Picking the right lens for NITI Aayog
New initiatives to transform India require new collaborations, not old battles
Rajiv Kumar is the vice-chairman designate of NITI Aayog. He has an opportunity to enhance India’s economic stature if he wears a bifocal lens during the next three years of his tenure. So far, I have seen only his binary lens, in particular with regard to foreign vs home-grown economic advice.
In June 2016, Kumar wrote that he was sad to see former Reserve Bank of India governor Raghuram Rajan leave for Chicago. On 2 August 2017, he published two articles. In one, he shares his happiness that “foreign” economists like Rajan and Kumar’s predecessor Arvind Panagariya have left and predicts that more such “foreign” experts in top government positions in India will follow these two. That was for the readers of Hindi daily Dainik Jagran. In an almost identical article written on 2 August for the Daily Mail, no names are mentioned. His column in the Daily Mail, which asserts that India can grow on its own terms, makes a few useful points and a few that are controversial.
Kumar is right to caution India on blind faith in efficient financial markets. But then, many Western economists are sceptical of it too. It is doubtful if many outside the economics department of the University of Chicago believe in it. There might be exceptions even in its hallowed portals. Kumar is also right to mention that the financial crisis of 2008 was a failure of “minimal governance”. However, he leaves out a crucial caveat. It is “minimal governance” with respect to the financial sector that proved to be a mistake.
Competitive markets work in non-financial sectors. Finance differs crucially because of some inherent features.
First, competition improves systemic stability outside of finance. In the world of finance, too many firms competing for market share can make the economic and financial systems unstable. When such competition among financial firms combines with executive compensation schemes that reward short-term profits for firms, the system is endangered.
Second, financial institutions are pro-cyclical in nature. They take on more risk (lend more) as economies boom and asset prices increase and do the opposite when economies slow and asset prices tank.
Third, in financial markets, demand for assets rises with rising prices and falls with falling prices. That is what gives rise to booms and busts. The point is that minimal governance has failed with respect to the financial sector. But to call it a failure in other aspects of the economy is incorrect. Branding those who come from abroad as “helicopter experts” is needlessly binary. Kumar, now as the vice-chairman of NITI Aayog, needs to wear a bifocal lens. India needs both home-grown experts for their contextual familiarity and international expertise for the best practices, and also because the latter are free of domestic political baggage. Rather than making the case against systematic discrimination of India-trained Indian economists, inadvertently or not, the NITI Aayog vice-chairman-designate is making the case for the systematic exclusion of foreign-trained Indian economists. He has tailored his suit to the “swadeshi” fashion and that is unfortunate because it is fashion without substance. The “swadeshi” school of economics covers its intellectual vacuity with moral pretensions.
What are Indian ground realities and who understands them better? Is India an optimal currency or economic area? Research by Praveen Chakravarty at the IDFC Institute has documented growing and non-narrowing divergences between Indian states in many dimensions. In economic terms, states in the south and states in the central plains might as well belong to different countries. India’s development challenges are varied and so should be the policy approaches to them.
The International Monetary Fund (IMF) is everyone’s favourite whipping boy, yours truly included. I tell my students about the IMF prescribing to Asian nations fiscal austerity, higher interest rates and higher market access for Western investors, when they were struck by a crisis of an over-leveraged private sector, banking sectors on the verge of collapse, and external deficits. I also tell them that the developed nations cut interest rates and deployed fiscal stimulus in the aftermath of the 2008 crisis—the opposite of what the IMF told Asian nations. But I also tell them to think of the counterfactual, and of the difference between America and other East Asian nations.
Who can say that Asian currencies would not have plunged even further without interest rate support? Who can argue that Indonesia issuing rupiah-denominated debt to foreigners is the same as America issuing debt in a currency that everyone wishes to hold, allowing the country to run current account deficits in perpetuity? It is easier to be wiser in hindsight and attribute mala fide to the IMF but real-time decision making in a crisis is a different cup of tea. Malaysia might have avoided the worst fallout in 1998 by defying the IMF, but Indonesia is better off economically today than Malaysia. In short, the impossibility of knowing the counterfactual should hold us back from delivering absolute verdicts.
India’s economic challenges are, in equal measure, frustrating and exciting intellectually. These challenges warrant the embrace of best ideas and practices from all corners, but tailored to the Indian context. As a premier think tank to the government, NITI Aayog needs thought leaders with open minds. New initiatives to transform India require new collaborations, not old battles.
V. Anantha Nageswaran is senior adjunct fellow (geoeconomics studies) at Gateway House: Indian Council on Global Relations, Mumbai. These are his personal views. Read Anantha’s Mint columns at www.livemint.com/baretalk
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