New Delhi needs a dose of the urgency for reform that marked the last time it faced an economy this troubled.
With the value of the rupee plunging to new lows, the current account deficit at an all-time high and inflation running at nearly a ten-percent annual clip, India is in serious economic trouble. Indeed many are beginning to wonder whether the country is edging toward a replay of the events in the summer of 1991. Back then, an acute balance of payments crisis forced New Delhi into the indignity of pawning its gold reserves in order to secure desperately needed international financing.
At a small public event the other week, Duvvuri Subbarao, the outgoing head of the central bank, pointedly referred to a recent book, This Time is Different: Eight Centuries of Financial Folly, and conceded that policymakers rarely learn from their mistakes. He conceded that:
“… in matters of economics and finance, history repeats itself, not because it is an inherent trait of history, but because we don’t learn from history and let the repeat occur.”
This is a theme that policymakers have been pondering for a while. More than a year ago, at what was ostensibly a celebration of an updated book on the economic reforms catalyzed by the 1991 debacle, Subbarao warned that the dangers sparking that crisis – ballooning fiscal and current account deficits – were once again lurking. At the same time, a high-ranking commerce ministry official told a group of business leaders that economic indicators were provoking “a sense of déjà vu.” Worried that conditions were ripe for a replay of the 1991 crisis, he exclaimed:
“Why are we dodging these [policy challenges]? In 1991, we were candid enough to take these decisions. The quicker we take these decisions, the better it would be, instead of acting like ostriches.”
Prime Minister Manmohan Singh flatly rejects the comparison, however, stating that “There is no question of going back to 1991.” He is basically right, since the country is in a much more resilient position than two decades ago. That said, it would do wonders if the political class were once again seized with the sense of urgency that gripped New Delhi back in 1991. Perhaps then a solid determination will emerge to push forward with a new round of economic reforms that have been put off for years.
Shoddy management of the economy has been a hallmark of Singh’s second term, which is highly ironic given that he and his current economic team are widely credited with pulling the country out of the fire 22 years ago. Then serving as the newly appointed finance minister to Prime Minister P.V. Narasimha Rao, Singh famously inaugurated the reform era by quoting Victor Hugo: “No power on Earth can stop an idea whose time has come.” These days, however, he gives every sign of being trapped in Samuel Beckett’s absurdist play, Waiting for Godot.
Still, whatever Singh’s merits as a policymaker, he hardly deserves all of the criticism he receives for India’s travails. A good part of the fault lies in New Delhi’s peculiar structure of decision-making. Singh’s diarchal arrangement with Sonia Gandhi, the Congress Party’s risk-adverse, redistributionist-minded matron, has been a recipe for policy inertia and inconstancy, prompting one Western diplomat to exclaim a while back that “Even the power structures in North Korea are clearer than those in India.”
Officials also argue, with some justification, that India’s immediate problems are not of its own making and other countries are in the same leaky boat. The proximate reason for the current crisis can be traced back to three months ago when the U.S. Federal Reserve hinted that it would begin curtailing its ultra-expansionary monetary policy, which has kept global liquidity at an artificially high level in recent years. That signal caused foreign investors to begin pulling their money out of a number of emerging markets. India has been hit most severely, but the repercussions have also been felt in Indonesia and, to a lesser extent, Thailand, Malaysia, South Africa, Turkey and Brazil. Indeed, some analysts (here and here) are warning of calamity redux –something similar to the 1997-98 Asian financial crisis that triggered months of global economic distress.
Photo Credit: REUTERS/Mansi Thapliyal
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Sreenivas
The article is on point! It is indeed ironic that the same person that rolled out the bold policies in 1991 allowed such shoddy (mis)management of the economy.
-UI Business Corp.,
Devesh Kumar
BlAck economy is the main reason for this pitiable situation. Though one cannot dare to raise a finger on the prime minister but many of the team members are corrupt to the hilt.and who don’t know that he is just a dummy. The strings are pulled from a higher power centre. Peculiarly enough this has happened for the first time in the history of world’s largest democracy. ..
Little Helmsman
Very informative article! I hope India can move further along reforms and make it a country that garners respect and admiration.
Dewey Last
India's second quarter growth rate of 4.4% [2013 2nd qtr] is still a substantial figure compared to the rest of the world. The US and EU are struggling to keep from recession, while China and Japan have growth about the same level as India [more or less]. I do not see this as a failure, but as a global trend of lower growth. It will take several more years to reapportion assets in the wealthier countries so growth can be upward and steady again. For the rest of the world, growth will stagnate until the stronger economies stabilize.
I am not disagreeing India does not have problems such as corruption and inadequately educated government officials [princelings], however the economy is integrated into the world's and as such factors such as world growth are undeniably linked. In the last 10 years, India's economy has quadrupled. A hiccough can be expected, and I doubt it will last more than a few quarters as it looks like the US economy is about to normalize in a year or so.
Most doomsdayers I have come across are avid stock traders. Drive down the price and bargains become readily available. It looks like a good time to do some strategic investment. India is not going anywhere but up in the future. Leave it to the media to come up with analysts who have recently been potty trained and have a boo-boo now and then. Articles like this will smell bad in a year or so.
Go India!
Derek
“Why are we dodging these [policy challenges]? In 1991, we were candid enough to take these decisions. The quicker we take these decisions, the better it would be, instead of acting like ostriches.”
The goals of the elite and the nation have diverged. In the past, they were one and the same. Now, as India as matured, reforms only serve to hurt the elite's power and profit. Why would lawmakers care about reforms beneficial to society if their own business and economic interests are harmed? They will hold on as long as the law allows them to. The story of how the elite abuse their powers and their nation's constitutional systems is a sadly all too common occurance in this day and age.
arnu
Face it. India is banktupt.. It is mismanaged, allowing rampant corruption to run amuck. Not to mention not knowing its priorities. The house of India feeds its elders only but not its children. The obscene over expenditure on unproductive nuclear and non nuclear weapons of war means spendjng more than you earn. The rupee will be worth peanuts soon. India can join Zimbabwe and Indonesia soon where everyone is a “millionaire”.