Friday, 16 December 2011

Can India's economy be rescued?

I had warned on the impact of the global economy on the Indian economy as global boom started turning to global bust from 2007. However, India withstood the bust so well (along with China and other perception-based economies)that it was even being looked to as one of the engines for continued global growth - which is of course entirely nonsensical.

Anyway our chickens have eventually come home to roost, and if India is not in full-blown panic already, it will be soon.

Is there any way forward out of the mess for India's economy? There are two ways, and only two ways. One is a strong way (political) and one is a weak way (financial).

The strong political way forward would be for all the political parties to come together (a call I had given nearly 3 years ago now, when I had said, contrary to every other commentator that I know, that India had only 3 years before disaster hit - someone can check through my public commentaries and provide the exact date).

What could the political parties do together? Take forward the programme of economic reforms which has been more or less stalled (for what, a decade?) at the same time as strengthening the basis of the Indian economy (education, infrastructure, power, environment).

That can only happen if the politicians can show the people that they have, at least temporarily, turned their attention away from exclusively focusing on looting the country and turned it instead towards building the country. What would that require? I'm afraid it would require a lot! It would require the smaller parties, on which Congress depends, to realise that their future is bound up, at least for the coming elections with the Congress. That requires the Congress to stop focusing merely on staying in power and moving attention instead to doing the right things for the country. And that requires the BJP to stop focusing on its electoral prospects and work together with Congress for the good of the country. In other words, we need a government of national unity, which can be signalled by consensus and progress on the issue of corruption which was, at least till the current crisis hit, the focus of public concern.

Having addressed that, a government of national unity could turn its attention to an agreed programme for economic progress. All this can only happen if there is widespread agreement with my analysis nearly 3 years ago that we must all swim together or we will all sink together.

I am willing to return full-time to India to serve such a government of national unity in any suitable capacity for a salary of Rupee one a month, providing minimum housing is provided and any necessary official travel is covered.

The public perception of any of the above happening is extremely small (though I hope that it will). So, you may ask, what is the other way forward, even though it may be a weak way forward?

It is for the Reserve Bank of India (RBI) to print more money, cut interest rates, and lower the amount of money that our banks are required to hold as reserves. That may be thought to be inflationary in the short term, but in the current global and Indian environment, that is highly unlikely. If the RBI does not move in this way immediately, what is much more likely to happen is deflation as the country sinks into a cycle of negative growth (or at least back to our usual "Hindu rate of growth" of 3%).

In addition, we could to pioneer, in a new development globally, non-inflationary complementary currencies for funding specific areas such as education, infrastructure, power and environmental projects. This could make India the country with the fastest-growing economy in the world, till other countries also start adopting such complementary currencies. Of course, complementary currencies will not cure the global and Indian malaise permanently by themselves, but they will provide a much-needed respite till the global financial system is put on a firm basis.

If India does not move politically and/or financially in the ways I have outlined above, at least three things will happen. First, global worries about how the nation can fund its current-account deficit in the absence of foreign investors (who have already withdrawn, and will continue to withdraw) will mean that we will have to devalue the Rupee. That will not help us in the long or medium term, but may simply meet short-term necessity. Least of all will it help the government's poor position fiscally (which is a key reason why moving to complementary currencies would be such a good thing). The government's poor fiscal situation is the second thing that will cause concern, and that cannot be helped in any way other than moving to complementary currencies to sustain growth in all areas which do produce taxes for the government. Eliminating black money without cost to the government (which means abandoning the current quest for a Lok Pal, which would anyway be ineffective, and adopting my proposals for this - see my separate posts on the subject) would be a key step to bolstering the fiscal health of the government.

If the above moves are not made: our banks, which have made huge loans to finance private, industrial and commercial growth on the basis of an optimistic scenario for national growth, are already be facing the fact of how many of these loans can go sour. Is even an implosion of our banking system likely? Probably not, but it is certainly possible.

I pray that the horrendous situation facing our people in the immediate future will cause us to turn away from our culture of competing elite-groups built on mutual back-scratching to a united move to save the country.

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