Ringside view of the economy

I. G. Patel was one of those rare economists who traversed the worlds of academia and policy-making with ease. He had a glittering career as an academician in the Universities of Bombay and Baroda and later as Director of London School of Economics and IIM, Ahmedabad. As a policy-maker, he was an advisor to the Government in various capacities and later Governor of the RBI.

The editors of this book — Deena Khatkhate (a former IMF economist and a long-time columnist in the journal Economic and Political Weekly ) and Y. V. Reddy (former RBI Governor) have done a remarkable job of putting together a volume of Patel’s papers (many of them unpublished) and lectures given over the last 60 years.

This seven-part book has 34 articles in topics as diverse as Demand for Money, Demand for Gold, Planning, Equity and Social Justice, Economic Reforms, Banking and Financial System, and Trade and Development. There are even a couple of articles paying tribute to A. C. Pigou and Adam Smith.

‘Non-ideological’ approach

One aspect which strikes the reader is Patel’s pragmatic approach to understanding and solving the economic problems on hand. Patel had the remarkable quality of being willing to change his views when confronted with new data or studies. This ‘non-ideological’ approach will have its critics, but it served Patel well in his policy making role. As the editors remark in the Introduction chapter — taking the middle path also “required a certain quiet courage”.

Patel’s philosophy towards economics is best summed up in his own words … to “provide practical answers to questions that arise in real life by application in limited contexts such as substitution or shifting incidence or cost-benefit ratios”. The articles in the first section deal with Monetary and Credit Policy — many of which were written in the 1950s but have a contemporary resonance with the RBI today. The central bank is grappling with a stubbornly high inflation rate and Corporate India is literally haranguing the RBI for a rate cut to revive growth. Patel’s ends his article on Nature and Significance of Monetary Policy with a remarkably prescient comment – “The more real threat to monetary policy comes from reckless fiscal policies”. (Page 43)

The limits to monetary policy — in both advanced and developing countries — are laid threadbare in the Chapter on Monetary Policy Revisited where he states: “As far as monetary policy is concerned, it can at best have a subordinate and supporting role in both sets of countries, and there is little reason to think that it can be more effective in one group of countries than in another. Economic logic knows no national frontiers and it often transcends institutional frontiers as well.”

He also warns against giving an exaggerated role to central banks in developing countries, though its role in development cannot be undermined. These sobering views have a contemporary relevance where greater independence to the central bank and giving it “more teeth” have dominated recent debates, especially in the aftermath of the global financial crisis.

Communication must go beyond markets

On the communication policy of central banks, Patel makes a telling comment that central banks’ communication must go beyond communicating with markets.

The section Economic Development and Planning has articles on ‘Import Substitution vs Export-led strategies’, debates that dominated the agenda in the 1950s and 1960s, all too familiar to the students of Indian economy.

Though Patel, like most other economists in the 1960s, believed in strict import controls and in the import substation strategy, he was not dogmatic. The pragmatist in him could envisage a future where external conditions changed in favour of exports and an export-led strategy would be worth pursuing. He also warns against pushing the import-substitution strategy too far, which could lead to investment of the wrong kind, nullifying the very objective of the strategy.

Patel also was in strong favour of liberalising trade among developing nations and forming regional trade blocs.

In the chapter on “The Second Five-Year Plan: A tentative framework”, Patel believed in the crucial role played by the public sector in developing basic industries, a view that was dominant at that time. However, Patel also stressed the need for developing small industries for generating employment and incomes in the Second Plan. He was also very aware of the limits of physical planning.

Patel believed that India missed a trick by not recognising the potential of Japan in the 1950s and 60s. Had India opened its doors to Japanese investments, its growth trajectory would have been very different.

Patel was clearly not enamoured by all the talk of India becoming a superpower in years to come. He favoured a more modest role and ambition for India — achieving the per capita income of Malaysia and Thailand would be a worthwhile endeavour. A sobering analysis, indeed for people whose favourite past time is to keep comparing India with China.

Economic reforms in a political context

In the Chapter India’s Economic Reforms and Development, which is a review of the book honouring Manmohan Singh on his 65th birthday, Patel’s insights on the political context within which reforms are enacted are brilliant. He said, “… economic policy will have to be shaped in an imperfect political and social context.”

What he had to say on the political economy of China and the East Asian ‘tiger’ economies is even more interesting. “I do not understand why so many of us are reluctant to concede that authoritarianism has much to do with the economic success of China, Taiwan, Korea, and even Singapore and Indonesia and that democracy in India takes an economic toll. If we value democracy, we should be willing to accept that it is worth paying some economic price for it, at least for a generation or so.” (Page 286)

A reality-check on growth

About growth itself Patel had this to say, “I wish we would stop deluding our people about 8 or 9 per cent growth. Let them applaud a 5.5 per cent or 6 per cent rate of growth of good quality rather than bemoan the lack of an even higher rate of growth.” (Page 294)

This is a reality-check for all those who were, till recently, singing praises of India’s 9 per cent growth in the recent past, fuelled largely by foreign credit. That reforms made no dent on corruption also disheartened Patel — one wonders what he would have made of the recent telecom and coal scams throttling India now.

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