1991 RELOADED

 

In the 22 years since the last major crisis, the economy is right back where it started.

 


Finance Minister P.Chidambaram says he can see some green shoots in the Indian economy.

• The GDP growth has come down from around 9% to well below 6% in a scant 3 years.
• Investment is hugely down, from  38 to 26% of GDP.
• Inflation remains high, around 13% for consumers.
• The Current Account Deficit has just gone well above 6% (6.7%) which could lead to foreign money withdrawing from India.

Governor, Dr. D.Subbarao spoke very gaurdedly about the green shoots during his IG Patel Memorial Lecture at London School of Economics.
We can accelerate growth and improve welfare only if we effectively implement wide ranging economic and governance reforms. Slipping up on this will amount to a costly and potentially irreversible squandering away of opportuinities.
People borrow more when interest rates come down. They then spend more. Some of that extra spending gets translated into imports. Without those imports the extra demand would gets translated into higher prices. But India seems to have both now- higher inflation and higher imports. Along with it lower exports has lead to looming Balance of Payment crisis.
The only remaining hope is strong - very strong government action to bring down the fiscal deficit. The complexity arises from the political economy, political executives are much more tempted by short term political pay offs rather than long term sustainability. The India growth story will not materialize in the absence of vigorous and purposeful structural and governance reforms.
The question is if we can have those reforms without a crisis. History says we cant.

• The reform of agriculture happened because of the succesive droughts of 1966 after which India was reduced to begging America for food.
• The big bang reforms of the 1991 happened because Rajiv Gandhi was much more tempted by short term political pay offs rather than long term sustainability and landed the economy in a mess that was inherited by his successor V.P.Singh.

Make no mistake the current set of reforms is happening because a crisis is looming.


COURTESY: THE HINDU