There is a classic 80/20 divide with respect to India and it's economy. As you might be familiar, life is best thought of in 80/20 terms e.g. 80 percent of wealth is controlled by 20 percent of people; or 80 percent of world trade is accounted for by 20 percent of the countries (actually with the large undervalued exchange rate of China, the 80/20 Pareto rule may need to be modified to 90/10); 80 percent of the poor live in a fifth of the countries; 80 percent of land area is barren and only 20 percent is inhabited. Some aspects of life belong to the 70/30 regime - the top 30 percent of batsmen account for 70 percent of the runs.
The "Beyond Logic" series has temporarily, and hopefully permanently, outlived its relevance. It was aimed primarily at decision makers in India, the knowledge-proof babus. Nowadays, this tribe has become less relevant (thank globalization for this happy occurrence) and some of them are even tuned in, and a small minority perhaps even ahead of the curve. This article marks the beginning of a new column entitled "Calling the Bluff". Derived from poker, the term means the asking of a showdown with the presumed bluffer being asked to display her cards and prove to the world they are as strong as she is claiming them to be. The person calling the bluff typically has a very strong hand and is liable to win the bet by successfully "calling the bluff".
The budget speech came and went, the market dropped, and we all shrugged our shoulders. Not much ado about nothing did you say? Right you are, but there are hidden messages. Perhaps the most hidden is that nominal GDP growth for next year is targeted by the government at 12.7 percent - given an expected inflation rate of close to 4.5 percent, this is mega news. That the government is officially forecasting 8.2 percent GDP growth in the year just following a super monsoon is about as India shining as it gets.
The G-7 finance ministers meet this weekend to discuss the world economy and what ails it, and what particularly ails the rich world. After a rather vibrant 2003, and a more than vibrant stock market worldwide, one conclusion could be that the world is coasting and so nothing needs to be done. This would be wrong, and thought so by most economists. The major reason cited for future instability in the world economy are the twin US deficits - current account and fiscal. In a recent report, the world's economic umpire, the IMF, states that there could be dire consequences of irresponsible US policies; "unless corrective action is taken, (US policy) raises a number of longer term and multilateral concerns" (press briefing on IMF occasional paper, "US Fiscal Policies and priorities for Long-Run Sustainability", emphasis added).
The Honourable minister for education, Mr. Murli Manohar Joshi is feeling left out. The parliamentary elections are going to be held in a few weeks and the question in the BJP camp will be "what have you done for me lately". The weather gods have helped the economy so the mandir types feel vindicated - they have done their bit for Mr. Vajpayee's reelection. The India shining team can take credit for bringing to the attention of the people that the good weather is indeed beneficial for crops, and incomes. The rain helps alleviate the heat and the hunger; not clear that you need a multi-crore advertising campaign to know the obvious, but hey, that is what election campaigns are all about. (Just look at the alternative - the leading opposition party Congress's slogan is: Elect us, because we have a Gandhi as a leader).
The next few articles will survey the evidence in India on the contentious trinity issues - what happened to inequality, growth, and poverty in India before, and after, the introduction of major economic reforms in the early nineties. This examination is critical because the present Indian government has raised the stakes - it believes that past reforms did not have a human face i.e. reforms to date have made "the rich richer, the poor poorer". Translated, this means that two propositions hold: first, incomes of the poor have proceeded at a slower pace than incomes of the rich; second, that the speed of poverty decline has not kept up with growth. (Business Standard, August 21,2004).
The importance of the recent monetary policy statement was not in what was done, but in what Dr. Bimal Jalan, the RBI governor, refused to do. He shrugged his shoulders and said that he really could not do anything about lowering interest rates because such lowering was beyond his control. Think about it. The head of a central bank correctly states that the domain of interest rates is beyond his authority. Certainly a tragedy unheard of in any part of the world today, not even in the Ministry of Finance (MOF) controlled Japan. But in MOF controlled India, it is a living hell with real savings deposit rates at above 10 percent and mandated public provident fund real savings rate at above 16 percent. A madness that puts us at the top of the league of mad, mad nations in 1999.
If proof was needed that poverty is Big Business, at least as far as the largest NGO, the World Bank, is concerned, then it is available aplenty in the just released World Development Report, Attacking Poverty. The “veil of ignorance” position on whether the conclusions on world poverty are consistent with increased business for the World Bank would be the following. First, there should be large amounts of poor in the world – obvious, but necessary. Second, the number of poor should not be seen to be declining too fast – it is best if they were not declining at all. Why? So that it could be shown that there is need for policy advice, technical assistance, and need for the NGO – the World Bank.
The Rupee has come full circle. In the article, “Exports Burn while Delhi Fiddles”, (Economic Times, July 23, 1997) I had argued that the rupee, at Rs. 35.7/$, was the strongest currency in the world, and that the “market” level for the rupee was close to Rs. 41 – a level breached some nine months later. It was suggested that the rupee level controllers at the Ministry of Finance (MoF) and the Reserve Bank of India (RBI) should relinquish control and let the rupee find its own level, much like the happenings in a fish market. Today, the rupee is trading at Rs. 46 to the dollar, instead of being the strongest in the world it is the weakest, and its fair value is closer to Rs. 44 than Rs. 48. The suggestion: the MoF-RBI combine should please decrease control. Some things do change in India, but many, unfortunately, remain the same.
Simplicity. Objectivity. Logic. Efficiency. The SOLE of policy making. In theory. Indian policy makers have just issued the Eleventh report on how the tax bounty should be shared among the states. Surely enough time to fine-tune whatever logic is ostensibly present in the recommendations over the years. We are told that a primary purpose is redistribution from richer to poorer states. Further, that states should be subsidized for developing infrastructure. Further, that states should be rewarded for fiscal performance. All laudable statements of purpose. Let us examine if the EFC has met any of its own stated objectives. Do they pass the SOLE test?
