The Hindu Business Line : Onus is on politicians

The economy is on the upswing and it is now for the political agents to play ball, and behave as politicians generally do vis-à-vis economic matters in a `developed' country.

In recent weeks, there have been at least two important milestones that the India has crossed, which should not be ignored if a genuine effort is to be made to assess the position of the national economy in the international league table and also understand better the policy implications. These two milestones are represented by the recent revaluation of the size of the nation's GDP (which has put it in the list of the dozen biggest GDPs on the planet) and the recent continuous increase in the value of the rupee vis-à-vis the US dollar.

The fundamental assumption behind imputing extraordinary value to these two developments is that they are `irreversible,' that is, that while on the one hand India's GDP will continue to be included among the top dozen (with time perhaps even climbing higher in the list), the rupee will continue to rise in value against the greenback secularly. Another way of looking at these two developments would be to see India as not only an `emerging economy' (in terms of the conventional wisdom) but as a `developed economy' (by the same yardstick) in the international arena.

Long haul ahead

Admittedly, the use of the expression `developed economy' in this particular case cannot be treated at par with its use vis-a-vis economies such as the US or Japan which economies have matured beyond a point as far as exploitation of natural resources is concerned and where the dynamics of development today are almost solely dependent on the export of capital and the profits such export can earn. India, in fact, has a long way to go before it can attain such a status, its present economic profile still being heavily dependent on the productive and efficient exploitation of its own natural resources, which includes human resource in its myriad forms.

India is being increasingly seen as a `developed economy' by the rest of the world in the sense that it has entered a phase in its growth profile where it certainly cannot be lumped together with under-developed or developing economies but can more easily be identified with that small band of `Third World' nations whose place at the high table of international economic diplomacy is today taken for granted. An automatic manifestation of this is the growing attraction of the Indian economy to foreign investors who have the country high on the list of destinations for their funds, equity or otherwise. The foreign investment figures will bear this out, especially the fact that the trend has been sharply upwards in recent years (increasing by more than 400 per cent as far as Foreign Direct Investment is concerned).

Disrupting Influence

While the external perception — no doubt based on evidence provided internally — of the Indian economy has led to this inflow of foreign capital, this very flow (as every budding economist knows) has had a disrupting influence on the normal ebb and flow of variables such as internal monetary liquidity, which has led to changes in other variables such as the price level with a direct impact on the lives of average citizens. Clearly, while such alteration within acceptable bands is nothing uncommon in any economy (especially those undergoing structural changes over a period of time), they become problematic when the repercussions (on the price level, for example) persistently refuse to be contained within demarcated levels.

In short, this is what is happening in the Indian economy today, with the inflation rate now gaining a tendency to stay above the 6 per cent level — at a time when the inflow of foreign exchange has been robust. Even if there is no political interference in the decision-making relating to measures to control the price rise, pure economic logic would perhaps argue that the price inflation needs to be tempered a bit because of its destabilising influence on other economic parameters, not to speak of the impact on the standard of living. One of the methods adopted by the Reserve Bank of India to control the price-rise has been to sterilise the foreign exchange inflow as much as is possible from having an impact on monetary liquidity in the economy, a direct result of which has been the upward pressure on the rupee's value vis-a-vis the US dollar.

Clearly, if the pressure on the foreign exchange front remains intact (which can be assumed given India's `developed' status in the world at large), and the RBI continues with its present policy of going slow on the sale of dollars, the rupee will continue to rise vis-à-vis the dollar, which, as everyone knows, will have a disturbing effect (as has already happened) on a number of other economic parameters such as export prices, on which depend the international competitiveness of Indian products in the world market.

And yet, this is something which will happen inevitably if the level of inflation in the domestic economy is to be kept at manageable levels.

Issue of returns

The question is: what is the point in the rupee's rising value where there will be some sort of a trade-off between the foreign investors' expectations of profit from India investments and the diminishing returns from such investment flowing from fewer rupees being got for a dollar invested.

Clearly, the policy-makers must be agile enough to locate that point much before the economic players concerned do so, which is an extremely delicate and tricky task for the authorities involved, even if they play the game by the book of Economics. The job becomes even more complex when politicians enter the arena mainly on the plea that inflation needs to be controlled more effectively.

At election time, such incursions by politicians are inevitable — an interference which, ultimately, will lead to the rupee's rise vis-à-vis the dollar being contained at a level which may not gel with India's economic image externally.

After all, the stronger India's economy is perceived to be by foreign investors, they must be expected to shell out more for every rupee they buy in the market. True, for domestic players a higher value for the rupee will hurt exports.

But this only means that exporters will have to become even more competitive, which is to be expected of the economic agents of a `developed economy'. Will the political agents play ball, and behave as politicians generally do vis-à-vis economic matters in a developed economy?

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