Monday, October 6, 2014


The liberalization of the Indian economy during my time in the finance ministry in the early 1990s was not popular with businessmen; they disliked the resulting competition and uncertainty. I helped Manmohan Singh with many speeches trying to persuade unhappy and sullen industrialists. Although the BJP-led government of the late 1990s was more to their liking, they did not like its reforms any more. Still, it brought down tariffs radically, and demolished the remnants of import licensing. Atal Bihari Vajpayee did big reforms with the least hoopla. This column is from Business Standard of 19 September 2000.


General Pervez Musharraf thinks the Indian press is patriotic. I am sure India’s official super-patriots do not think so. Ever since I left the finance ministry, I have been visited from time to time by foreigners, chiefly from banks, brokerages and governments. They usually come after visiting government economists, and they want to check if the uniformly rosy picture they were given was real. It generally was not; I told them more or less what I have written in this column, and it has seldom been complimentary to the collective intelligence of economic advisors. Terribly unpatriotic of me; and I know many equal traitors. But we are a part of the intellectual openness that attracts investors to India; it is equally an advantage for Indian investors and companies. The con game that the Chief Executive mistakes for patriotism is unlikely to win Pakistan many friends even if he gets his press to play it.
But in the last two years, the official and my view of India began to converge. Things certainly started looking up from 1999 onwards. Industrial growth began to rise, inflation fell, reserves rose, export growth started looking up. When I left India a year ago, there was really little to complain of. In Stanford, I could give straight-faced talks lauding the state of the economy.
The year that has passed since then, however, has seen a remarkable reversal of fortune. Industrial growth has again fallen to modest levels, and stubbornly refuses to rise. Inflation has risen again. Reserves have been under pressure, and would fall even faster if the government did not indulge in such shortsighted measures as confiscation of half the balances in the EEFC (exchange earners’ foreign currency) accounts and sending the bloodhounds of the department of revenue intelligence after importers of capital goods who have not fulfilled their export obligations. It is not clear that the situation is desperate; but the government is certainly acting in desperation. What is worse, industry is in a panic. Many industries are reeling from import competition. Industry after industry is going to the finance minister and complaining that imports are cheaper than even its cost of inputs.
Still, somehow, the xenophobia that infected industry in the late 1990s is less in evidence. The change in attitudes too must be related to the difficult business climate. When businesses get into trouble, they look for a sugar daddy. If strong companies buy them out, their competitors feel the heat; so such competitors are against foreign investors coming in. Both tend to be in trouble together; there is no hard and fast dividing line between the two. But the worse the business climate, the greater the number of people who would like to sell out – and they are all for foreign investment, which can only improve the sale price of businesses. The fact that opposition to foreign direct investment has weakened suggests to me that even more businesses are in trouble today.
How did this come about in such a short space of time? Why did the incipient boom of last year peter out so soon? I think that it has less to do with macroeconomic processes and more with particular events.
The balance of payments has worsened on account of the rise in oil prices and a fall in foreign investment. Oil has seen sharp ten-year cycles since the Arabs’ nationalization of their oil industries in the 1970s; the last year and a half has seen the latest upturn. It has nothing to do with our policies, or indeed with any events in India; and it has raised the import bill by about $5 billion.
Also, investment inflows have declined. Portfolio investment has fallen because of the break in the US stock market boom. The collapse was imminent in the preceding boom; we have done nothing to bring it about. It has raised subjective risk premia of US investors, including the perceived risk of investing in developing countries; India is just a victim of circumstances. There has been a fall in direct investment from the high levels of 1996-98, and it does have something to do with policy. The BJP has not restricted FDI, but it has multiplied silly little rules and exceptions; given the legendary reputation of the Indian bureaucracy for arbitrariness and procrastination, any addition to rules gives foreign investors a negative signal. This applies equally to non-resident Indians, from whom the Prime Minister has sought $15 billion of foreign direct investment a year. They all adore the PM, but they are not going to invest so much in India. They will bring in a billion or two a year, mainly in the software industry; but the customs officer and the labour inspector will continue to do a good job of keeping them out of the rest.
Finally, the rise in inflation from the extraordinarily low levels next year. It is largely due to two factors: the rise in oil prices, and a rise in administered prices. The first was an unavoidable consequence of external events, and the second was obviously desirable. Neither was ideal; instead of the cabinet huffing and puffing for months over the most trivial rises in public sector prices, the government should set up mechanisms that delegate downwards the power to change those prices and allow cost increases an automatic and instant pass-through. Still, even a pass-through mediated by a sweating cabinet is that much reduction of folly.
So by and large, the worsening of the economic situation is due to external events, and not the result of stupid policies. The reason why all eyes are on the government in these times of adversity is because the government is in everything in which it should not be involved – in oil, power, sugar, foodgrains, etc etc. And not content with its overstretched brief, it is now trying to get a foot into the software industry – the one industry that is doing well and bringing much prized glory to the country.
On the terrible dangers of this government involvement in the only success story I shall write later. For the moment, let me conclude by saying that India is not the only country affected by external events or accidents. The rise in oil prices is global. The US is suffering one of the worst droughts in decades. Investors who are wary of the euro have moved money into London; the resulting strength of the sterling has hurt what remains of British industry.

But in other countries, businesses are supposed to tackle the problems arising out of such macroeconomic events; as a result they are run so as to be prepared for such events, and sold if they cannot cope. In India, they are in the habit of running to the government at every pretext; and politicians love them to come asking for succour. The problem with Indian business is not that it was protected for too long; it is that it does not want to stand on its own feet. And it feeds the politician who loves to interfere in what ought not to concern him. Their unholy alliance is the economic bane of India.