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Opinion | India’s economy needs a way out of short boom-and-bust cycles

Corrective action begins with the question of why Indian expansions turn into crises so soon

In the context of the recent tensions that erupted between India and China at their border high up in the Himalayas in June, a column that I had written (‘Towards ‘Briclipse’’, 19 March 2012) assumes relevance. Despite being the epicentre of the global financial crisis, US stock markets were doing better than emerging stock markets in 2012. Further, its policies had generated adverse spillover effects in different ways on Brazil and India. The column made an argument that by publicly demanding China to revalue its currency, the US had pushed China to strive to keep its currency perpetually undervalued, resulting in debt accumulation and asset price bubbles for the latter. It concluded with the plea for emerging economies to chart their own paths to economic prosperity by collaborating with one another, rather than emulate the failed policies of the West. That plea has been buried, perhaps forever, in the debris that dotted the Galwan Valley in June 2020.

As I write this in mid-2020, the world economy faces deep uncertainties and question marks over its future path. A global pandemic has struck. History reminds us that pandemics bring the curtains down on an open and integrated era, and herald the beginning of a less open and more fragmented era. If the pandemic is controlled, then there is climate change to reckon with. Some jobs are permanently lost even as other jobs open up. The net effect of these changes on the labour class and its prosperity is unclear. There is also the onward march of artificial intelligence to contend with.

Be it an economic or health crisis, policy responses have featured ever-falling interest rates and ever-rising mountains of liquidity. They do far more to boost asset prices than the fortunes of the median household. The divergence between stock market valuations on one hand and prospects of real economic growth and corporate earnings on the other has never been greater. The biggest risk to the world economy in the coming months and years is not so much from the pandemic, but the policy response to it and the bizarre effects such a response has had on asset prices and investor psychology. The global economy needs a reset, and it will most likely get one, perhaps, after the American presidential elections in November. But, the path from here to there won’t be smooth, nor will it be pleasant. In many respects, the “new normal" in America will be anything but normal. The America of the 2020s will be wholly unpredictable and India will do well to assume that it is on its own.

On the economic front, India cannot reduce its dependence on China overnight, nor can it attract global value chains leaving China immediately. It is a process. To expect immediate results is likely to be both futile and frustrating, and sap morale that needs to be sustained because both are multi-year, if not multi-decadal, processes. A beginning has to be made somewhere and the skirmishes in the Galwan Valley are as good a starting point as any.

India has had a somewhat disappointing decade between 2010 and 2019, relative to expectations generated by the first decade of the millennium. This is because the first decade began with promise after the turbulent events of the end of the first millennium that spilled over into 2001. India, in particular, faced droughts and financial system strains, and had to endure opprobrium and sanctions for going nuclear, apart from the fallout of the terror attacks on America in September 2011. India endured them all, undertook some reforms, built infrastructure and enjoyed the fruits of growth for a few years. But the cycle set in too quickly.

In recent times, my interest in such historical cyclical episodes has been piqued by the works of Neil Howe and William Strauss (The Fourth Turning), George Friedman (The Storm Before the Calm) and Peter Turchin (Secular Cycles). Leaving out Sir John Glubb’s classic paper,The Fate of Empires, would be a folly. In my view, it is both natural and reasonable that most social and economic phenomena are better understood through deductive approaches. Of course, by their nature, predictions based on deductive logic are risky endeavours because they mix up deductive analysis with inductive theorizing.

That said, most of us are familiar with the cycle of crises, from denial and anger to acceptance, action, recovery-expansion, complacency, excess and another crisis. While this framework applies to economic organisms, it can be observed in human behaviour too. In short, cycles are a reality. The problem with India is that it had its excess and crisis too soon after merely five years of expansion in the early years of the noughties. India’s crisis started with an exaggerated response to the global crisis of 2008, presumably because that was the “in-thing" to do. But that has spawned many other crises in its wake that continue to hold India back.

Openness to evidence and criticism and honest stock-taking are needed for India’s economy to emerge stronger from this crisis. Both need trust. Who will set the ball rolling? If not now, when? Corrective action begins with the question of why India’s expansions turn into crises so soon.

V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views.

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