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Business Commentary/ Jay Dubashi

Indian economy attains nirvana

Economist Dr Jay Dubashi resumes his column.

Indian economy has attained the highly prized state of nirvana. Nothing seems to bother it. For the last two months, everybody from the prime minister downwards has been trying to get the economy moving but with little success, and all attempts to defreeze the economy have come to naught.

Last month, the prime minister came out with a ten-point programme to revive the industrial sector but there was no response. The PM's efforts were followed by a seven-point programme by the finance minister but that had no effect either.

Now the PM has come out with a five-point programme for agriculture and may follow it up with a three-point plan for something else. In the meantime, the economy stays grounded.

How long? Nobody knows. The economy has been slowing down for the last four years, from 1995 onwards. It achieved its highest ever real growth in 1994-95 when GDP rose by 7.8 per cent. It was down to 7.5 per cent a year later and five per cent last year. It may be no more than 4.5 per cent this year, though the government refuses to admit it.

In fact, this may be the worst year for industry with a growth rate of just around four per cent, down from six per cent last year. And as for exports, the less said the better. In the first half of the current financial year, they were down by three per cent on last year.

What has gone wrong? It is said that increasing globalisation has something to do with it. You can't really expect India to do better when the whole world is in a slump. I don't believe this.

The Indian economy is the least globalised in the world. We buy very little from the rest of the world, and the world buys little from us. Why should the global slump affect us so badly?

That things are different in India is clear from the way prices are behaving. While prices have crashed all over the world, India is faced with inflation, not deflation. Commodity prices are down 24 per cent on the year at the global level, with food prices down by 20 per cent. Crude oil (Brent) is going at 38 per cent below last year's price, something of a record. And even gold is down nearly 10 per cent, and so is silver.

In India, we are in the midst of a severe inflation, so severe that the ruling party's fate may depend on it. At wholesale price level, the index is up by over eight per cent on last year. At consumer price level, it is up by 16 per cent, making India the second country after Indonesia in this part of the world, as far as inflation is concerned.

The biggest factor in the ongoing recession in India is not economic crisis in east Asia, nor the slump in western Europe, nor the weather. The main factor is political instability.

Politically, India is no more the country it used to be. With governments coming and going faster than in most countries in this part of the world, India is increasingly prone to political shocks, which translate into economic instability on a more or less continuous basis.

The economy began slowing down from 1995-96 onwards, the last year of the Narasimha Rao government. We have had four prime ministers since then, and no government has lasted more than a year.

In India, as in other countries, policies do matter, but so do the individuals behind these policies. When the men change every few months, there is total loss of credibility in the system.

This is what had happened in Japan, once the stablest of countries in Asia. It is no more so, and this is reflected in the country's continuing stagnation for the last seven or eight years. It is essentially a question of credibility and trust, and once you lose them, there is very little to hold the economy together.

The same thing is happening in India. The stock market is down because investors do not trust it. They would rather put their money in banks, or under the pillow, as French farmers do even today.

The Indian middle class is so uncertain about the future, that it would rather not spend money and wait for things to settle down. Purchases of durable goods during Diwali this year were so scanty that most stores were caught on the wrong foot and made huge losses.

Things are not going to improve unless we have a firmly established government at the Centre, which seems unlikely for years to come. Until then, the government may play about the interest rates here, and buybacks there, but this is not going to have any impact. In India, politics always matters more than economics, and markets play second fiddle to politics and political parties.

Jay Dubashi

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