For India, dangerous curves ahead

The financial sector had over-expanded both in the US in G7 and globally. Once the Keynesian policies failed in the 8216;70s, the free market argument won. Just then the USSR helpfully collapsed. Thus followed liberalisation, which benefited Asia, which was ready for a big growth spurt. India and China took off in a big way. There were risks, of course, as financial markets became connected across the globe. The younger 8216;rocket scientists8217; began to invent fancy instruments, which allowed buyers to imagine that they were eliminating risks. Professional bankers at the top of the tree were out of their depth, but they were happy to make big salaries.

The feeling of low risk/ high returns was exaggerated by the idea that each player was passing on the risks to someone else. But at the same time, each player was buying a slice of the risk of the others, who were also passing their risks on. It was like a game of pass-the-parcel, except that there were more parcels than there were players. No one thought the music would ever stop; when it did, everyone found they were holding some toxic parcels.

George Bush, with his double deficits, is the culprit, and Alan Greenspan ran the most irresponsible monetary policy, which added fuel to fire. The fact that inflation stayed low was attributed to the skills of Greenspan. But it was actually the influx of China and India into manufacturing and services that kept inflation down. Money supply growth went straight into real income growth as imports kept inflation low.

This is what created the longest boom in more than a century. India8217;s liberal economic reform succeeded because of this long boom. Its fragmented politics was a side-effect of this boom as it allowed political parties to waste vast sums of money on what they called inclusion, but which mostly went to their party coffers or their own pockets. Now comes the hard work. There will have to be serious thinking about the next stage of reforms, otherwise India could get back to the glory days of Socialism with a pathetically low growth rate.

India needs to become positive about industrial growth. That requires tackling problems like Mamata Banerjee, Raj Thackeray and the Bajrang Dal, who are ruining Bombay, Calcutta and Bangalore as places to do business. The land acquisition rules need to be updated for a democratic polity, instead of compelling farmers to sell land. Labour laws need radical change to prevent more murders of CEOs by workers who have to take insecure jobs because the present laws make it uneconomical to hire on a permanent basis. Few politicians think about such problems.

Now that the Deal is done, can we have Manmohan Singh8217;s undivided attention to tackle these problems?