

The great hope is in the revival of the much vaunted domestic economy that the whole world also wants a slice of.  Hopefully, what is done is done, and there will be change before we reach the point of no return. In trying to drive out inflationary liquidity over the last 13 months or so, we have lost economic momentum, while succeeding only very slightly in curbing inflation, because a lot of it is automatically imported, via our vast petroleum needs.

So what can we expect next? We do have the wherewithal to ride out this period of distress, as long as we once again pump-prime the domestic economy, reversing the present tight money policies, in an echo of what we did in the aftermath of the Wall Street debacles of 2008. It would have been great to encourage FDI also, but judging from the furore over FDI in multi-brand retail, it may prove to be politically too difficult at present.

But we cannot afford to kill the golden goose entirely. Most analysts of the European and American economic scenario are also casting doubt on their ability to return to prosperity via the rocky road of prolonged austerity. What that would do is assassinate the spirit of all enterprise, and no government can substitute for it, or insinuate anything else to serve in its precious place.

On our part too we need to course correct fast. Perhaps the greater folly has not been the delusion of grandeur occasioned by the navel-gazing.  Nor in the inward looking regard that we were safe as the second fastest growing economy in the world. It is in not recognising our imperatives on how to keep it that way.  We have presumed that the “India story” that we have got used to dining out on, could never slip away.  Now that it is, we must freely admit that our revised self-image of several years now cannot stomach or tolerate being sent back to the third world of basket cases. Let us therefore hope that it is not the covert policy of the Government in a variation of the Communist deification of poverty and privation.

(1,108 words)

15^th December 2011

Gautam Mukherjee

Published as Leader Edit in The Pioneer as "Ahead lies disaster" on December 15th, 2011. Also online at www.dailypioneer.com where it is archived under Columnists and in the ePaper of the day.