The Mess We Find Ourselves In | Value Research The only silver lining is that those responsible for it will not be there in their positions for long
Economic Viewpoint

The Mess We Find Ourselves In

The only silver lining is that those responsible for it will not be there in their positions for long

The hue and cry over the formation of Telangana out of Andhra Pradesh and the consequent agitations in different parts of the country by those demanding a re-drawing of the internal map of India, has temporarily diverted attention from the state of the economy. No one denies the fact that the country’s economy is going through a downturn, the likes of which has not been witnessed for more than two decades. At one level, the debate on the direction of economic policies -- epitomised by acrimonious war of words between economists Amartya Sen and Jagdish Bhagwati -- has acquired a new urgency with everybody pitching in with her/his comments on the relative importance/unimportance of growth versus welfare (or redistribution) schemes.

While this debate is undoubtedly important, it is also true that India at present is having neither of the two. The growth rate of GDP has slumped. Jobs are not being created in adequate numbers despite the government’s claims of having sharply brought down the incidence of poverty over the last 9 years. Welfare schemes are being implemented with varying degrees of efficiency in different parts of the country. But all these efforts are being negated, if not neutralised, because of the government’s inability to control food inflation, which hurts the poor more and widens the gap between the affluent and the underprivileged.

As if these problems were not enough, the sharp devaluation in the value of the rupee vis-a-vis the US dollar has created a crisis-like situation. Since the country imports 80 per cent of its total requirements of crude oil and because the government has chosen to gradually equate domestic energy prices (especially diesel, the most widely-used petroleum product) with world prices, what is essentially taking place is that we as a country are not merely importing inflation but also in the process spurring inflationary expectations.

The government is unable to narrow the trade deficit which is the principal reason why the current account deficit on our external balance of payments has careened out of control. Many of our exports are highly import intensive (for example, polished diamonds) while the markets for other labour-intensive export items (including textiles, garments, handicrafts and processed foods) have shrunk on account of recessionary conditions in the West, in particular, Europe. With imports inelastic and exports sluggish, it is hardly surprising that the government has no alternative but to depend on volatile flows of foreign capital to bridge the current account deficit.

This is hardly a good situation to be in. The government has belatedly decided to curb imports of gold and luxury products. But the problem will not disappear in a hurry. The reason why people have been investing in (legal and illegal) gold is simply because the yellow metal is perceived as the best hedge against inflation. So, the demand for gold will not be curtailed until the root cause -- inflation -- is first addressed.

The government has gone on an overdrive increasing caps on foreign direct investment in various sectors. But this is not going to result in a flood of FDI flowing into the country given the economic conditions currently prevailing. As the experience of attracting FDI in multi-brand retail should make amply clear, there is indeed many a slip between the cup and the lip. The key issue the government has not been able to tackle is to convince India’s own entrepreneurs that they should invest in their own country before seeking greener pastures overseas.

The sad part of the story is that those who are in positions of power and authority in India are unable and unwilling to acknowledge that they are largely responsible for the mess we are now in. The good part of the story is that these individuals may not be in their positions for too long.

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