The financial sector in India has been relatively ignored by the policy makers, mostly on the grounds that it couldn’t possibly be that important. But no more. Financial sector developments – in the FX, debt and stock markets – are now the driver with policy-makers (including such renowned ones like Mr. Greenspan) often relegated to back-seat driver status. But while the rest of the developing and developed world is allowing competition to flourish, we in India are doing the opposite i.e. encouraging protection, and bad performance that accompanies the acts of the protected.
They are the new wonder boys. After software, they are touted to be India’s new export kings. Magazine cover stories extol their powers. Their coffers are being filled by the promise of high tax-free returns, which are promised to be annually more than the promise, nee guarantee, of provident fund returns of 12 percent per year. Please welcome the money managers at India’s mutual funds.
No set of calculations yield an absolute poverty figure of 45% for India in 1996 as reported by the World Bank. A correct use of WB’s own data suggests that absolute poverty in India is close to 20%. This suggests that research on poverty is Big Business.
Arundhati Roy replies to Dr. Bhalla and suggests that his numbers are all wrong. She further adds that big dams have "contributed only 12% of the total produce" in agriculture.
It must be the funny political season, otherwise why else would otherwise sensible economists go bonkers in terms of explaining the recent sharp downturn in the inflation rate (latest rate – 1.6 percent). I can understand Congress economists going around the bend (though Jairam Ramesh has a guardedly sensible article in India Today), but economists not being able to understand that both the economic recovery, and the decline in inflation, is for real, is mystifying. Inflation is down in the entire world; China has witnessed negative inflation for the last two years; East Asia, in spite of large devaluations, is witnessing inflation less than 2 percent; even Indonesia should see inflation in single digits by the end of the year. But India, as always (but not for much longer), is sui generis; the top 5 explanations for “why inflation is not low” follow.
This series of articles will be on one particular aspect of Indian policy making – it’s sui generis logic. The title is derived from a conversation with a senior policy maker, a friend, who in the heat of an argument several years ago, said "Surjit, if you ask for logic, we won’t help you". I am still looking for logic, and I would invite readers to contribute their experiences. By and large, this "logic" series will be concerned about the functioning of capital markets in India. It is not an exaggeration to state that the Indian capital market remains the most under-reformed sector of the Indian economy – and its most uncompetitive. One of the salient lessons of the East Asian crisis was the signal given to policymakers – capital markets can only be ignored at the economy's peril. India's East Asian neighbors are in a capital market reform overdrive, and will soon have transparent, efficient and productive capital markets. The question remains – will India again lag behind?
Dynastic madness will ensure that political stability is with us for the next five years. The apologists are cranking out spineless spin – lack of organization, too many “old” advisers, not the right coalitions – to explain why the Congress was kicked on its backside into near oblivion. Only in the land of sycophants does introspection mean other people’s faults rather than the presence of the pretender. Which means that in 2004, the Nehru-Gandhi firm is likely to be fighting it out with the Communists for seats, and irrelevancy. A perfect stable political environment, therefore, for Mr. Vajpayee to kick-start policies that will result in the next decade being known as India’s decade, much as the eighties and nineties are known as China’s decades. A sustained GDP growth rate of 7-9 percent is well within our grasp, though our reach is closer to double-digit levels.
Now that election fever is in the air, the chattering classes have a new mantra - bring in the BJP. This preference has recently been articulated by both an eminent industrialist - Rahul Bajaj in a TV interview - and a respected leftist liberal (to be distinguished from left-over leftists) Lord Megnad Desai, in an article entitled "It is endgame for the UF", (Business Standard, Nov. 10, 1997). In financial markets, there is a saying that when the last buyers throw in their towel, then stocks have bottomed. If I were a BJP member, I would be worried for surely the Bajaj-Desai endorsement means that support for the BJP can henceforth only decline!
As talk of second-generation reform gathers steam, it is appropriate to review the patchwork quilts to onions framework that has characterized Indian policy making for the last five decades. The quilts came from socialist patches to competitive instincts of ordinary human beings. The patches were deemed necessary by the we-know-better economists and wannabe policy makers in the sixties and seventies. Courses were taught, and theorems proved, on the advantages of central planning and budget deficits. Leading international institutions like Harvard, MIT, World Bank and the IMF recommended interventions against human nature, and freedom. To our blame, we willingly lapped it all up because it suited our wretched political economy favouring the BLIPs – Babus, Left-intellectuals, (major) Industrialists and Politicians.
There are good reasons to analyze the recent voting behavior in some detail, for after a surplus of Lok Sabha elections, we may not have another for the next five. The first issue of interest is whether the major parties gained or lost because of alliances. In the case of the Congress, the answer is clear – the leadership-less Congress crashed to even a worse performance than the wholesale rejection of Mrs. Indira Gandhi in 1977. The numbers are revealing – at that time, Congress won 154 seats; today it just managed to cross double digits with 112. The share of the vote then – 34.5 %; today, 28.4 percent.
