Finance Minister P. Chidambaram has said he can see some green shoots in the Indian economy. Of late it has been as barren as Caesar’s wife Calpurnia.

GDP growth has come down from around 9 per cent to well below 6 per cent in a scant three years.

Investment is hugely down, from 38 to 26 per cent of GDP, and no amount of pulling on the corporate udder is getting it to yield milk.

Inflation remains high, around 13 per cent for consumers who are sullenly waiting to get rid of Sonia’ Sorry Army.

The current account deficit has just gone well above 6 per cent which could lead to foreign money withdrawing from India.

And political uncertainty engulfs the country like the January fog in Delhi.

Is it any wonder that the economy is not taking off?

The imminent crisis

It is the job of finance ministers to hold out hope. After all, they can hardly say that the end is nigh.

But governors of central banks have to be more circumspect. That is probably why Governor Subbarao spoke very guardedly about the green shoots during his I.G. Patel Memorial Lecture at London School of Economics.

This is what he said: “…There is nothing inevitable about the India growth story. We can accelerate growth and improve welfare only if we effectively implement wide ranging economic and governance reforms. Slipping up on this will amount to a costly and potentially irreversible squandering away of opportunities.”

He then went on to discuss inflation, governance and the current account of deficit. Having some inkling of how much the current account deficit is – and has been – worrying policymakers for the last one year, I paid particular attention to the last bit.

The labour did not go unrewarded. Dr Subbarao shot down a straw man which he had himself set up. “…the marginal propensity to import by borrowing money is small”, he told the audience.

If I may respectfully ask, Sir: who ever said there was a link between the two? As far as I know, this is how it works. People borrow more when interest rates come down. They then spend more.

Some of that extra spending gets translated into imports. Without those imports, the extra demand would get translated into higher prices. It is as simple as that.

But India being India, we seem to have got both now – higher inflation and higher imports. Add lower exports and what you have is something very worrying, a looming balance of payments crisis which could happen at the drop of a foreign hat.

Governance problem

The only remaining hope is strong – very strong – government action to bring down the fiscal deficit which, as Dr Subbarao said, is a governance problem.

“The complexity,” he said, “arises from the political economy… political executives…much more tempted by short-term political pay offs rather than long-term sustainability.”

He then concluded his speech thus: “The India growth story is not inevitable. It will not materialise in the absence of vigorous and purposeful structural and governance reforms. It is those reforms that must continue to engage our attention.”

The question is if we can have those reforms without a crisis. History says we can’t.

The reform of agriculture happened because of the successive droughts of 1965 and 1966 after which India was reduced to begging America for food.

The slow reforms of the mid-1980s in the financial sector happened because the so-called ‘Hindu’ rate of growth forced them on the government. As S.S. Tarapore, former deputy governor of the RBI, once put it, there were over 200 rates of interest in the economy. Simply reducing the rates at the short end was a major reform.

The big bang reforms of the 1991 happened because Rajiv Gandhi “was much more tempted by short-term political pay offs rather than long-term sustainability” and landed the economy in a mess that was inherited by his successor, V.P. Singh.

And make no mistake. The current set of reforms is also happening because a crisis is looming.

Two decades ago, Manmohan Singh started off by getting the economy out of very deep trouble. He may well end his career by landing it right back into it.

Such is life.


(This article was first published in The Hindu edition dated April 1, 2013.)