In Beijing, Indian athletes quietly opened a new chapter in the country’s evolution. One medal could be a flash in the pan. Three are not. With some luck it could have been more. By the time 2012 comes around, it could be in double digits. That Indian athletes have done it despite the system continues to lend credence to the belief that India is a sum of its “private” elements. However, that is inadequate compensation for systematic and sustained failure of governance. Indeed, sticking to past form is to risk eventual irrelevance. The world is churning rapidly and the Indian government has to do far more than not be a nuisance.
As India opened its account in Olympics, the US seemed to be closing its. That both the men’s and the women’s relay teams dropped the baton was rather symbolically apt under the circumstances. The baton perhaps had already begun to slip in the field of finance when the US Congress agreed to repeal the Glass-Steagall Act to facilitate the merger of Citigroup with Travellers Insurance. That was when the tail began to wag the dog. The financial sector began to exert disproportionate influence on the US economy and on the capitalist discourse.
As the services sector began to grow faster and contribute more to the gross domestic product and employment than manufacturing, US current account deficit began to rise even as the dollar went south. But, current account metrics—useful in the world of widgets —were declared irrelevant in the world of financial wizardry. It was all dark matter. Well, in 2007, it became clear it was not dark matter but shadowy. The financial sector, when it boomed, contributed to the current account deficit and in its bust, it is helping reduce it. The financial sector’s contribution to US households is now clear. It is to turn them into dissavers and net debtors.
That it was not even skilful malice but sheer incompetence that led to impoverishment of ordinary Americans is evident in that financial institutions are writing off billions of dollars in losses themselves, exposing both the hollowness and unsustainability of the profit boom of the last few years. The model is broken and it has damaged America’s standing. It has not been grasped yet.
Confirmation of that came in Ben Bernanke’s inaugural remarks to the annual conference in Jackson Hole, Wyoming, on Friday. He laid out in elaborate detail the importance of the “hardware” and “software” of the financial sector. “Software” constituted, in his view, macroprudential regulation in which the regulator looks at systemic risk created by herd-like behaviour by financial institutions. This should have been known long ago. Financial institutions, far from competing out risks, always pile it up with their herd-like behaviour. Regulatory indifference made it far worse this time around.
In a recent opinion piece in the Financial Times, Raghuram Rajan concedes as much when he says that clear limits to the specialization of the developed world in non-traded goods such as financial services are now seen. He adds that as the US reduces its current account deficit, shifts in specialization would take place. He is hinting that the developed world with vastly depreciated currencies in the next year or two might find its competitive advantage restored in manufacturing, while the emerging world might have to depend less on export of manufacture to the developed world. Protectionism and trade retaliation could be counted upon to chip in, too. Therefore, the developing world might have to specialize in the production of non-traded goods.
Which developing countries are better poised to do that? India comes up on top of the list. Enabled by technology, it has already made its mark in trading seemingly non-tradable services. Indians dominate the world of finance in the West. They are in key positions and hence their knowledge and experience count for something. Hence, now is the time to start planning for takeover by Mumbai of the mantle of the headquarters of world of finance from New York/London. Far-fetched? Yes, it is, right now.
Certainly, it is not going to happen and may never happen if the country insists on running double-digit fiscal deficits in an exemplary display of poor governance. No country that aspired to be a global financial centre achieved and sustained that status while running imprudent macroeconomic policies. Its currency would always be vulnerable. One of the greatest disservices this government has done, among other things, is to enfeeble India’s fiscal health considerably.
That leaves India in no position to grasp the momentous opportunities that upheavals in geopolitics and geofinance are throwing up. In other words, if the next four or five years will be like the last four, India could expect to meet with the same fate as its men’s field hockey team rather than of its medal winning athletes.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at firstname.lastname@example.org