Our political masters are fond of blaming the global slowdown and the crisis in Europe for our slower growth and the fall of the rupee over the last 12 months. These reactions remind me of what John Kenneth Galbraith wrote about the October 1929 stock market crash in his Short History of Financial Euphoria: “The market in October 1929 was said to be reflecting external influences… Professional economists were especially cooperative in advancing and defending this illusion."

The central bank has released two major documents/data in the last couple of weeks: the Financial Stability Report, and the balance of payments data for fiscal 2011-12. The former acknowledges that “all key external sector vulnerability indicators—the reserve cover of imports, the ratio of short-term debt to total external debt, the ratio of foreign exchange reserves to total debt, the debt service ratio and net international investment position-gross domestic product (GDP) ratio—deteriorated". It also points at global uncertainties “leading to increased risks in financing the external deficit" and hopes that the administrative measures taken to encourage capital inflows and fiscal consolidation could help moderate the risks. In fact, the tone and content, in particular the absence of any comments at all on the exchange rate policy, make one wonder whether policymakers continue to look at the problem as being one of liquidity; of the primary cause being the savings investment imbalance created by the quality and quantity of the fiscal deficit, and nothing to do with the changed exchange rate policy of the last few years. If so, perhaps only a major crisis will open our eyes: some macro numbers in 2011-12—fiscal and current accounts deficits as a percentage of GDP—are worse than in 1991.


We still seem, however, to believe in the rationality and efficiency of the market, that the market determined, highly volatile external value of the currency is a better policy. I find such market fundamentalism curious and representative of an ideology which says that the domestic value of the currency must be kept stable (in order to protect the purchasing power of the savings of the rich?), but a highly volatile external value is better (because it creates another “asset class" for the rich to make speculative profits?). For this ideology, the impact of external value on the competitiveness of the tradables sector, on growth and job creation, etc., are of no concern. The solution to deficits is to attract even more capital from abroad. If that does not work, a crisis will result, businesses will close, output will fall and unemployment will increase sharply (ask the Mexicans in 1994-95, East Asians in 1997-98, Brazilians in 1998, Argentinians in 2001 and Greeks and Portuguese now)—and the economy will stabilize at a lower level of output. This, after all, is the process of “creative destruction" in capitalism. It would be truly amazing if our policymakers, who are getting more and more nostalgic about the politics of distribution (not production) we practised under the senior Mrs Gandhi, are really convinced that this is the right policy for us.

There is a huge discrepancy between our balance of payments (BoP) and GDP data. My analysis suggests that in 2009-10 and 2010- 11, the negative contribution of net exports was around 50,000 crore less in the GDP data than the number in the BoP data (goods and services). The gap has jumped to 120,000 crore in 2011-12, with the fourth quarter reporting a positive contribution of net exports to GDP.

Mahbubani had another important point to make, on governance. If I were to really say what I feel on this, my editor will not permit either the additional words—or my language. But I can’t resist making one observation: whatever our conflicts, rivalries and differences with our neighbour in the north-west, we have a common culture of sloppiness in governance. On the same day when reports suggested that the mantralaya in Mumbai had violated all fire safety rules, came the report which stated that the name of the Indian prisoner who was given presidential pardon in Pakistan had been wrong in the first official announcement.

Let me end by quoting Prof. Jagdish Bhagwati and Prof. Arvind Panagariya (letter to the Financial Times, 5 June, not the Time cover story or Barack Obama’s comments or those of the Singapore Prime Minister) “there is a policy paralysis which began with the environment minister denying clearance to many projects nationwide. More importantly, this was reinforced by virtually every central ministry freezing up prudentially in response to an outbreak of corruption scandals."

A.V. Rajwade is a risk management consultant, columnist and author.

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