Socialism was always incompatible with the culture and traditions of India. But the Congress Party had thrust it on the people of India through catchy slogans such as ‘Garibi Hatao'. But, in 1990, with Soviet Russia itself losing its trust in the socialist order, the Congress Government here had to begin undoing the damage caused by its juvenile socialist pursuit.

This undoing of ‘deforms' caused by socialist pranks was however popularised as reforms in 1990s; the guilty deformers became heroes as ‘reformers'! But the catch came later.

Besides undoing the damage, the ‘reformers' endeavoured for ‘next generation' reforms, to marketise the Indian economy, particularly the financial sector, on the American — read Anglo-Saxon — model. But this process, sold as deepening the reform, pushed vigorously from within and outside, did not take off sufficiently.

The reason is that the elite reformers, trained to think, speak and live like Americans, could not understand that without creating a ‘market society' on the US model, they could not create a ‘market economy' of the US type. But this significant mismatch was never debated in the Indian economic discourse. Understandably, Indian reforms on the US model hit a roadblock in early 2000.

Shift in balance of power

Meanwhile, crisis after crisis hit the world — the Asian Crisis in 1997, the dotcom crisis in 2000, the 9/11 terror in 2001 and, finally, the global meltdown in 2008. Yet, even as the US/West has slowed, Asia, particularly India and China, has risen and continues to rise, threatening to shift the balance of global power from US/West to Asia. The 2008 crisis is also changing the very discipline of economics and rewriting the textbooks and theories of economics.

So much has happened in the world, and in India, in the last two decades that it calls for a review. Twenty years of experiment with liberalisation is a vantage point to stop at, recall the past, and look ahead. Here is an illustrative analysis of a vast subject.

The ideas and principles of Indian economic reforms were imported principally from the US in SKD (Semi-Knocked-Down) condition and assembled here by the Singh Parivar — Messrs Narasimha Rao, Manmohan Singh and Montek Singh Ahluwalia — and marketed as economic reform in India.

The instalments of SKD imports were branded as next generation reforms. Take some of the marketing techniques of the reforms:

that without foreign investment, India would not develop and, on a capital output ratio of 4:1, India would need foreign investment up to 8 per cent of GDP to add 2 per cent to the GDP to increase it from 6 per cent to 8 per cent based on a capital output ratio of 4:1;

that India's infrastructure needs exceeded $400-700 billion, which the country could not finance with domestic savings;

that India can develop only by accessing foreign markets; domestic demand is inadequate.

Assumption disproved

The un-admitted assumption was that Indians could not build India. In the early 1990s, many Indian manufacturers were even told, though indirectly, that manufacturing was not their cup of tea and Indians were essentially traders; the implication being that ‘‘let the MNCs do the manufacture and let us do trading''. (But today, the proposal is to hand over trade itself to the MNCs through FDI in retail!) Now back to the sequence.

The experience of India, particularly in the last decade, has totally disproved the reform marketing assumptions. First, the net foreign investment into India for the last 20 years adds to less than 2 per cent of the total national investment against the projected 8 per cent, to post a GDP rise from 6 per cent to 8 per cent and, yet, India has achieved more than 8 per cent growth in GDP. So FDI did not drive India's growth. Second, India's export has always been less than its imports.

It is only its domestic demand that is sustaining the economic growth. India's domestic consumption is almost 60 per cent, against which, for example, the export-dependent China's is less than 40 per cent.

So, exports did not drive India's rise. Third, Indian domestic savings rose from 23 per cent of GDP in early 1990s to over 35 per cent of GDP now, despite huge interest cuts to promote consumption.

Core drivers

According to the Goldman Sachs Global Economic Paper No 187 (2010) India's infrastructure investment in the next decade would exceed $1.4 trillion. But for financing such huge infra cost, the domestic savings generated by Indian families will suffice and India would not need any FDI. The Goldman Sachs paper says that India would be generating over $800 billion of cash savings, which would be more than all the bank advances of today put together!

Viewed cumulatively, domestic consumption and domestic savings and investment constitute the core drivers of India's economic rise. And yet the economic debate in India still centres round the very SKD ideas imported from the US, which haven't worked. And, despite the tectonic changes taking place in the very discipline of modern economics, India still copies from the economic theories of US/West developed in the last three decades. Read on for a brief on the drastic debates in US/West for changes in macroeconomics that are hardly noticed in India.

The near collapse of the world financial order during the crisis of 2008 has raised fundamental questions about the US-led theories and model of economics. It has caused civil war within the guild of economists over the macro-economic theories deployed in and by US/West on which the Indian financial reform is largely founded.

Paul Krugman, a Nobel Laureate in economics, virtually howled, “Much of the past 30 years of macroeconomics was “spectacularly useless at best and positively harmful at worst”; Barry Eichengreen, the prominent American economic historian stated in disgust, “The crisis has cast into doubt much of what we thought we knew about economics”; Larry Summers, Former US Treasury Secretary lamented, “Economics has forgotten a fair amount that is relevant and it has been distracted by an enormous amount”; Bradford Delong, Professor of Economics University of California at Berkley, confessed, ‘Economics (is) in Crisis'.

Economics in crisis

If US economic schools faced civil war within, Continental Europe (mainly France and Germany) began a war on the “Anglo-Saxon financial model”.

France threatened to walk out of the G-20 meeting in April 2009, unless the theories of financial freedom — called ‘Casino Capitalism' — were revised and/or rejected.

With the US-devised financial model losing sheen, Japan, which was consistently derided by the West as promoting and operating the inefficient bank-centric financial market, proudly claimed, in March 2009, that while the Western — read Anglo-Saxon — world's finances were in a shambles, its financials were stable.

The Prime Minister of UK admitted at a G-20 meeting in April 2009 that the old Washington Consensus, which became the foundation of free market globalism, free convertibility of currencies and particularly financial capitalism, was over.

The IMF, which had championed free convertibility of currencies based on the Washington Consensus, ultimately had to give up the idea explicitly and accept, in 2010, capital controls as part of the policy-mix.

The global trends question the very character of the reforms set by the Indian economic establishment in 1990s. So, the 2008 crisis seems to call for a review and reform of the reform process itself.

QED : The pillars of what was considered as economic reforms in the 1990s and till 2008 collapsed in 2008. With the result that while till 2008, the global agenda was “economic reforms”, the agenda now is “reform economics”. It needs no seer to say that India should “reform economics” before moving ahead with further “economic reforms”.

(The author is a corporate adviser. blfeedback@thehindu.co.in)

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