Follow Us:
Friday, March 05, 2021

How do you value risk?

India is at a cusp. More accurately, it is at what mathematicians call a point of inflection.

Written by Bibekdebroy |
September 24, 2008 11:47:58 pm

India is at a cusp. More accurately, it is at what mathematicians call a point of inflection. At a point of inflection, a curve changes shape. For instance, an accelerating rate of growth becomes decelerating, or vice-versa. Around 2003, the trend rate of GDP growth changed from 6.5 per cent to 8.5 per cent, perhaps even 9 per cent. So that was one point of inflection. GDP growth is down to 7.5 per cent now, perhaps even 7 per cent. Hence, we are at another point of inflection. Lest we forget, the UPA’s National Common Minimum Programme (NCMP) promised us 7 to 8 per cent rate of growth and no more. So that promise has been kept.

However, this isn’t about downturn in the economic cycle alone. It is also about downturn in the policy cycle. Elegies, and they aren’t eulogies, have begun to be written about the UPA. Newsweek is an instance. The short point is there have been zero reforms under the UPA, the nuclear deal doesn’t count. What second generation economic reforms have been implemented? Incidentally, historians often count a generation to be 25 years. Hence, if we count from 1991, we should expect second generation reforms in 2016 and not before. Partial VAT is a legacy, as is the road programme (though procedures have improved for Pradhan Mantri Gram Sadak Yojana) or improved school enrolment indicators. Adherence to deficit targets is a sleight of hand.

The diluted Right to Information Act is like an old man without dentures. The less said the better about pensions, banking, insurance, privatisation/disinvestment, labour market (not the Industrial Disputes Act alone), education (including skills), health and improved efficiency of public expenditure. Other than the Pay Commission, we have added many large vessels to the fleet of so-called flagship programmes and tax reform has retreated from avowed goals. The public sector has an uncanny ability to convert every asset into a liability and, with its blind belief in the public sector, the UPA has done no better.

Consequently, India’s track record in cross-country surveys isn’t laudable. The World Bank’s “Doing Business” and “Economic Freedom of the World” are two recent examples. These typically have ranks, as well as scores. In general, India’s ranks have dropped, implying other countries have done better. When India’s scores have improved, they have done so at slower rates, the point of inflection again.

Beyond numbers, reforms are also headed south. What is worrying is the feeding in of global developments into reform scepticism. First, least important of the lot, we are unhappy with China’s behaviour at the NSG. So let’s dump anti-dumping and safeguard measures on Chinese imports. True, this may be knee-jerk and transient. Also true, this protectionist stance in trade policy is partly neutralised by the FTA with Asean. Second, WTO talks are headed nowhere in a hurry and that trigger is missing too. Third, imported inflation through oil, commodities and food (less important for India in an imported sense) has reinforced protectionism (such as for agro exporters), though those pressures are easing now. Fourth, we have US developments, liable to be misinterpreted.

But before that, let’s ask a few questions. First, why is there such hype over the Sensex, if it is not representative of the entire capital market? Second, why can’t there be greater supply of shares through disinvestment? Third, why do promoters hang on to so many shares? Fourth, why has the debt market not developed? Fifth, why is the capital market (especially the Sensex segment) so sensitive to purchase and sale by foreign investors? India is a large country and sources of growth are primarily internal. India’s trade/ GDP ratio is 30 per cent and will never be much over 35 per cent. (China is an outlier.) For example, a large chunk of India’s trade is inter-state. Like Europe, had these states been individual countries, India would have appeared far less insular. In a similar vein, why isn’t the Sensex primarily driven by domestic investors and when will that shift occur? Sixth, why is the Sensex behaviour so distorted, at a zenith of 20,000-plus or a nadir of 10,000-minus? Answers to such questions underline the need for more reforms, not less.

Most discussion of the US financial sector meltdown and its impact on India has focused on macroeconomy and individual sectors (infrastructure) and companies (those that wish to borrow abroad or have forex assets). Unlike the financial sector, India’s real sector is more insulated and the trade basket diversified. Therefore, the impact on GDP growth or BOP (balance of payments) can’t be much. Any adverse impact on BOP because of FII pull-out and the reticence to invest in emerging markets will be more than neutralised by FDI inflows and reduced oil imports (in value, if not volume), thereby easing downward pressures on the rupee.

The more serious impact will be on mindsets and policy stances, somewhat reminiscent of 1997/1998. Stepping out on the road involves the risk of being run over by a BMW or Blueline. Shopping in a market involves the risk of being torn apart by a bomb. One takes risks because the gains are more than commensurate and the existence of risks is no argument for risk aversion and playing safe. There is risk in voting in a new government too. You never know what it will do. Similarly, globalisation brings risks, both because the economy can no longer be insulated and is susceptible to external shocks and because policy-making loses degrees of freedom.

One loses a little bit of one’s independence, so to speak, a bit like getting married. Why should that be an argument against marrying, stepping onto the road or going shopping? However, the US meltdown is likely to be interpreted as an argument against globalisation and opening up. Let’s impose controls on capital flows. The US has an enviable financial architecture. If information gaps, corporate mis-governance and regulatory failure can occur in such a developed country, how can we afford to liberalise financial sectors in a developing country? There is worse. Witness government bail-outs of Wall Street firms: clear proof that one can’t depend on markets. State intervention is necessary. Unwarranted comparisons are being drawn, not just with 1987, but with the Great Depression years. Those years led to Keynes, government intervention and the New Deal, a far cry from the down-sized government of the ’80s.

In pedagogy, there is always a problem with lessons learnt and morals drawn. Usually, people don’t learn what is taught. Instead, they learn what they wish to learn. Consequently, the US experience will be interpreted in Marxist imagery, the demise of market-driven capitalism rather than the withering away of the state. And this reinforces the anti-reform straws in the wind mentioned earlier.

This brings us to the new government of 2009. As of now, no one dare predict the political composition of that government, except that in economic stance, Tweedledum will probably replace Tweedledee. That’s the reason the downturn in the policy cycle will be more than transient and we are probably looking at 2014 for a fresh dose of liberalisation, unless the 2009 government doesn’t last a full term. As I said, 2016 for second generation.

The writer is a noted economist

📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines

For all the latest News Archive News, download Indian Express App.