Instead of strategising manufacturing exports, the Government is engaged in incentivising more foreign borrowing to bridge the balance of payments.

The present Chief Economic Adviser to the Government of India is a first-rate economist with an international reputation. He was one of the very few who was prescient enough to warn of the systemic risk of explosive financial sector growth as far back as 2005 at the congregation of central bankers in Jackson Hole, only to be dismissed by Alan Greenspan and Ben Bernanke, former and current Chairmen of the US Federal Reserve. The rest is history.

Inarguably, Raghuram Rajan has (or should have) a key role in shaping India’s economic policy. A good place to start is Economics 101 for decision makers in North Block, New Delhi, housing the Finance Ministry.

The fiscal deficit generates a lot of concern (and heat) and is the result of Government spending. Raghuram Rajan needs to explain the fundamental definition of GDP = C + I + G + (X-M), where G stands for Government spending. The more it is, other things remaining the same, the more will be GDP growth. Ironical but true. Most shouting from rooftops on the evils of fiscal deficits would be surprised.

In fact, the descent to mid single digit growth in the last year would have been worse without Government expenditure. India’s economic denizens must be careful about what they pray for.

(X-M) is the forgotten and neglected part of GDP in Indian economic commentary and represents the difference between exports and imports. Export performance is poor, imports are racing ahead. The gap is yawning. What it means is that India’s international trade is GDP subtracting.

Here, therefore, is a major reason for falling GDP growth, apart from the drop in capital formation (I in the equation). Consumption expenditure, originating from incomes from Government expenditure, is leaking in a significant way into imports. Yes, it boosts domestic demand but equally demand for foreign goods.

China all the way

The answer is not import curbs but to become an export machine — like China. Walk into any store in the US and it’s China, end to end. Pots and pans to sophisticated electronics, China is everywhere. India doesn’t exist. (At least, the former product group is well within its production and marketing capacity considering the average Indian household is full of them)!

Right macro management is the culmination of a series of right micro actions. Sadly, India’s planners and the biggest business groups have completely lost the plot. Obviously no useful lessons on the opportunities staring in the eye have been learnt on their numerous foreign shopping jaunts.

Instead of strategising manufacturing exports — a huge employment multiplier too, again witness China — the Government is engaged in incentivising more foreign borrowing to bridge the balance of payments.

Bloomberg recently carried a series of stories on China’s billionaire political families. A cynical view is that the Chinese are getting good value for money, considering that the oligarchy’s economic management has unleashed a long globally unprecedented domestic economic boom and built reserves of $3 trillion from trade surpluses compared to India’s paltry $300 billion, that too with borrowed money.

Still, the powers that be in Delhi think breathing down the Reserve Bank of India’s neck for rate cuts is the answer. They could not be more wrong. The likely outcome is more asset inflation and a worse general inflation and balance of payments picture — in short, more of the same while rot pervades elsewhere.

Raghuram Rajan was also on the economics faculty of Chicago. He has a lot of teaching ahead.

(The author is a Chennai-based financial consultant.)

(This article was published on February 3, 2013)
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