Rules for recovery

The involvement of the state in the present crisis has been both adequate and restrained.

The involvement of the state in the present crisis has been both adequate and restrained. For a conservative regime the Bush administration has been refreshingly innovative. A change from its earlier days, when the president himself emphasised grants and subsidies, rather than complex 8220;financial partnerships8221; to favour schemes for the poor. The response to uncalled-for financial exuberance, irresponsibility in financial nerve centres and lack of regulatory systems for transparency, has been quick and necessary. But in difficult times 8212; and from all accounts the passage of the measures will not be smooth 8212; initial financial support can build the case for more aggressive intervention as the consequences show up in the real economy of the developed world. If you don8217;t have a systemic approach for intervention it becomes difficult to withstand the pressure and India must be prepared to strengthen its own turf. This is particularly so since it can approach the world with competitive strength and confidence if some chinks in its armour, like fiscal irresponsibility, are covered.

China has today 8212; and in an earlier phase India had 8212; a systemic response to economic policy in an uncertain and not necessarily fair global system. It is useful to recount the rules ofnbsp;those strategies. This is so since our present policy-makers have been the strongest critics of these responses, and their global friends have actually been fairly abusive in describing Indian policies before the 8217;90s. Policy-makers in India have intervened sometimes more radically than ever in recent times, especially in 8220;controlling some prices8221; in agriculture, as this column has constantly argued, but policy without theory or first principles is always flawed.

The first principle to follow is Occam8217;s razor. Be simple; if the market can achieve your objective, follow it and in fact, if necessary, strengthen it. Substituting physical controls with fiscal, monetary and tariff policies, what we call the Narasimhan Committee mindset, is the paradigm. The second is: keep a watch on the world generally, since as a large country you are going to be affected and also need to develop positive options. The third is that if the market is unfair, retaliate with speed. At one stage we would do so; China does it all the time, for example using tariff and non-tariff barriers. The fourth is the ability to recognise domestic weakness as distinct from losses emerging from unfair practices abroad. When you have the kind of strength and depth India has you can afford to let those who can8217;t compete go to the wall. This is important since they will be the most politically noisy. When NRI and Bank-Fund economists talk of the late 8217;80s as a period of 8220;cronyism8221; in India they forget that the maximum churning around of Indian industry took place in that period. Large capacities were closed and interestingly the companies which now straddle the globe made their reserves then by reorganising, cost cutting, modernising and expanding. The rupees they put in reserves then are all convertible now, ready to finance their conquering the world. The elephant moves slowly but gathers speed and does not go back.

The fifth is an interesting principle for which I take some credit. It is the recognition of negative protection. If you are efficient but the guys who supply you at home are not 8212; for example the energy-wallahs 8212; then you will suffer even if you are good, as compared to your competitor abroad. So policy for maintaining the edge has to be visualised with closely interconnected, interrelated sets of actors. Of course the real solution is to make your weak link strong but when it is not tradeable that is not always instantly easy and wisdom requires recognising the need for different phases. These five are enough, but I will add on two more. The sixth is that in a coalition regime a constant restatement of first principles is important for the guys who will chip away at policy less than at arms length. The last one emerges from the global Indian. Strangely enough the world8217;s troubles can be our oyster if we play it well. This is the time to buy real resources abroad. We are only dimly recognising that possibility. It will mean changes in tax laws, monetary policy stances and regulation. Here I, like most, don8217;t even know the rules. We better learn fast though, for in India everything has to be rule-based or it degenerates into bhais ruling the roost.

There is a supra rule which dominates all this. Don8217;t give up your closest dreams which are social and political in the finest sense of the term.

The writer, a former Union minister, is chairman, Institute of Rural Management, Anand

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