As I write this editorial on the 27th of July, the world’s two largest democracies are in the throes of crises that are entirely self-inflicted by their respective political classes. In India, the Reserve Bank has just increased interest rates by a higher margin than almost everyone seemed to expect. The central bank is clearly prepared to tamp down growth in order to contain inflation.
Predictably, the reaction has been rather sharp. However, I would say that it’s more instructive to read what the RBI brass has said rather than focus on the rate hike and its impact.
Translated into plain English, here’s what the RBI said: We know this will limit growth, but there’s no alternative because the government is not doing its job. If enough infrastructure was being built and if the government could have controlled its expenditure, then we could have had low interest rates. As things stand, the government’s failure means the choice is between high inflation and lower growth. Between the two, it’s better to have poor growth rather than high inflation.
Subbarao has said in no uncertain terms that policy actions are needed to sustain growth. Unless the government can deliver on these, the RBI has no solution. After the rate hike, there were all kinds of opinions being expressed that this was the end of the cycle and that interest rates won’t go any higher. These may be more wishful thinking than have any basis in reality. In a recent edit, The Economist magazine wrote that India has only reformed the output side of the economy; it now needs to act on the input side. That hits the nail on the head.
Narasimha Rao’s reforms of 1991, and practically everything that has followed, has set Indian businesses free to produce as much of and whatever they want. That’s the output. The problem is in the inputs. Two decades later, we’ve run out of steam on how to produce what people can buy. The inevitable result is that those who have more money can out-bid those who have less. This even goes for resources, which we thought we had a limitless supply of. Skilled people, for example. Today, there’s no problem doing any business in India, as long as it doesn’t need infrastructure, people, money and land. The rest is fine.
The problem is that there’s no turnaround in sight. For a while, people had this feeling that growth was a given and that these problems wouldn't matter so much. Unfortunately, that's not true. Leadership matters. There's no limit to how wide the difference between good leaders and bad ones is. If you doubt that, take a look at Bihar.
Sadly, leadership problems are also threatening to engulf the economy that's the second most important to us, and indeed to most people around the world. You would have seen in the media that the US government will run out of money because the president and the legislature can't agree on controlling deficits. US politics has taken a turn towards economic irrationality and this isn't going away any time soon. The world is in for a lot of economic roller coaster rides as this plays out over the next few years.
Far from it being a given, prosperity is a precious and rare thing that needs care and attention to grow and flourish. It's unfortunate that these inputs appear to be in such short supply around the world.