Tags:
Journalism of Courage
If there is one thing that the Asian crisis has proved in relation to India it is not that the Indian economy has been well and truly globalised, but quite the opposite. Many see the rupee8217;s recently declining fortunes as being linked to this crisis. In fact, even if it triggered the fall, a weaker rupee was entirely justified by the fundamentals. The question was when, rather than if, a correction would occur. This time round, India8217;s relative economic isolation has saved it from the fate of far stronger Asian economies. The important thing is for it to draw the right lesson. It is not that India should attempt to halt a further opening up, or globalisation, of its economy. Rather, its relative isolation should be seen as a temporary state and an opportunity to do things right which were done wrong by other Asian countries, and to do them in the right order. Its priority should be to open up to the world well fortified against another Asian mishap.
Has the lesson been learned? The signals are mixed. As important a voice as economist Jagdish Bhagwati has spoken against hurried capital account convertibility, especially in the light of events in Asia. He is right, but his argument should not be allowed to be appropriated by the proponents of a closed and protected economy. India would forget at its peril that the Asian economies have reaped the benefit of openness all these years. Their sufferings today are due not to being open, but to neglecting certain kinds of economic reform. India has taken the right, gradualist, approach to convertibility. It should stay the course, using the intervening time to effect reforms so that full convertibility, when it comes, does not make for instability. One good signal in recent days has been the institution of a second banking reform committee under M. Narasimhan. Considering that so many of the Asian economies are in such a mess today because of their lax supervision of banks, the setting up of the committee, important in itself, is equally important as a message that India is learning from the rest of Asia. Indeed, there is no room for complacency on the banking front. The so-called non-performing assets of Indian banks, financial bureaucratese for bad loans, are higher than the average for the economies now in trouble on account of them. Poor supervision may be one part of the explanation, but so is misguided policy. This consists of decades of directed lending by banks, the so-called social role that public sector banks are required to play, and what not. India had better accept that even as much opening up as it has already effected will not allow it to persist with the socialist ideas of old. The government8217;s social policies are better served through direct subsidies than by burdening the banking system.
