The Gold Standard | Spare a thought for the students

Economics Prof. Omkarnath at the University of Hyderabad rebuts Sanjaya Baru’s piece on Dr. Manmohan Singh’s middle path. Dr. Manmohan Singh is the former boss of Sanjaya Baru. He used to be the Prime Minister’s media advisor in the first UPA term.

Professor (he used to teach for a year at the National University of Singapore) Baru calls Dr. Singh, a post-Keynesian. I am not quite sure I get it. Overall, Sanjaya Baru’s piece is somewhat unconvincing because he is trying to defend the indefensible performance of his former boss.

But, not only we will not hold that against him but also we sincerely hope that he is right and we are wrong to be sceptical:

India remains one of the world’s faster growing economies and there is no reason why it should not become the fastest growing one before Dr. Singh’s term is over.

Our interest is in other gentlemen.

First is Prof. Omkarnath. He is more critical of Professor Baru’s piece. But, his arguments against Dr. Singh are a cause for a concern.

He calls Dr. Singh a fiscal fundamentalist. H…mm Some one who allowed subsidies to balloon, the budget deficit to explode and who allowed his Minister for Railways to be dismissed for having revised fares after nine years, is a fiscal fundamentalist?

He adds:

At the same time, financial sector reforms have only led to the ascendancy of central banking to the detriment of development banking (of which directed credit was an integral part) built assiduously after bank nationalisation. It is a complete paradox that today we are made to wonder about financial inclusion.

This leaves us bewildered. It is at best a hypothesis and at worst, incorrect, misleading and irrelevant to the issue of financial inclusion. So, should we lament the demise of ‘directed credit’? Well, we wish that it has died. It has not. Is farm loan waiver an instance of undirected credit?

We must be grateful for small mercies. Evidently, Dr. Singh had forgotten that his guru, Kaldor would have suggested dual exchange rate to fight the current account deficit. We hope that Professor Omkarnath’s article does not remind him of what he had forgotten.

But, TGS agrees with Professor Omkarnath on the importance of quality of growth, on the failure to reform agriculture and the public sector and on the decline of public capital formation, etc.

Wait. There is worse to follow. The next day, we have a Professor who teaches economics at IIM, Calcutta telling the readers of THE HINDU that India achieved an investment boom between 2003 and 2008 because the NDA government conducted a fire sale of public assets!

The NDA barely privatised a few companies. They are all doing well now compared to their performance under the ownership of the Government of India. Between 2003 and 2008, interest rates came down in India. The Prime Lending Rate of the State Bank of India declined in small steps and remained low into 2006. Indian corporations had become lean and mean with their balance-sheet at the turn of the millennium. They could re-lever. They did. Global growth was also supportive of India’s growth and investment. None of this merit any mention in Professor Mohanty’s article.

The proximate cause for investment is interest rate. To be sure, there are other factors. But, an academic would first consider interest rates and then proceed to explain why he thought that it did not matter to the rise or fall in the rate of investment relative to other factors. Not a word about interest rates in Professor Mohanty’s discourse on investment boom in India.

It is hard to judge whether that or the one that follows is the real gem: Globalisation led to import penetration of India’s manufacturing sector causing the sector to run a trade deficit of 44% of GDP (of that sector).

Now, let us agree with him at face-value. From which country does India import manufactured goods? – goods that it should be equally good at making. The country is China. India has a huge bilateral trade deficit with China. It exports raw materials and imports finished goods – mostly light manufacturing goods. Mr. Mohanty declines to name that country, conveniently or there is more to it than what meets the eye.

Of course, that said, we will not fall into that trap. No point in blaming globalisation for a deficit in international trading of manufactured goods. A low-wage developing country with enormous productivity catch-up potential should benefit from globalisation and run up trade surplus in manufacturing as China did. India failed to do so and the reasons are entirely domestic. An academic worth his salt would at least discuss these factors even if he did not identify them as responsible.

He is not done yet. He has more to offer. He concludes by telling readers that if only the Government of India listens to the suggestions of a C.P. Chandrasekhar, growth would revive…

So, it is incumbent on us to visit the wisdom of Mr. C. P. Chandrasekhar. We are handed the most precious gem of all, without much difficulty in excavation:

The way out, as clarified by economists with divergent inclinations, is to escape from this vicious cycle by expanding spending, and finding ways other than expenditure contraction to address inflation or balance of payments difficulties. But that requires not only ignoring the demands of finance, but also countering its speculative manoeuvres. In contexts like India, if recession hits, controls on the movement of footloose and speculative capital are a must to give the government the required room for manoeuvre. That is the lesson the government must glean when seeing its own image in the European mirror.

There you go: Raise spending. Raise taxes. Ban and extradite those who bet on the consequences of fiscal profligacy. Break the mirror if you are ugly. Problem solved.

How wrong we were! We thought that the Government of India (GoI) was irresponsible. But, it is trembling in its shoes with raising expenditure and falling revenues. It is afraid of foreigners leaving the country. That is why it announced retrospective tax law amendments, of course.

GoI is practising European austerity. Then, silly of the Reserve Bank of India (RBI) to conduct such large-scale Open-Market Operations (OMO) to buy government bonds. It is a waste. Are they really buying Indian government bonds? Perhaps, Professor Chandrasekhar should investigate the RBI and let us know whether it is  actually helping the European Central Bank by conducting OMOs on Eurozone sovereign bonds.

While TGS asked its readers to spare a thought for the students of these learned professors, readers should not fail to spare a thought for the UPA I and II regimes: They have ‘accomplished a lot’ for the Indian economy without following these wise words fully. Imagine how much more they could have done had they had the benefit of this wisdom when they started out in 2004.

Let us raise a toast to the gurus of economics who adorn the pages of THE HINDU.

Sarcasm apart, if this is representative of the economic wisdom that Indian students receive in their classrooms, India will remain a tax-and-spend populist nation for a long time to come.


DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.